Some bumps in a sale are genuinely unforeseen and have to be handled as they arise. But others the owner knew about, or should have, and did not address, and those can slow down or derail a deal at the eleventh hour. We call these transaction SNAFUs. Here are six avoidable ones.
Failing to address cross-collateralization with the lender
A common setup: the owner owns the operating company and, through a separate entity, the real estate it occupies, and the same lender holds both the company's credit facility and the real estate mortgage, cross-collateralized, often with an operating-company guarantee. In a sale, the owner typically wants to sell the operating company, repay its debt, keep the real estate and its mortgage, release the cross-collateralization and guarantee, and lease the building to the buyer. The lender will often object: it may not lend against now non-owner-occupied investment real estate, it loses the operating-company collateral and guarantee, and its original underwriting relied on the tenant's credit. The fixes: refinance the real estate mortgage with a lender comfortable separating the two, or plan to repay the mortgage from sale proceeds, so the bank cannot delay or derail the deal.
Not keeping minority shareholders in the loop
An owner may assume that if a deal is good for everyone, minority holders will simply go along. But shareholders kept in the dark can turn uncooperative and delay things, sometimes purely because they felt slighted by how the news was shared. Keep all shareholders informed throughout.
Not addressing required consents
Customers, vendors, landlords, and others may hold consent rights on a change of control. Misjudging whether they will consent is risky. It can help to float trial balloons to gauge their mood, and to draw on relationships with key parties to secure consent. Failing to do so can delay closing or, at worst, bust the deal.
Not taking care of key employees
An owner may assume a key non-owner employee, like the CFO, will selflessly take on the second job of facilitating the sale. If they are not owners and have not been taken care of, with closing bonuses, for example, they can become unhelpful or even disruptive. Everyone should be pulling toward the same goal, so secure key employees' buy-in at the outset.
Not confirming that divorce decrees are iron-clad
Before a process, confirm that any divorce documents are crystal clear about an ex-spouse's rights in a sale. Otherwise a disgruntled ex-spouse seeking restitution can create real heartache and complication.
Hoping for the best
Hope is not a strategy. Owners sometimes know about an issue and quietly hope it resolves itself during the deal. It rarely does. Address known issues proactively rather than waiting for them to disappear.
There will always be hiccups in a transaction, but SNAFUs like these can be avoided by addressing them head-on rather than letting them languish. The owner who prepares thoughtfully and proactively not only runs a process that meets their objectives, but also maximizes the odds the deal actually closes.
← Back to all insights