Business, Legal & Accounting Glossary
The likelihood or probability that a transaction will close is referred to as certainty of closure. Because the costs of due diligence can be very high, most buyers (strategic and financial) assess the certainty of closure before proceeding with a letter of intent. As a result, the certainty of closure must be high in order to justify the effort and costs required.
Sellers should be especially mindful of the certainty of a transaction’s closure. Many different types of buyers may present themselves with attractive offers during the sale of a business. In many cases, the highest purchase price may not be the best option for a seller if it comes from a buyer who does not have the necessary financing or simply has a poor track record of closing deals. In other words, this buyer may have made a high offer to compensate for a low certainty of closure.
If the transaction fails because the buyer does not come through, the seller may end up incurring significant dead deal costs as a result of due diligence. As a result, a high likelihood of closing from a buyer with a proven track record may be more important than a high purchase price. It is preferable to obtain a lower price for the business but complete the transaction than to obtain a high price but end up back at the auction if the deal does not close.
Dead Deal Cost
Letter of Intent (LOI)
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This glossary post was last updated: 26th January, 2022 | 0 Views.