Deal Close Rate?
July 24, 2024
by a professional from Washburn University - Washburn School of Business in Wichita, KS, USA
Trying to get a good benchmark on deal close rates once there's a signed LOI. What kind of close rate are you seeing on your deals once you get to a signed LOI?
Our working theory as a firm is that getting to a really good signed LOI (i.e. good process, good engagement from both parties) has a really high close rate, and the reverse is true as well.
What are you finding effective for getting to a good LOI, and then getting the deal closed?
from Columbia University in Oakland, CA, USA
Some buyers take the view that it's vitally important to get a deal under LOI and then they can always re-trade or walk afterward if reality doesn't line up with their expectations. You see this in real estate and other asset classes, too. The thought, which hassome grounding, is that there is value in having exclusivity over other buyers. The downside is burning time and expense for everyone involved on an opportunity that doesn't close. This happens, but when it was avoidable from the beginning, it can leave a bad taste in people's mouths.
The approach I recommend is to determine upfront what headline questions must be true for you in order to close and to communicate those upfront to the sellers and any brokers/bankers involved. They may not be able or willing to provide enough info upfront for you, but if they mislead or underinform you upfront and post-LOI DD bears out that the facts don't support you closing, it's perfectly defensible to walk. And I think, more importantly, you can hold your head high for running as straightforward and efficient a process as possible. Or if you do need to renegotiate terms, there's at least a rational basis (and paper trail) to point to, which can cool hot tempers in the midst of a deal process.
For what it's worth, the second approach results in fewer LOIs being signed, but it results in a higher likelihood of the parties closing and, if not, maintaining positive reputations in the space.
from University of Southern California in Las Vegas, NV, USA