Why small deals don’t get done: Evidence from rural entrepreneurs

Abstract

For myriad reasons, rural entrepreneurs may want to harvest by selling their business. While these entrepreneurs may look for inspiration to larger, public deals, there are few relevant insights to glean from these deals. Despite the high stakes involved for rural entrepreneurs and potential buyers, researchers have placed little attention on dealmaking at the lower end of the spectrum. We address this lack of research by answering the research question: Why do deals involving small companies go unconsummated? Because research on why large deals fall through is sparse and of limited applicability, we ground our research using insights from the venture financing arena (venture capitalists and angel investors) about why deals between entrepreneurs and investors do not close successfully. Applying a novel dataset from an economic development effort in a small southwestern U.S. city, we analyze the reasons why an investor group investigated 20 potential small deals, but none eventually closed. We found that issues both with the potential buyers and sellers led to the deal failures, with issues involving the valuation and also the selling entrepreneur being the most common deal-breakers. Furthermore, through this investigation, we gained insights into the challenges of an investor-driven model for economic development.