A large number of Mergers & Acquisition transactions are completed and disclosed each year. What isn’t announced are the significant number of deals that almost happened but weren’t completed. Failed deals are common and can cause disruption and meaningful expenses for both the potential seller and buyer. Business owners who are contemplating a sale should understand the key factors which could derail a sale process. Failed deals are intrusive and costly. Many of these deal disruptions are preventable if proper planning and focus are applied to the deal process. We’ve identified six common reasons why deals fall apart:
1. The seller provided inaccurate or misleading information to the buyer
In order to complete an M&A transaction, a significant amount of information needs to be exchanged. The seller will typically compile information about the business to share with the buyer either preemptively or at a buyer’s request. This information will be the basis of the buyer’s initial offer for the business. Once agreeing on preliminary terms, the buyer will focus on substantiating this shared information by completing their due diligence, often with the help of accounting firms and other outside advisors. If the original information was not accurate, had accounting irregularities or could not be supported by market-based data, it will likely result in a change to the original offer. When the original terms are revised, the deal can become threatened and oftentimes falls apart. It is critical for sellers to provide accurate and credible data that can withstand the scrutiny of the due diligence process.
2. The potential buyer wasn’t a serious buyer of the business
In the last 20 years, the number of financial buyers (e.g. private equity firms, family offices, etc.) has grown at an overwhelming rate. Add to that the number of global and domestic strategic acquirers that are focused on acquisitions and you have a healthy demand for deal flow. This demand for deals has made acquirers more creative and aggressive in their pursuit of potential targets. Buyers can be very savvy and know how to persuade sellers to share non-public information, even though the buyer might not be the best or most qualified prospect for the business. Sellers should understand the buyer universe and choose a serious and well qualified buyer prior to engaging with them since poor matchmaking will often result in a failed sale process.
3. The complexity and specifics of a deal can overwhelm the strategic rationale
Potential deals often start with a general understanding of the deal terms. Both parties to a transaction will also enlist the help of advisors including lawyers, accountants, tax specialists and investment bankers. They are hired to support and finalize the deal process and to protect their client from potential risks. M&A transactions are almost always complex and have a significant number of items which need to be negotiated. Negotiating these deal terms can become contentious and ultimately, overwhelm the strategic rationale of the deal. The best outcomes are achieved when both parties stay focused on the strategic rationale and overall value of the deal, while not letting the ongoing negotiations derail the transaction or deviate from the original intent.
4. Timing wasn’t right for the seller to exit
Advisors who have experience working with privately held businesses are aware of the emotional toll a sale can have on an owner. Parting ways is seldom an easy emotional process, especially for family businesses or entrepreneur-led companies. A prolonged sale process, coupled with intense negotiations with lawyers and financial advisors, can wear on the seller and cause them to have second thoughts and, ultimately, walk away from the deal. They may use any number of small deal points to explain their decision, however, in many cases, the timing was just not right for the owner to exit. A good advisor will spend time up front setting expectations on value, the sale process, and preparing the seller for what is about to transpire. It is disheartening to all involved to endure the significant distraction of a sale process with nothing to show for it.
5. The external market changes
Deals can fall apart for reasons outside of the control of either the buyer or seller. External markets can change rapidly, which can positively or negatively impact the prospects of the business or the overall deal. Market issues can be isolated to a specific industry, or they can be the result of changes in the broader economic climate. Either way, if compelling changes from external market factors are present, they will influence the terms of the deal. It is important to keep momentum in a transaction and execute a deal to completion once the constructs have been negotiated; otherwise, you run the risk of unforeseen external factors disrupting the deal. A common phrase used in the deal market is “time kills all deals”. Given enough time, a proposed deal, no matter how good it is, will be at risk of not getting closed.
6. The seller takes their eye off their business
Selling a business is a time-intensive event. It requires a substantial time commitment from management and ownership. If the management team becomes too distracted by the deal, the company is at risk of performing below expectations. If the business begins missing the forecast that was initially provided to the buyer, it will likely lead to a reduction in value. A good advisor will bear much of the burden of the process, which will alleviate some of the pressure on the management team and enable them to remain focused on business operations.