10 Factors That Can Destroy an M&A Transaction
As many as 80% of small and middle market businesses that go up for sale never close the deal. Many begin the negotiation process only to see a deal fall apart. These 10 factors are common culprits.
Unclear Story Elements
The most attractive companies win the best buyers. Poor strategic planning, however, can make it difficult for owners to clearly articulate the value of their business. Some owners also fail to effectively communicate the strength of their management team, further undermining perceptions. Advance planning and finessing the story can both help.
Unreasonable Price Expectation
The most common reason deals fail is that sellers expect a price that’s unreasonable. Some are influenced by competitors, or by exciting stories about similar businesses. Others simply don’t know how to assess value. Whatever the source of the problem is, setting clear and reasonable expectations is one of the best ways to increase the likelihood of sales success.
Issues With Earnings
Financial statements can confirm forecasts. But unclear or invisible business drivers undermine earnings perceptions, and cause buyers to perceive businesses as risky purchases.
Every deal has its own timeline. Understanding the process of deal momentum can support success. Waiting too long can kill just about any deal. When deals drag on, both parties get frustrated and may lost interest. Substandard or lengthy due diligence processes are a major culprit here. Sellers can address this issue by ensuring they are adequately prepared for due diligence.
Material changes in the circumstances of the business are always a possibility. Though out of a seller’s control, these changes can wreck a deal. When such a change occurs, sellers need to promptly notify the buyer, and explain any relevant information. Otherwise trust will quickly fall apart.
Customer and Vendor Concentration
When large revenues are concentrated in just a few customers, or if one vendor controls a major portion of the supply chain, risk to the buyer increases.
Buyers cannot necessarily benefit from a seller’s long-term relationship with key players, so they must factor these potential losses into their assessment of the sale. In some cases, this is enough to cause them to walk away.
Renegotiating the Deal
When deal structure, terms, or conditions must be renegotiated, it can kill the deal. Back-tracking kills momentum and undermines trust. It can also make other deal components subject to review, further slowing the process.
Few Internal Controls
When due diligence reveals internal sloppiness, a buyer perceives more risk, and may be concerned about the health of the business. Operating efficiencies are always a major question, so sellers can save time and expense by diligently preparing for due diligence. When a buyer uncovers a problem, it’s difficult to recover.
Negotiating Over Every Penny
Everyone wants more money, but when owners fixate on a specific price, they set themselves up for failure. The next buyer will not necessarily pay more than the current one. Look at the sum total of the deal, not just its price, and don’t negotiate over every last penny. Sometimes it’s better to get the deal done than to get it done at the absolute highest possible price.
Every business owner needs a quality team to advise them through the deal process. But business owners are often hesitant to spend money on a quality team when it’s time to exit. Most owners have never done this before, and will never do this again. that’s why they need a successful team consisting of, at minimum, the following:
- An experienced M&A firm who can lead the transaction team.
- A transaction law firm with significant M&A experience.
- A wealth management firm that can help maximize owner proceeds.
- A transaction accounting firm that understands the tax implications of various deal structures.