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Why So Many M&A Deals End in Failure

By 3p Contributor

By Lisa Coffey

Mergers and acquisitions (M&A) has become a bit of a buzzphrase of late. It appears that, lured by the benefits of a hot market and huge amount of cash paid by buyers, many entrepreneurs want to jump on the bandwagon to sell their companies. And it gets interesting: The eminent baby boomer tsunami has all the makings of surpassing any rate of sales in the history of M&A. Such circumstances engender a competitive environment among sellers and leads buyers to scrutinize the quality and price-value relationship of any realistic acquisition.

In the recent past, owing to such advantages as strong earnings, favorable capital markets and lower interest rates, many buyers aspired to grow their businesses swiftly through the means of acquisitions as opposed to organic growth. That makes one wonder that sellers must have a jolly good fund in selling their business.

But that's far from the actual reality. Arizona Republic management consultant, Gary Miller, writes: "80 percent of small and middle market business owners who put their businesses up for sale never close the transaction." Through keen observation, we fathom some of the reasons that contribute to the failure of the mergers and acquisitions are very basic at their core. Read on to find out what they are:

1. Lofty value expectations

The most common reason why M&A deals fail to close is because the seller's valuation expectations are highly unreasonable.

As business owners come to hear about the companies or competitors operating within the same industry, selling for much higher valuation, they can delude themselves into believing that their business might be worth the same value.

2.  Falling behind the game when it comes to "strutting your stuff"

A number of business owners lack that all-essential edge when it comes to attracting buyers. If you won't throw a bait, there's very little chance that you'll catch any fish. The principle works very similarly in the realm of mergers and acquisitions: Companies that are able to make the best show of their abilities are generally the ones that walk out with the best deals.

The root cause is often poor strategic planning. Due to poor planning, business owners fail to coherently express the company's competitive advantages, its revenue potential, the growth opportunities and the ability to offer significant returns on invested capital.

Audited financial statements provide a sort of surety about the financial accuracy and assist validating the forecasted performance. Dearth of clarity and evidence regarding major business drivers, sales pipeline backlogs, back office operations, and the stability of growth and earnings discourage buyer's willingness to move on to the due diligence.

3. The timing of the deal

The success of a deal depends on its timing as much as anything. The pendulum of a deal swings back and forth all the time, and making your move at the right moment is crucial to your success.

M&A experts like to say that time is the enemy of all deals. If the deal process is protracted, both the buyers and sellers can start to lose interest. Bog standard and unduly drawn-out due diligence analysis of financial and strategic matters prove to be the final straw. If the buyer hasn't got an able due diligence team, or the seller is not fully prepared for the buyer's due diligence process, the deal could lose precious momentum.

4. Disclosure of material changes

Material changes in a business come unannounced. Oftentimes, such changes are beyond seller's sway (e.g. recession, losing out an important client or a key employee), but can still adversely affect the deal closing out.

Therefore, in case a material change does occur, it's binding on the seller to disclose it promptly and fully to the potential buyer. Failure to be up front about a material change could destroy a buyer's trust in the seller.

5. Painful re-negotiations

If negotiating the terms, conditions, structure, representations and warranties won't tire you in one go, it will in the second. Renegotiating a settled deal is a catalyst. No one's likely to go back-tracking, barring exceptional cases, because the deal components that have been agreed upon previously. These tiresome, monotonous and mentally-draining tasks could make the deal lose its momentum and on top of that add time and engender deal fatigue. Furthermore, it gives rise to distrust and makes the engaged parties skeptical of the rest of the components of deal previously negotiated.

6. Disproportionate concentration of customer/vendor

The buyer's perception of risk is heightened if it's found that a considerable amount of revenue is concentrated among a handful of customers, or the supply chain raw materials are concentrated in one vendor.

Irrespective of the longstanding relation that the seller may have with any customer or vendor, buyers still like to take into consideration the potential loss of them. One can never write off the possibility of buyer walking away from the deal upon mapping out the consequences of such loss.

7. Inconsistent internal controls

On a number of occasions, the buyer's due diligence process will reveal inconsistencies in internal controls (eg, poor collection processes for aged receivables, manufacturing error rates, tarnished financial statements, regulatory filing inconsistencies). It could send a straight signal to the buyer that the business isn't run well.

Operating efficiencies become contentious when there's a lack of effective internal controls. And once the seed of doubt is sown in the buyer's conscience, the deal could start the journey southward very easily.

8. Fighting it out until the last dollar

It's perfectly understandable that the sellers who've put in so much effort in their business want to earn every last penny out of it. But very few owners are lucky enough to get their wish. The mistake that sellers shouldn't make is fixating their minds on a particular price for the company. Lots of owners pass on a deal, thinking they'll get a better deal from the next potential buyer. But there have been instances where multimillion-dollar deals were lost for just a few thousand dollars.

That's why a more rational approach is required. The seller should examine all the component of the deal's structure, and not just the final offering price. If the deal satisfies their exit plan goals, they should nod along and go ahead with the deal.

9. “No” to expert advisors

It goes without saying that a quality deal is essential to a deal's success. Most business owners do well to build a successful business, but seeking to monetize the same in some form of exit is still their Achilles heel. Most business owners have never sold a business, so for them it’s a once-in-a-lifetime event. Therefore, they lack the necessary skills to see the deal through on their own.

Research suggests that owners who shun themselves from taking any outside help, and go it alone to strike a deal, often leave with money on the table. The reason: They fail to get the best terms and conditions on the transaction.

The bottom line

These are just the nine main catalysts for any M&A deal failure. But there's a way around them. Expert opinion suggests that a successful deal team must have these five key members:

  1. An experienced M&A consultant who could lead the team from the front

  2. A shrewd wealth management team that can help the firm maximize the proceeds and cut down the tax obligations from the sale of the company.

  3. A transaction law firm that has all the necessary transaction experience and expertise

  4. A transaction accounting firm that is well-aware of the tax implications of assorted deal structures and that can work in sync with the owner's wealth management firm

  5. A meticulous investment banking firm with in-depth industry experience in the space, major valuation expertise, and negotiation and closing transaction skill sets.

Collectively such an impeccable deal-team can ensure that your interests are safeguarded and you get the best deal that's there for you.

Image credit: Pexels

Lisa Coffey presents ideas to empower companies to make evolutionary leaps in their go to market strategies and assist entrepreneurs catapult their small business into the 21st century by utilizing these business strategies on Investmentbank. A free spirit, residing in Salt Lake City, Utah, she has been a writer for 5 years with over 500 published articles.

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