Owners who plan M&A deals well do a lot of the legwork before signing a purchase agreement. They likely have a good idea of their company’s value, and have developed a profile of their ideal buyer. That doesn’t mean the process ends with a purchase agreement. This is just the beginning of a long and involved undertaking that may rival the work of a full-time job. This is precisely why we recommend hiring outside support. With a quality advisory team, you greatly reduce the risk of encountering these common M&A deal killers.
Due Diligence Issues
Due diligence is the moment when buyers learn whether the evidence supports the big claims owners have made about their business. So due diligence issues can spell disaster because they mean the buyer may not be getting the business they hoped for. Owners should prepare for due diligence before even putting their company on the market. This affords them time to correct any issues, and ensures they can promptly respond to any and all due diligence requests.
Intolerable Liability Concerns
Many owners think that liability issues extend only to overtly illegal activity. But a new owner doesn’t want to be sued, or to have to fight with the previous owner about who is liable for the company’s malfeasance. Some common issues include:
- corporate behavior that increases the risk of lawsuits, such as discrimination or illegal payment practices
- tax liability
- failure to follow industry-specific regulatory requirements
- poorly written or executed agreements with contractors
- intellectual property issues, especially if the company has valuable intellectual property but it is unclear who actually owns the IP
Deal Structure or Value Worries
The structure of the deal is ultimately almost as important as sale price for determining how much value each party extracts from the deal. Earnouts, for example, reduce the initial payment to the owner, but can afford an opportunity to earn more if the company is successful. Buyers and sellers often spend significant time arguing over deal structure and ultimate valuation. If they can’t come to an agreement, it may tank the deal.
Integration Red Flags
Integration is key to realizing the deal’s full value. If it doesn’t succeed, neither does the deal. Buyers may be looking for integration red flags—staff jumping ship, cultural issues, communication problems, a failure to develop an integration plan—from the very beginning. If they have reason to believe integration is just not going to work, they may walk away.
Owners cannot prevent every conceivable issue with a deal. Consider how the COVID-19 pandemic affected myriad businesses, and killed or delayed hundreds of deals. Sometimes buyers walk away because of external factors. Owners, however, may be able to reduce this risk by carefully screening buyers for stability and deal history. A buyer with a history of walking away, with difficulty getting funding, or very obvious distractions may be more likely to take their next deal.