There’s nothing more frustrating than a failed business sale or acquisition, especially when you consider the time and resources devoted by the seller, buyer, and investment banking team. While myriad factors play a role, most factors that cause an M&A deal to fail fall into one of four categories.
Here are the most common reasons for M&A deal failure:
The seller may not have a clear reason for selling their business. Absent this motivation, they are unwilling to flexibly negotiate, and less likely to see the deal through to closing.
Some sellers are just dipping their toe into the water and don’t really plan to sell their business. They just want to get a feel for the process.
Many sellers have unrealistic pricing and valuation expectations. They assess value based on emotion, not on reality. The realization that their business is worth less than they initially thought can deter and demoralize many sellers. This is the leading reason deals fall apart.
The seller may not be fully honest about their business and its shortcomings, or they may not be able to provide documentation supporting their claims. When this happens, the business sale may disintegrate during due diligence.
Sellers may wait for a buyer to appear, and only then begin assessing tax and legal issues. By then, the deal terms must be altered and the buyer may no longer be willing to purchase.
Some buyers are not sufficiently motivated to go into business. When compared to someone who is engaging an M&A firm to help sell their business, a potential buyer has less “skin in the game”, and they may back out at the last moment.
Not unlike a business owner who is in the process of selling a business, a potential buyer could become discouraged or disinterested if they realize that they had unrealistic pricing expectations.
Some buyers aren’t fully aware of the time and coordinated effort required to successfully buy, let alone operate, a business. Working with an experienced team of intermediaries is crucial because they should sufficiently educate all clients on what the process entails.
It’s not uncommon for due diligence to reveal information about a business that was not previously known to all parties, and that can severely affect the chances of a successful deal coming to fruition. This might seem inevitable, but when sellers are open and honest from the outset, this is less likely.
The seller may not be able to sufficiently substantiate their earnings. It is crucial to have all financial reports accurate, up-to-date, and presentable.
Funding may fall apart.
There may be regulatory or other legal issues, especially with governmental agencies.
Outside influences may force one or both parties to change deal terms by giving aggressive advice that causes a party to walk away or suddenly demand a change in terms. Unexpected taxation, contract disruptions, supply chain issues, and other challenges can erect significant barriers to a successful sale.
No deal has to fall apart. Sufficient planning, a good faith effort to negotiate, and experienced advice from investment banking professionals can help you set reasonable expectations, negotiate fairly, and arrive at terms that are tolerable for both parties.
About Madison Street Capital
Madison Street Capital is an international investment banking firm committed to integrity, excellence, leadership and service in delivering corporate financial advisory services to publicly and privately held businesses.
Over the years we have helped clients in hundreds of industry verticals reach their goal in a timely manner. Our experience and understanding in areas of corporate finance and corporate governance is the reason we are a leading provider of financial advisory services, M&A, and valuations. With offices in North America, Asia and Africa, we have adopted a global view that gives equal emphasis to local business relationships and networks.