Top 10 Ways an M&A Transaction Can Go Bad

  1. Unreasonable Price Expectations. This is especially true if the business owner is going it alone and has not done his/her due diligence regarding the “Market Value” for the business. There are many factors that go into determining value but none of it is tied to emotion, something I have seen to be common among business owners who spend years building their businesses. Always work with an M&A advisory firm to provide unbiased insight into your business’s market value.
  2. Unclear Story. Getting the highest offers from strategic or financial buyers is more than showing them numbers on a Profit and Loss statement. A compelling picture needs to be painted so buyers can visualize what opportunities they would have if they purchased your business. This picture needs to be exciting and compelling. Most importantly it needs to pass the smell test.
  3. Quality of Financials. Does the company have financial reporting that gives confidence to a buyer? Audited financial statements confirm financial accuracy and help validate forecasted performance. To be clear, not every company needs audited financials but depending on the size and industry it may be a significant advantage when going to market.
  4. Time Delay. This is one of the first lessons I learned in the M&A business. Time kills all deals. Every deal has a life of its own. As deals drag on both buyers and sellers lose interest. If the buyer doesn’t have a strong due diligence team or the seller is not prepared for the buyer’s due diligence process, deal momentum is lost. Working with an M&A firm that has dedicated due diligence personnel is an important factor when selecting the right firm.
  5. Material Changes. Things can change…customers, vendors, employees, you name it. It is important that information of all meaningful changes in business operations and/or financials should be disclosed promptly to the buyer during the due diligence stage of a deal. Otherwise, there is broken trust and the deal will likely come apart quickly.
  6. Employee Issues. Significant value of a business from the perspective of the buyer is its key employees. When key employees leave or threaten to leave during a transaction the buyer will in many cases back out of the deal. This is especially true for management team members and revenue-generating positions like sales personnel. One way to avoid this situation is to sign “stay bonus agreements” with key employees prior to the start of the sales process. This will give you peace of mind that this issue will not become a problem at the 11th hour.
  7. Owner Dependence. A company that is too dependent on the owner is not ready for a transfer of ownership. This is a topic that requires significant analysis and discussion. Both strategic and financial buyers will likely walk away quickly when they realize the company cannot function well without the owner. This indicates a weak or nonexistent management team and a perception that customers are likely to leave if the owner is no longer there. Preparing a business for a successful sale requires mitigating this issue.
  8. Customer Concentration. There are very few buyers that ignore customer concentration. The definition of customer concentration varies by the acquirer, but it is commonly defined as when a single customer represents over 15% of total annual revenue or top 3 customers represent over 50% combined. There are many mitigating factors that will help, such as longevity with a customer or multiple divisions of a key customer that you may serve. Nevertheless, a deal can quickly go south when a buyer realizes this is an issue. My advice is to always disclose this information upfront so buyers can get comfortable with the situation before they find out later in the process. No sense in wasting time with a buyer who doesn’t have the tolerance for this.
  9. Re-negotiating the Deal. This is usually the kiss of death when a buyer or seller decides during the transaction process to re-trade the deal without legitimate reasons. A loss of a key customer might be one good reason. Re-trading usually means the seller is getting greedy or a buyer is finding a way to lower the price they agreed upon in the LOI. Either way, this breaks trust and, in many cases, leads to a broken deal.
  10. Inadequate Advisors. Selecting a quality deal team is critical to deal success. In my experience, business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit. Selling a business is a once-in-a-lifetime event for most business owners and they do not have the skills to complete a deal on their own without professional help.

I believe a successful deal team has four key members: (1) an experienced M&A Advisory firm with years of experience, solid valuation expertise, and strong negotiating and closing transaction skill sets. (2) a wealth management firm to help owners maximize proceeds and to minimize tax obligations from the sale of the company; (3) a transaction law firm (which may or may not be the owner’s regular corporate law firm) that has significant transaction experience and expertise; and (4) a transaction accounting firm familiar with the tax implications of various deal structures and who can work collaboratively with the owner’s wealth management firm.

A lot can go sideways in a deal process, and these are just a few of the minefields to watch out for.

Steven Pappas, M&A MI

Touchstone Advisors
860-669-2246 (O)
860-575-4032 (M)

M&A Master Intermediary