Source: David Eisenberg , Axial Forum
Here we will take a look at the top four reasons why a typical M&A transaction fails to come to fruition. Whether you are currently engaged in a potential transaction or are exploring your options, these themes will help provide some insight into some of the biggest challenges to the deal process.
Valuation
Mismatched expectations of valuation is one of the most common reasons a deal will not be realized. Too often, business owners and deal professionals simply cannot agree on a price and one walks away from the table. The conflict is only natural, as sellers want to sell their company for the most, while buyers want to make sure they are getting the best deal.
Working with an experienced M&A advisor will significantly increase the likelihood of a deal’s closing. Because an advisor is both interested in the seller’s success and is well-versed in the private capital markets, it can serve as a helpful negotiator and communicator between buyers and sellers.
It also doesn’t hurt for company owners to have a reasonable sense of market valuations. Being mindful of a range for the company’s valuation and staying informed on the M&A market will help reduce valuation-related conflicts.
Deal Fatigue
Selling a business is unlike any other transaction. Not only does it take longer than any other negotiation, it has significantly higher stakes and is a full-time job. Based on research done by Kelley Drye & Warren LLP, the M&A sale and negotiation process can take at least 3-6 months — and this timeline does not include the process of selecting an advisor or identifying potential buyers/sellers, which can add at least another 6-12 months.
Many business owners improperly prepare for the transaction and tend to underestimate the effort that selling a business will take. As a result, they either become impatient with the processes or burn out as they work 20 hours a day running their business and talking to potential investors.
Deal fatigue is not often something you read about, but you will hear it from most business owners and investors that have been through this process. A failed transaction not only has an impact had on one’s patience but their bottom line as well. One business owner in particular running a $50M+ retail company spent 9 months on a potential sale transaction back in 2010 to see it fall through in the end. His 9 months away from running the business caused him to take a 15% hit to his revenues.
Due Diligence
Due diligence is another common reason why a deal doesn’t close. The due diligence period is the opportunity for an investor to identify any red flags and leave no stone unturned in the business.
As a result, many investors come with a very large checklist of items to investigate. Danny A. Davis, a leading M&A integration specialist in the UK, explained, “For each merger, I have a list of about 6,000 items to consider. With every new deal, I add a few items. Although deals are always different, and require different plans for different items, we can take a somewhat standard approach to increase efficiency.”
With such expansive checklists, there are all types of risks that can cause a deal to go south. If an investor discovers improper financials, outstanding lawsuits, cultural issues, or any skeletons in the closet, they may opt to walk away.
To prevent a failed due diligence process, it is important to work with M&A advisors to make sure all the company’s ducks are in a row.
Cultural Misalignment
Although “culture” may seem relatively amorphous when talking dollars and cents in a negotiation, cultural misalignment can be one of the biggest red flags for both buyers and sellers.
On the one hand, if an investor senses that a company has poor corporate culture or will resist post-merger changes, it could mean an unnecessarily difficult, uphill battle. On the other hand, many retiring business owners want buyers that will respect the culture and legacy of the business. If the two parties do not see eye-to-eye, it does not take long for one to leave the negotiation.
As one Axial member previously told us, “If we cannot provide good evidence of cultural alignment, the rest of the business doesn’t matter.”
To increase the likelihood of closing a successful transaction, the most important precautions to take are hiring an quality advisor and putting time on your side. These two strategies will help mitigate the above challenges — or any of the other dozens that could emerge during the process.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout North Carolina including Charlotte, Raleigh/Durham, Greensboro, and Wilmington, with a team of more than 45 professionals serving more than 130 companies throughout the region.
