Source: Samuel Howard, Axial Networks Contributor
Deals fall through, it is an unfortunate fact of life. Of course, you can improve likelihood of success, but sometimes deals — even seemingly surefire deals — breakdown. No matter how compelling the logic or promising the prospects, not every deal will make it to the finish line. In 2019, over 20% fell short. And in today’s deal-friendly climate, the uptick in activity is inevitably shadowed by a proportionate rise in busts. A boom not only means more successful deals; it also means more false starts. And sudden downturns in economic conditions can naturally shake confidence in going through with transactions.
For sellers and buyers alike a failed deal may be a setback — expensive, exhausting, stigmatizing – but it need not be a death-knell. Other opportunities exist. Take heart in large-scale M&A, where suitors frequently step in once an initial buyer backs out and there’s a tsunami of baby boomer-owned companies coming to market. So, if misfortune strikes, hold off from writing the epitaph. Instead, do a deal autopsy, focus on your strengths, remedy the deficiencies, and identify your options.
Back to Square Two
All your hard work is not wasted when a deal doesn’t pan out. For a company whose buyer backs down, it’s likely the next buyer will want the same bedrock information — financials, a full tally of assets and liabilities, and the competitive positioning. Plan B does not mean starting out from scratch, just going deeper into the playbook. This is why sellers should always create a diverse buyer list to be ready to move onto a second option.
Stop the Rot
While some of the biggest busted deals can invite sensational headlines, there’s no need to feel as though a pall has been cast over your company or firm, prejudicing other would-be buyers or sellers. Instead of issuing a “no comment”, stay visible, stand behind your business and show the marketplace that you are unfazed by the twist in the script. Negative speculation and counterparty ambivalence will dissipate quickly once other parties show interest.
Tailwind in the Aftermath
Silver linings are often hard to find, but you can still turn a flat-lined deal to your advantage. Learn from the experience. What caused the breakdown? In retrospect, was it inevitable or could you have resolved particular issues before they jeopardized the whole deal? For business owners, what are the takeaways that will help you build a stronger case for your business or add value before you bring your company to market again? For deal professionals, did you conduct all the necessary due diligence? Cultural due diligence is a vital step of the process particularly when looking to acquire family-owned entities or businesses where the CEO has been integral to the day-to-day.
Restarting the process gives you a chance to improve on the first go-around. Do not blindly repeat the process. Study the full spectrum of the market, which may include different types of buyers and acquisition targets.
For sellers, the chosen process itself also begs reconsideration. If a negotiated sale with a single counterparty backfired, perhaps a private auction would be more advantageous. While a multi-bidder auction is complicated, it not only tends to drive prices but encourages the winning bidder to close the transaction.
Obviously, everyone wants a programmatic deal process, where a letter of intent leads seamlessly to a closing transaction. In reality, however, deal-making is more turbulent and uncertain. Even the best laid plans can be ill-fated. If a deal sputters, do not treat it as an indictment but rather, the result of an imperfect process. Thwarted deals once had the makings of success. Remember: You initially saw a hot opportunity, others will too.
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, Southern Pines and coastal areas with a team of more than 45 professionals serving more than 125 companies throughout the region.