When you receive the Letter of Intent (LOI), the intentions turn crystal clear. It becomes obvious that the buy-side and sell-side parties are seriously willing to make a deal. The primary terms of the transaction make both parties all set to sign a non-binding agreement. Signing this letter is a milestone in the sale process. But, half or even more of transactions do not reach the closure even if this letter is signed. Reason?
Why M&A Deals Fail
Let’s discover a few prime reasons in this post.
- Poorly Drafted LOI
As aforesaid, the LOI is crucial. It is a fundamental requirement to move toward next-levels. If your vision about the sale is not clear, the risk of disagreement would be obvious in the later stages. This happening could break the deal. However, the idea to hide some downsides in an effort to move to negotiation may tempt you. Here, you need to rethink in this matter. If you want to leverage negotiation, be thoughtful before signing the Letter of Intent.
Take your time to collate terms and conditions for transactions. Discuss all terms in detail with the middle M&A advisor to find that both parties are on the same page. Here are some commonly found reasons for collapsing the deal:
- Considering multiple earnings number (which can have expenses that will not be included in P&L, comparisons of transactions between last year/ last 12 months and a multi-year average EBITDA, etc.)
- Structure and terms of an earn-out
- Working capital levels that are still left
- Conditions of non-competes, especially when they are applied to the owner’s family members
- Effective presentation of the LOI that is simply explained
- Being Less Vocal During Due Diligence
Saying and listening are keys to move with the sale process. Both parties are extremely concerned about doing everything right.
This can happen when you communicate and respond to requests. This practice is always appreciated. It brings you in the good books of the other party, which gains confidence in you to trust.
For effective communication, you should premeditate well. Take the fact into account that due diligence requires understanding. The buyer always shows interest in discovering every financial detail or result, human resources, business operations, insurance, legal information, and other ones. If your presentation is really understandable and well organised, it is obvious that you would receive responses with a lightning-fast speed. Simply put, the buyer will be happy to know about every aspect effortlessly.
Besides, the seller should be honest and come up front with any bad happening that occurs before or after signing the letter of intent. These news cannot remain undercover. So, it’s always praised to voluntarily talk about negative things that happened or happening instead of hiding. This transparency will help you to frame downsides in the best way.
- When the Advisor Cheats
There are many professionals involved in a deal, who ca be a banker, advisor, business representatives, stakeholders, lawyers, and more. Each party has its own interest and objectives. Considering the role of the lawyer specifically, he is the one who tends to protect the client. Such professionals frequently shows conflict in major or minor issues. They frequently push advisors to negotiate over cost or transactions, discuss likelihood and risks or liabilities, and other benefits.
Here, the substantial thing is your role. It’s above your advisor. Instead of making blindfold decisions, brainstorm and finalise things yourself. Remember, it’s your call because you are going to be the owner of that business upon merger or acquisition. You should know about vulnerabilities and risk tolerance factors. Pass your intentions clearly to your legalmiddle market M&A advisor about what you expect from the deal.
d. When Business Performance Declines
A buyer carefully observes every update and look for every opportunity or reason that can reduce the cost of that business. However, it’s not an overnight miracle. It’s time-consuming, and sometimes, turns exhaustive. The challenges and hectic valuation may lead to ignoring the day-to-day operations of that business. If the business declines a bit around the closing process, the buyer may ask for more time. Spend that time on due diligence to ensure that the decline is temporary, and it’s a deviation for a time being. It’s not a trend, which cannot terminate the transaction process.
There are a few instances wherein sellers change their mind in the midway. They think that short-term gains can maximise their earning. Often, a negative result is observed. The seller enters into a new process, which brings ups and downs in the normal operations. Such things lead to decline in overall business performance. However, they expect a massive increase, which does not actually happen in most cases. If, anyhow, the performance improves, you won’t get its credit. This happens because there is no clarity of how long the result will last.
Therefore, focus on the deal and honest communication. Avoid changes in the deal just to make short-term gains. However, you may continue to analyze the market in the backend for creating a better plan of action. Execute it once the deal is done.
- Inaccurate Evaluation
There may be a possibility that the profit margin or assets that look tempting on paper may not be so in reality. There are many instances, let’s say the case of the Bank of America’s acquisition. The on-paper deal might be rocking, but it may not be the winning factor in the real sense.
- Poor Integration Process
The post-merger integration is a big threat. To overcome it, come up with a careful appraisal of key employees. Identify key processes or projects, products, sensitive areas or matters and causes of bottlenecks. This identification can help in overcoming the integrated risks. You can consult and plan for designing crucial products. Even, you can think about launching automation or hiring a gig partner for efficient and quick production.
- Cultural Integration Issues
If you have observed the case of the Daimler Chrysler, understanding cultural and integration issues is easier.
You should come up with a proper strategy and make hard decisions to remove cultural differences. It may require joining hands with local businesses to run respective units. This is how you can achieve the targets and make profit as predicted.
- High Recovery Costs
The Daimler Chrysler case also ran up high costs toward the expected integration attempts, which could not sail through. Keeping bandwidth and resources ready with correct strategies which can surpass the potential costs and challenges of integration could have helped. Investments today in a difficult integration spread over the next few years may be difficult to recover in the long run.
- Negotiation Flaws
Sometimes, you fail to measure the real amount for an acquisition. It may end up in overpayment with a high advisory fee. This can cause a big loss and hence, lead to failure.
- External Factors May Hit
Sometimes, the unfortunate financial crisis hit and the overall financial sector collapses. The worst hit companies are the ones that are into mortgages. The most challenging part is that these factors are uncontrollable. You cannot reverse them. In such condition, you should think ahead of time and cut losses. In order to do this, you may have to lock down the business or make hard decisions.
- Avoiding Alternatives
It is not always good to merge or acquire for reaching the top position among competitors. Sometimes, selling and settling with a better return work well. You may start a new venture with the money. So, you should proactively think about extreme steps or alternatives that can be profitable. An experienced middle market or any M&A advisor can help in it.
l.No Backup Plan
Keep the thought of failure in the corner of your mind. It’s simply because more than 50% of M&A deals fail. So, foresee the conditions, evaluate them well, and if it does not seem working out, discontinue the deal in a timely manner. Certain loss may be seen, but it can prevent a big loss.
There are several reasons of why an M&A deal fails. These all can be associated with no backup plan, ignoring alternatives, uncontrollable external factors, negotiation flaws, high recovery costs, poor integration post the deal, inaccurate assessment, business decline, and more reasons.