Merger and acquisition (M&A) deals are a crucial part of growing and consolidating companies.
At Bondo Advisors we work hard on the processes to ensure the success of the deals we advise, however, despite all the efforts and planning, sometimes an M&A deal can fall through.
There are a number of reasons this can happen, from disagreements between parties to regulatory or financial issues. We review some of the most common reasons why an M&A deal can fail and how companies can prepare for and mitigate these risks.
Overvaluation and price expectations
Both buyers and sellers can have unrealistic expectations about the price of a business. Sellers often overestimate their business, thinking that the sale price should be enough to compensate their effort or comparing themselves with other operations that are not necessarily comparable. For buyers, the possibility of inheriting risks can lead to an undervaluation of the business. Fortunately, price disagreements usually appear early in the negotiations and involve less waste of time and money than disagreements that appear later in the negotiations.
Lack of key details in the LOI (letter of intent)
The letter of intent should not include everything, however, it is important to start the negotiation and agree on the most relevant details in the initial stage of the negotiation. This ensures that both the buyer and the seller have a mutual understanding and reduces the risk of differences later in the process.
Unreliable financial information
Sometimes the accounts do not clearly reflect the real situation of the company, especially in companies that are not audited. If a company does not audit its accounts or does not have much financial knowledge, it may present inaccurate or incomplete information, which can make it difficult for those interested in the M&A operation to make decisions, and in many cases lead to discussions about the actual status of the post due diligence accounts.
Lack of real commitment to the sale
Some sellers are simply testing the ground to see if someone is willing to buy their business at the price they would like to receive. However, they do not have enough motivation to face the complexities and frustrations that the entire sales process entails. It does not make any sense to enter into a sales process if you have not thought enough beforehand.
Negotiation fatigue
Negotiation fatigue occurs when negotiating parties begin to feel frustrated and exhausted from the endless negotiation process. Fatigue is common in M&A where parties tend to become inflexible about their positions and are unable to understand the other party's position. You have to avoid getting stuck in trivial matters, and know that negotiating means having empathy, finding a middle ground and not thinking that all "battles" can be won.
Exaggerations, lies or falsehoods
Seeming little marketing hype like “our powerful AI-based machine learning system,” which is then not backed up by due diligence, is one of the key reasons acquisitions fail. There are sellers who exaggerate, others who hide information and a few who lie outright. The truth often comes out in due diligence and frankly there is no point in not being completely honest about the state of the company.
Non-compliance with forecasts for the current year
M&A deals can often take a year or more to complete. Throughout those 12 months it is easy to get confused in the daily management of the company and suffer the consequences: such as failure to meet sales forecasts, KPIs, the development of new products or the opening of new markets. Although all this is provided for in the business plan, relevant changes may occur in the market that end up in default or in significant variations. Both of these things can scare off the buyer or lead to a renegotiation of the price which often results in a broken deal.
Financing of the operation
When the buyer has limited experience in acquisitions, it can be the unexpected surprise that, when trying to execute the transaction, the buyer cannot find the necessary financing. It is essential that the seller be clear from the signing of the letter of intent how the acquisition is going to be financed, be aware of the deadlines, and verify the solvency of the buyer.
Non-aligned interests among shareholders
In companies with a more complex shareholding structure, it is not unusual for only a few shareholders to have visibility into a sale negotiation at an early stage. As the phases progress, there may be a significant disconnect between the interests of the different founders, or between the founders and some partners. This may be due to: preferential rights, different valuations for entry into the capital, obligations that only affect management, or the unwillingness of some shareholders to sign the representations and guarantees, etc...
surprises
The processes are long and many things can happen in a year: the buyer can be acquired, change its CEO, there can be a pandemic, an economic crisis, a stock market crash, a war, a natural disaster... There are thousands of unexpected reasons that can mean that a purchase-sale falls through until the day it is signed at the notary.
At Bondo Advisors, we value the crucial role that a well-planned and executed M&A deal plays in long-term business success. We offer advisory and consulting services to help identify and minimize the risks associated with an M&A deal. With a highly trained team and a wide network of contacts in the sector, we work closely with our clients to provide advice throughout the entire M&A process. If you're looking for support to ensure your next M&A deal is successful, we're here to help.
www.bondoadvisors.com