I unfortunately have been a part of M&A sale processes that have failed or haven’t resulted in a favorable outcome. These are very painful, expensive and do a great deal of damage to the sell-side business in the short term. When deals do fail, they are often from a few common mistakes. Hopefully this list will help those considering a sale of their business spot the red flags before beginning a process.
Not ready to begin a sale process. Whether it’s an incomplete or unprepared leadership team, books and systems that are not ready to stand up to the scrutiny of a due diligence process, or a poor financial model that can’t be supported, a company that isn’t ready to begin a sale process isn’t likely to realize a positive outcome.
Poor planning/communication before the start. Planning is central to a good deal outcome. That starts with bringing the right team into the deal at the right time. It also means considering what’s in it for the leadership team should a deal occur and having stay bonuses in place to properly incentivize the leadership team before the process begins.
Hiring the wrong investment banker. Having the wrong investment banker lead a process can be a deal killer. That’s usually a result of a lack of research on the available firms to determine which makes the most sense to represent the company rather than hiring someone familiar who doesn’t have the necessary deal experience. Ideally, the investment banker leading the deal should have M&A experience in the same industry as the company being sold, as well as a history of success with similar deals.
Due diligence information is incorrect or incomplete. When potential buyers discover missing or inaccurate information provided by the seller during due diligence, the result is a loss of credibility. It also extends the time it takes to close a deal. That loss of momentum can kill a deal.
Confidentiality is lost, resulting in employee/customer/vendor issues. If communication regarding a deal isn’t controlled well enough, it can lead to employee morale issues, as well as concerns from key customers or vendors, all of which could escalate and sink deal negotiations.
Focus only on who will pay the most. There’s more to a deal than making the most money from a transaction. Sellers should also consider the certainty of close as well as who fits best as a partner, especially if the seller has a sizable equity roll.
Financing markets change during the deal. In another example of time killing deals, if markets get tougher during the deal — interest rates rise significantly, for example — it could lead to an attempt by the buyer to reprice the deal or make structure changes to the deal terms that are unwanted by the seller.
Lack of a real connection between the buyer and seller’s leadership team. One key for a successful, timely close is the buyer and seller leadership teams have a genuine connection. When trust never really develops, a deal is unlikely to close, especially when the buyer is private equity.
Preparation is key when it comes to M&A. Take the time to get your house in order before going to market and the results are likely to be much more favorable. ●
Lou Schneeberger is a professional board member for four businesses
