The #1 Reason M&A Transactions Fail

As an investor or entrepreneur, you’ve spent years building value in your business up to this point. After months of intensive time and expense, you’re finally negotiating the smallest details with a buyer for your business. If the transaction doesn’t close, it is likely due to one reason: the underlying financial performance of your business during the sale process.

Fortunately, this factor is largely under your control, for two reasons.

First, it is up to you to set expectations with buyers for how your business is going to perform during the transaction process. Too often, we see owners create unrealistic or unsustainable forecasts for a business that represent best case outcomes, rarely coming to fruition. We advise the opposite approach, and create detailed, bottoms-up projections to realistically meet or exceed every month through the sale process. Simply put, meeting targets you set builds trust with your buyer. Missing targets destroys credibility and puts your entire transaction in jeopardy.

Second, while it’s tough to time the market, we guide owners to seek a transaction when they are expecting strong performance from the business for the foreseeable future. The way I was raised, if you borrowed someone’s car, you always returned it with a full tank of gas. If you think of your business as borrowed for the next owner, you should strive to leave a full tank of gas in the vehicle. Too often we work with owners for years, only to have them call us to help with an exit right before their financial performance or their end market hits a rough patch. They think they can outrun a downturn. It almost never works. When deals fail due to poor financial performance, if it’s not because a company published unrealistic projections, it’s because they waited too late in their business cycle to consider an exit. They didn’t leave enough “in the tank” for the next investor.

We also believe that negative surprises should be not only expected but disclosed as soon as possible. Bad news doesn’t age well, and the sooner you share a negative surprise and contextualize it for the buyer, the better you build trust by being honest and transparent. Everyone experienced with acquiring companies knows there is no perfect business, and when bumps in the road happen, the best thing to do is get out in front of the issue and address it immediately.

The other top reasons that M&A transactions fail include: 1) the lack of preparation; 2) the lack of a highly experienced and closely coordinated team dedicated to a successful deal (including legal, accounting, and tax); and 3) “black swan” events that can’t be foreseen, such as a macroeconomic problem or other unpredictable externalities. The good news is that most of the key factors that derail transactions are under your control.

We hope you found this piece insightful. Please feel free to contact anyone on the Industria team. We would welcome the opportunity to discuss our viewpoint.