In the realm of business acquisitions, understanding why deals fall apart can help business owners and buyers avoid wasted time and distractions. In this blog, we'll delve into the common reasons behind deal failures and, more importantly, explore strategies to prevent them. Our mission is to help business owners understand the exit process - and the challenges - so they can confidently and successfully cross the finish line.
Common Reasons Why M&A Deals Fall Through
1. Unrealistic Business Valuation
An inaccurate business valuation is often the biggest deal-breaker. Unrealistically high valuations can raise red flags and turn off potential buyers. To avoid this, ensure that a thorough market-based valuation backed up by a financial review is completed ahead of time. Seek the expertise of a business valuation expert, so they can determine the right value and help set realistic expectations with potential acquirers.
2. Due Diligence Challenges
Common due diligence shortcomings can send potential buyers running. Prepare for due diligence in advance by understanding the questions and information buyers will want during due diligence. Ensure accounting records are prepared according to Generally Accepted Accounting Principles “GAAP”, processes are well documented and all books, records, and contracts are in good order. Consult with a due diligence expert ahead of time, so they can ensure your business is well-prepared for the challenges and scrutiny of due diligence.
3. Misaligned Expectations
Misaligned goals and visions between buyers and sellers can create insurmountable obstacles. Techniques for aligning expectations include open communication and crafting clear and detailed agreements. M&A advisors can act as trusted intermediaries to help build strong relationships between buyer and seller teams.
4. Legal and Regulatory Hurdles
Legal and regulatory hurdles must often be addressed to prevent deal failure. Ensure that the specific buyer is comfortable and compatible with the regulatory requirements including all necessary licenses. Proactive measures can help address these issues, such as contract transferability clauses for customer and vendor contracts. For businesses requiring specific licenses, explore legal structures that can mitigate those requirements.
5. Financing Obstacles
Financing is critical to deal success. Sellers must understand the role of bank and equity financing and what is required by a buyer to overcome financial underwriting standards.
Proper preparation for bank financing requirements can serve double duty as it will also help with the due diligence process. Ensure that the valuation and financing structure align with debt and financing covenants, such as overall debt to EBITDA ratios and debt interest coverage ratios. In some situations, owners can offer “seller financing” to bridge a potential gap in valuation or financing issues.
Avoiding Common Deal-Breakers Summary:
1. Obtain a Business Valuation: To prevent valuation-related deal-breakers, utilize business valuation experts who can provide an accurate and market-based assessment. This is critical in aligning seller and buyer expectations.
2. Prepare for Due Diligence: Ensure the business has proper documentation and materials to survive due diligence. Collaborate with M&A professionals to cover the commercial, financial, and legal aspects of this process ahead of time to avoid any surprises.
3. Alignment of Expectations: Understand the buyer's perspective and work with M&A advisors and trusted intermediaries. Communicate openly, honestly, and transparently at all times.
4. Understand Financing Issues: Develop contingency plans to address financing issues, ensuring that the deal can proceed smoothly despite any financing requirements.
In summary, understanding why deals fall through and taking proactive measures to prevent deal-breakers can be the key to success. By carefully preparing for due diligence, enlisting the expertise of valuation professionals and M&A advisors, and addressing potential deal-breakers head-on, sellers and buyers can navigate the acquisition process with confidence and increase the chances of success.