Why & how do M&A deals fall apart?

International investors find Australia attractive, with inbound M&A deals here exceeding $40billion each year. However, not all deals proceed as planned. While rigidity and lack of transparency are common deal-breakers, there are many other reasons that a business deal may not close successfully. Why and how do M&A deals fall apart? We highlight six deal breakers and how to avoid them.

Both buyers and sellers can have unrealistic expectations about the price of a business. Owners may overvalue their business, thinking that the sale price should be enough to compensate for their time and effort and fund their retirement. For buyers, the prospect of inheriting liabilities, sustainability issues and increasing labour costs may lead to undervaluing the business. If parties fail to reach a consensus, one will walk away from the deal.

Tip #1: A professional valuation of the business is essential to avoid bias during the deal-making process.

A seller’s poor financial records may mean they are not able to substantiate, at least to the buyer’s satisfaction, the earnings of the business. Poor record-keeping is also often seen as a sign of shady dealings. Non-compliance with standards, poor relationships with shareholders, suppliers and improper business practices may deter parties interested in the deal.

Tip #2: Sellers should keep their house in order at all times to increase a buyer’s confidence in the deal. Both parties should conduct due diligence to be clear on the true state of business affairs.

Some sellers are not entirely honest about their business. They may be hiding the fact that new competition is entering the market, that the business has serious problems or some other reason it is not saleable under existing circumstances. Even worse, all owners may not agree about selling the business.

Tip #3: It is better for sellers to be upfront about the state of their business so buyers know exactly what they are getting into. Sellers should be prepared for close cross-examination by buyers.

Some sellers are just testing the waters. They may merely want to see if anyone wants to buy their business at the price they would like to receive, or their desire to sell may not be strong enough to overcome the complexities necessary to finalise the sale process. Similarly, a buyer may begin with positive intentions but then doesn’t have the courage to go through with the sale.

Tip #4: Only initiate a transaction if you are truly ready to buy or sell. A professional business broker can assist as they are experienced in identifying commitment issues before the business goes onto the market or before a serious buyer is introduced to the business.

A seller may decide to wait until a buyer is found and then check with their external advisors about the tax and legal consequences. At this later stage, the terms of the deal need to be altered, and the buyer won’t agree. Sometimes a buyer’s investigation reveals an unexpected issue, such as an environmental situation or problems with federal, state, or local government agencies.

Tip #5: Although there are some ‘acts of fate’ that just happen and cause deals to fall through, sellers can prevent most of these by dealing with complications ahead of time. Nobody likes changes – especially buyers!

Deal fatigue occurs where negotiating parties start to feel frustrated or exhausted by the unending negotiation process. Deal fatigue is common in mergers and acquisitions where parties tend to become adamant about their proposals and positions, prolonging the negotiation process.

The outcome is often less beneficial than what was hoped for at the beginning. In a negotiation where one party feels disadvantaged, the parties may become involved in a bitter exchange of words, lose the gains already made, and want to exit the negotiation.

Tip #6: Avoid stalling on trivial matters involving the business deal and don’t erect unnecessary roadblocks. If parties in a negotiation experience deal fatigue, your deal advisors should intervene. This will help the parties continue to negotiate without losing patience and work towards achieving a win-win outcome.

A quality business valuation, proper planning, thorough due diligence and good communication are key to the success or failure of any M&A deal. To complete a deal, both buyers and sellers need a skilled team of advisors who have negotiating experience and the ability to deal with different personalities. Your advisors should at a minimum include your accountant, a tax specialist and your lawyer.

Accru has assisted many businesses to implement M&A deals and our advisors are experienced at identifying deal-breakers and key issues at an early stage. To learn more, see our Merger & Acquisition planning tips and our M&A advisory services or contact your local Accru advisor.