Why Do M&A Deals Fall Apart?

Completing an M&A deal can be extremely difficult considering the amount of disruptions that can arise. Many of the disruptions that can cause a deal to go southward may be issues that are inevitable, while others may be the result of negligence or poor advisory of either party’s team assisting in the transaction. A few years back Google was exploring an acquisition opportunity to acquire an online news feeder.

While Google was performing the due diligence on the company it found some information in the financials that caused the acquisition team to walk away from the opportunity to acquire the company. While the details behind Google’s abandonment of the transaction are unclear, it is obvious that the company found something it did not like, and that something was large enough to be a deal breaker. I have found that when a company is beginning the acquisition process a large amount of information is provided on a generic or estimated basis.

While this is expected, it is important that the numbers are relatively close to the actual figures. It is also important that the numbers that are given represent the right accounts as well. For example, if the owners are taking out $500,000 a year in distributions, but they mistakenly say that it is taken out as a salary or wage then $400,000 would be added back into the adjusted earnings, falsely causing the valuation to be $1.5 – $2.0 million overstated.

Once the due diligence is underway and this mistake is discovered the deal could, and depending on the size of the transaction might very well fall apart. Many times accountants or lawyers are brought in by the selling company to ensure they do not make any mistakes that could come back to haunt them after the transaction is completed. While this is good, it is important to get those that are familiar with the M&A process and those that are not your previous lawyers or accountants (sometimes accountants are okay).

The reason I say this is because these third-party consultants see the deal as something that will take away their client; if the deal closes they lose that client. While it is not fair to put all under the same profile, many deals have gone south due to the best interests of the lawyers or accountants, not the client.

The Most Common Reasons M&A Deals Fail

The Google example above illustrates one of the most frequent failure modes: financial misrepresentation discovered during diligence. But that is only one item on a longer list of deal-killers that experienced advisors encounter repeatedly. Understanding these patterns in advance helps both buyers and sellers structure transactions in a way that reduces the probability of a late-stage collapse.

• Valuation gaps: Buyer and seller anchor to materially different enterprise values, and neither side is willing to bridge the difference. This is especially common when sellers have unrealistic expectations formed by anecdote or rule-of-thumb rather than market-informed analysis.
• Due diligence findings: The buyer’s due diligence process uncovers undisclosed liabilities, customer concentration issues, pending litigation, or key-man dependencies that were not apparent in the initial presentation.
• Key employee departures: News of a pending transaction — even confidential news — sometimes leaks. If critical employees respond by updating their resumes, buyers who discover this may reprice or walk away entirely.
• Financing contingencies: In leveraged transactions, the buyer’s financing commitment can fall apart if market conditions shift between signing and close. A deal signed in a benign credit environment may become unfinanceable if spreads widen materially.
• Advisor misalignment: As noted above, advisors whose business model conflicts with the deal closing — whether lawyers who lose a retainer client or accountants who fear scrutiny of their prior work — can introduce friction that has nothing to do with the merits of the transaction.

How Sellers Can Reduce Deal-Failure Risk

The most effective way for a seller to prevent deal failures is to invest in transaction readiness before engaging any buyer. This means cleaning up the financials, resolving known legal or regulatory issues, and stress-testing the narrative before it is tested by a buyer’s team. A formal sell-side preparation process is specifically designed to surface and address these issues in a controlled environment rather than under the pressure of active negotiations.

Pre-transaction financial recasting is a particularly important step. Owner distributions, personal expenses run through the business, and non-recurring costs should be clearly identified, documented, and consistently presented. The example in the original post — where $400,000 in distributions was incorrectly categorized — is entirely avoidable with disciplined pre-sale financial preparation. Buyers encountering an inconsistency of that magnitude during diligence will not always assume innocent error; some will assume the seller is managing the numbers, which poisons the broader trust necessary to close a deal.

Organizing documents into a structured virtual data room before going to market also materially reduces deal-failure risk. When buyers can access organized, clearly labeled documentation without repeated follow-up requests, diligence moves faster and the seller maintains momentum. Stalled diligence gives both sides time to reconsider — which often benefits the more hesitant party.

The Role of the Right Advisory Team

Choosing advisors with genuine M&A experience — not just general legal or accounting credentials — is one of the highest-leverage decisions a seller makes. M&A transactions have their own vocabulary, deal mechanics, and negotiating conventions that generalist advisors may not navigate well even with the best intentions.

Transaction-experienced legal counsel will know how to structure representations and warranties, negotiating survival periods and indemnification caps, in a way that protects the seller without creating deal-breaking friction for the buyer. Similarly, a transaction-oriented accountant will know how to present normalized EBITDA in a way that withstands buyer scrutiny rather than inviting it.

For buyers working the other side of a transaction, a structured approach to evaluating targets — including a clear diligence tracking framework and a disciplined investment committee memo process — helps ensure that material issues surface before rather than after a letter of intent is signed.

Frequently Asked Questions

At what stage do most M&A deals fall apart?

The most common failure points are during due diligence (when undisclosed issues surface) and in the period between a signed letter of intent and closing (when financing contingencies, final legal negotiations, or material adverse change clauses create opportunities for either party to exit). Deals that have survived a thorough LOI negotiation and a well-organized diligence process have materially better closing rates than those where either step was rushed.

How should a seller handle a buyer who discovers a financial discrepancy during diligence?

Transparency and speed are essential. If the discrepancy is the result of an honest accounting or categorization error, acknowledge it immediately, provide the correct figures, and offer whatever additional documentation the buyer needs to get comfortable. Attempting to minimize or explain away a material discrepancy typically causes more damage to trust than the underlying error itself. In serious cases, the seller’s advisors should facilitate a direct conversation between the parties to reset the information baseline.

Is it worth hiring an investment banker for a smaller transaction?

The decision depends on the complexity of the transaction and the seller’s experience with M&A processes. Investment bankers add the most value in situations involving competitive buyer processes, complex capital structures, or sellers who have never navigated a transaction before. For simpler transactions with a single known buyer, the cost-benefit calculation is more nuanced — but even there, the value of having an experienced advisor manage the diligence process and final negotiation often outweighs the fee. If you are evaluating your options, start a conversation about your transaction to understand what advisory support makes sense for your situation.