Preemptively Preventing Merger & Acquisition Transaction Failure

Over the next few years, thanks to aging and retiring baby boomers, an overwhelming number of businesses will likely be up for sale. This potential flood is sure to create a competitive environment among both sellers and buyers, as potential buyers begin to closely scrutinize the many options and choices they have to invest in.

But even without the baby boomer influx, a large number of small and middle market business owners fail to close on their business sale.

Why is that?

While each deal is unique in nature, most deals fail to close for one of the following 6 reasons:

Seller’s valuation expectations are too high

This issue typically comes into play when the business owner hears about a similar company that is selling for high valuations. Naturally, the business owner feels his company deserves the same valuation; however, that’s not always the case. A high expectation of valuation can alienate the buyer and, inevitably, can disappoint the seller.

High expectations might also cause a business owner to pass up on a perfectly adequate deal, in the hopes of getting an offer price that matches – or exceeds – some predetermined number they’ve come up with. Rather than merely fixating on the offer price, it’s important to consider all of the components of the deal’s structure.

The deal drags on

Momentum is a key ingredient toward the success of a deal. The longer a deal drags on, the more likely all parties involved begin to lose interest and will commit their time elsewhere. A buyer’s due diligence team has a big impact on the flow of a deal; but so too does the seller. If the seller isn’t prepared for the buyer’s due diligence process, delays will pop up and the deal will be in jeopardy.

Another time when momentum can be lost is when terms of the deal are renegotiated. Not only does this cause deal fatigue, but it can also create a level of distrust that could destroy the deal altogether.

Revenue concentration

If a company’s revenue is heavily concentrated in a small number of customers, the potential buyer will see this as a red flag. The same goes toward vendor dependence: if a company relies on one vendor for a bulk of raw materials, the buyer will perceive this as increased risk.

Exposed weaknesses during due diligence

During the buyer’s due diligence, certain areas of weakness might be discovered, causing the buyer to think twice about the offer. If the buyer discovers any evidence of poor internal controls (such as issues with financial statements or regulatory filing inconsistencies), he may perceive that as an indicator of a bigger problem: that the company is not well run.

Poor articulation

Selling a company means having to be able to communicate effectively. Not every business owner excels at this. A good communicator – within an M&A transaction – will be able to highlight the growth and revenue potentials, the company’s competitive advantages, and the strengths of the existing management team. Many business owners, however, fall short on this and fail to persuade potential buyers with the right rhetoric.

Lack of advisors

Most business owners will sell a business once in their lifetime, meaning they have little to no experience getting the deal done. That’s why research indicates that most owners who choose to sell their business on their own end up losing out on a higher return.

When selling a business, it’s key to compile a strong team, made up of an M&A consultant, a wealth management firm, a transaction law firm, a transaction accounting firm, and a strong investment banking firm.

By leaning on industry experts during your sale, you’re far more likely to avoid a failed deal, and more likely to enjoy a higher return than if you go it alone.

RC Victorino
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