Avoiding M&A Transaction Risks

During an M&A transaction, sellers are – essentially – placing themselves and their business at risk. The moment a seller has his/her first first discussion with a potential buyer, and until the sale is finally complete, there are a number of risks that can damage the business and implode the deal. During the sales process, sellers may have the sale implode, the actual or perceived value of the company could change or the news of a deal could leak prior to the sale.

While these risks are often times unavoidable, there are ways to minimize your exposure to them. Let’s break down these risks so that you can be better prepared to avoid them as you enter into an M&A transaction.

Most private business sale processes fail

The longer a business is shopped or the deal is dragged-on, the higher the likelihood of a failed process. That’s because it’s not uncommon for both buyers and sellers to grow tired of the process, which in turn negatively impacts trust between the two parties.

There are a number of reasons why your transaction may fail to be completed, including:

The state of the market – Even in stable times, market windows can close abruptly in unexpected ways (just look back to the 2008-09 financial crisis for evidence).
Changes in your business performance – During the M&A transaction period, changes in your business performance could cause your potential buyer to back out or delay the process. Whether a key team member leaves, you lose a large customer, or market prices/demand collapse, any sudden changes to the landscape of your business could cause the transaction to crumble.

These types of risks are all but impossible to avoid. You can’t plan for a recession; you can’t plan for the loss of an important client. How, then, can you lower the chances of your business sale falling through?

If at all possible, make the M&A process short and sweet. When you move the process along quickly, fewer things can go wrong during the interim.

Prolonging the process can hurt in other ways as well. The longer the process takes, the more money the buyer has to invest in financial and legal advisors. As these costs pile on, the potential buyer may begin to question whether it’s all worth it.

Banks, as well, can play a negative role in your transaction the longer it goes on. When a bank commits to financing, that money is earmarked for that particular commitment and can’t be used elsewhere. As a result, financial institutions aren’t likely to extend their financing commitments without charging additional fees. These fees are passed on to the buyer, which increases their deal costs.

A change in the valuation (real or perceived) of your business

Earlier we discussed how changes in your business during the sale process can cause that sale to fail. But changes in your business can also impact the perceived value of your company as well.

The value of your business is based on multiplying Valuation Metric with Valuation Multiple. As the process carries on, the product of this valuation formula may be adjusted based on newly acquired information.

When changes are made that impact your business (again, we can return to the loss of a big customer, for example), it’s only natural that the buyer reconsider the true value of your company. When original value expectations are no longer sustained, it’s quite likely that the deal will fall apart.

What can you do to avoid this? Again, we suggest doing your best to expedite the process, as the longer the negotiation process takes, the more risk your placing on your business.

The M&A process can impact your current operations – especially if word gets out

Leaks about an impending sale can have deleterious results for your company. Customers might lose confidence, as they wonder if a change in ownership will negatively impact the level of service they have come to expect. Vendors and suppliers might view an impending sale as notice that the business is under fire. Employees may become less productive as they concern themselves with their future in the company.

A leak can also empower your competitors, who may use confidential information for their own advantage.

So what can you do to avoid this? While leaks are often inevitable, one way to reduce your chances of this outcome is to, again, avoid a lengthy process. The longer the M&A transaction, the loner you leave yourself exposed to some (if not more) of these common risks in M&A.

Risks may be unavoidable, but you can be prepared

Understanding the realities of some of these common risks, and accepting that they’re often unavoidable, you’re now in position to anticipate these hiccups that occur along the way of an average M&A transaction. While expediting the process may not always be possible, you can at the very least be prepared to withstand sudden shifts in mood or behavior of your potential buyer, and adapt as needed to ensure the sale follows through to completion.

RC Victorino
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