When (and How) to Walk Away from a Deal
Deal-making is as much art as it is science. The science is generally performed on the front-end of the deal by equity analysts and expert researchers providing strategic insight, matching global trends with the deal’s strategy as well as giving substantial information for due diligence discussion. Doing deals is almost like dating someone you may be incompatible with. The longer you wait to break off the engagement or the relationship, the harder it is to tear off the band-aid. In most instances walking away from a deal is best done early. In most instances this means getting out all of the inherent dirty laundry at the beginning–on both sides of the table–so answers are divulged information, instead of having to wring them out one question at a time. It is with that in mind that we’ll be discussing reasons to walk away from a deal.
Deal Strategy Mismatch
It takes a great deal of discipline to know when to say no. This applies to so many aspects of life, but in deal-making–when large amounts of money are at stake–the ability, willingness and overall tenacity to turn down a decent deal must be innate in the deal-maker. Larger deals are even more difficult than the smaller deals.
Even if a deal will offer great dividends to investors, it may not be within the investors’ best interest, according to the particular strategy they may want to implement. Strategic disconnects could include:
- Different industry focus. If the deal is in a different industry all-together than what the strategy requires, it may expose an institutional investor to more risk than they may be willing to inherit.
- May not meet growth requirements. Many pension-fueled investment funds need to keep up with growing needs. As such many deals, while very safe, may not meet the growth potential and needs of clients seeking above-normal returns.
- Strategy disconnect in the deal itself. Even if all other deal scenarios are met, the internal company strategy of the target may be wholly and utterly disconnected from what is in investors’ mind. This is especially problematic if the company has pursued an unsustainable strategy and the path is unclear or unattainable for a sustained, long-term focus.
The deal gets too expensive
Deals can get too expensive, too quickly, especially if multiple bidders are brought to the table. But as Kenny Rogers would say, “know when to hold ’em, know when to fold ’em, know when to walk away, know when to run.” Pay close attention to internal analysts numbers and projections. If the deal seems to get better than even the best case scenario (you know the one: world peace, coupled with huge bumps in consumer demand), then it is unwise to proceed.
You want a great example of what not to do check out the analysis of the world famous KKR/RJR Nabisco deal. It’s a great example of a leverage buy-out gone awry. Using leverage can be helpful, but there is a threshold which ever deal maker should be unwilling to pass. Some deals hit that threshhold rather quickly. On the flip-side though, it is important not to miss value if it is inherently present. Others may not see what a particular deal maker sees in potential and synergies. Sometimes the bid may not have been enough, but in most cases, big egos get the best of rational thought when deal prices begin to sky rocket.
Details obscure and preclude deal goals
If overall strategy doesn’t scream “do the deal” then, it may not be wise to proceed. This third and final point may seem the most obvious, but some simply avoid taking the gut or smell test before going down the path. In most instances it’s not a matter of strategy mismatch, but of deal detail mismatch. Let me paint a picture. We worked on a deal sometime ago which was a nationwide industry roll-up. One particular company seemed like the perfect fit, but upon further investigation, the company was nowhere near where it needed to be to be included. In other words, the company’s details were not prepped and ready. If we had an extra 18 to 24 months, the deal would have worked out (as the issues could have self-corrected). This was unfortunately not the case and the deal just wasn’t a fit. The overall strategy seemed a fit, but the details obscured the vision. The company just wasn’t prepared to be sold.
How to walk away from a deal
Leaving the table tactfully is a big concern for deal makers. The world is a small place. Burning bridges which may need to be crossed later on can cost you thousands. I would compare this issue to calculating customer LTV (life-time value) for a consumer-based company. In doing deals, you’ll probably never know the LTV of those whose companies you’re working with, but you may need or want to deal with them later. Avoiding severing ties negatively will be essential in the event the deal return and smell better in the future. In other words, you’re walking on egg shells. Here are a few pointers to walk away as gracefully as possible.
- Walk away quickly. As soon as things go south, walk away fast.
- Walk away early. Starting due diligence immediately and finding the skeletons quickly allows for a quicker walk-away. People are always less-burned if you don’t drag things out only to have the deal implode down the road.
- Be forthcoming. Give all information and reasons for walking away.
- Smooth things. Attempt to make amends, if need be and make sure to keep communication lines between other members open.
Walking away is never easy. It can be a risky gamble that the prudent operator may get squeamish over. High-stakes negotiations requires an iron stomach.
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