News & Events
The Four Leading Causes Of Failed Business Acquisitions
ENLIGN DEAL TEAM | 01/15/2023
Dwelling on failed acquisitions isn’t how we like to spend a lot of our time, but it’s important to learn from past transactions that didn’t make it to the finish line. Below are the four most common reasons we’ve seen that transactions unravel before they are completed. These are presented in order from most to less common.
1. Buyer Concerns In our experience it’s most often a buyer defect that causes a transaction to terminate. These “buyers” either lack the experience and confidence to complete a transaction or ultimately get cold feet because they lack the entrepreneurial acceptance of reasonable risk involved in owning a business and being self-employed. Other reasons generally center around unrealistic expectations. For example a ~$40 million transaction terminated because the buyers investment banker didn’t know how to calculate or negotiate a reasonable amount of working capital. Another common buyer error is attempting to negotiate every single term and condition in their favor. They lack negotiation skills and simply “round off every corner” in their favor. Of course, some potential buyers do not have the financial wherewithal to complete a business acquisition in the first place, but an experienced advisor should be able to determine this early in the process and save everyone much grief.
2. Seller Concerns Sellers who “don’t need to sell” can cause unnecessary problems. They often lack the motivation to make reasonable concessions or pivot as the material facts or underlying conditions may change. These sellers often have unrealistic expectations in sale price, terms and conditions. Undisclosed or unmitigated liabilities that show up in the eleventh hour are almost always a death-knell as buyers legitimately wonder what other skeletons the seller may be hiding in the closet. Sellers don’t “need” to sell to justify going to market, but they at minimum should “want” to sell. Otherwise, they will likely waste the advisors, buyers, lenders, attorneys and accountant’s time and money.
3. Third Party Concerns There may not always be a problem with the buyer or seller. Third party interference can come from many directions such as landlords that want to dramatically increase rent, lenders that want to charge excessive fees, franchisors (the worst) that place undue burdens on the buyer AND seller extorting fees because their franchise agreement requires their consent for transfer. Other examples include government regulations, adverse results of environmental studies or employee/customer/vendor disruptions. Unfortunately, there are situations where the buyer (usually) or seller retain inexperience transaction counsel who is so focused on maximizing the benefits and protections for their client that the transaction become untenable to the other party. These attorney’s often smugly comment “sometimes the best deal is the one you don’t do” (for which they happily charged their fees for killing). Another less common, but notable third party interference comes from the sellers spouse or other family members who have adverse interests to the transaction. Third party interference can be a “deal killer” because they are often difficult to predict and often the third party has self-interests that they are unwilling or unable to forego.
4. Deal Fatigue Deal fatigue is not necessarily fourth, but runs in parallel with other causes. This occurs when a transaction loses its momentum and the buyer and or seller become emotionally exhausted as well as frustrated and give up. Sometimes it is virtually impossible to avoid deal fatigue due to third parties requirements such as landlords, lenders, environmental studies or the time required to complete quality of earnings (QoE) reports, but an experienced M&A advisor should aid by setting realistic expectations with all stakeholders and closely managing the process. Another unfortunate impact is that deal fatigue doesn’t reset with the seller when their business is taken back to market potentially making subsequent negotiations more difficult.
Business Transaction Tip: According to a 2023 poll of veteran transaction advisors, sellers that engage a professional business broker or mergers and acquisitions professional are approximately 90% less likely to encounter a failed transaction.
Summary: Transactions can fail for many reasons. Most are caused by inexperienced buyers or their advisors, but sellers and third parties can also be the culprits. Deal fatigue exacerbates other deal stressors and can be the ‘final nail’ in the coffin.
A transaction team comprised of an experienced intermediary, transaction attorney and loan packager can help avoid, mitigate or solve most transaction challenges.