I don’t like talking about breakups, but I have to share a cautionary tale that plays out too often in the transaction world. I’m talking about mergers and acquisitions gone awry—when a match seemingly made in corporate heaven goes to “it’s complicated” or worse in a hurry.
Transaction failures are more common than you may think. Studies point to failure rates for mergers and acquisitions hovering somewhere between 70 and 90 percent!
What causes so many mergers and acquisitions to end in heartbreak? Every situation has unique circumstances, but we identified four common causes that buyers and sellers should keep in mind.
Cause 1: Half-Truths and Exaggerations
Intentionally or not, sellers striving to put their best foot forward may misrepresent the allure of their company. They could inflate their overall value, earnings, earning potential and market strengths. Or they might underestimate their working capital needs.
Sellers can also be overly optimistic in how they frame their customer relationships and even market concentration—important aspects that don’t immediately jump off the balance sheet. It’s risky enough for a company to rely too much on any one customer. When that customer is unhappy and on the verge of leaving? That’s a dealbreaker.
Misrepresentation can go both ways. We’ve seen deals fall through because buyers couldn’t raise the necessary capital as quickly or easily as they indicated.
Cause 2: Operational Issues
Some transactions falter due to insurmountable operational roadblocks. Things may seem attractive on the surface, but then you discover record-keeping systems that consist of shoeboxes full of indecipherable sticky notes. If the seller wasn’t a stickler for detail, the issue could be more involved, like a lack of proper controls around internal reporting or balance sheets missing critical information.
Sellers may also list assets that actually deserve a liabilities label. For example, a warehouse full of inventory sounds positive until you realize upon further examination it’s obsolete and unsellable.
Again, operational issues may not be malicious, but they deserve consideration as major red flags all the same.
Cause 3: Poor Cultural Fit
It’s not hyperbole to say selling a company represents the biggest transaction of an owner’s life. The professional stakes are high, and the personal attachments are strong. This is their baby, after all.
From that perspective, making a big profit isn’t always the seller’s only motivator. They want to know their business will be in good hands for their customers and their community. Sellers may change their minds if they learn that buyers have a different value system or plans for radical change.
Cultural fit is particularly important when the seller intends to stay involved with the company post-transaction in a managerial or employee capacity. Taking on the new non-ownership role requires an adjustment period and a sense of trust on both sides. Sellers and buyers should both feel comfortable that they can maintain a strong working relationship. Clashes that occur early on can doom a deal before it’s done.
Cause Four: External Events
File this one under “T” for terrible timing. Despite all the double checking, investigating and analyzing, even the best laid transaction plans can go sideways fast through no fault of the buyer or seller.
COVID-19 was a perfect example. The pandemic caused the postponement or cancellation of countless transactions. Major natural disasters can have the same effect, as can shifting political climates that destabilize markets, consumer confidence and other economic indicators.
It’s hard to prepare for the unpredictable. If you have a transaction on the horizon, pay close attention to what’s going on in the world and factor any anomalies into your decisions.
Getting to “Yes”
Don’t get too discouraged by all this talk of things not working out. Plenty of transactions end with buyers and sellers both feeling victorious. By knowing what could go wrong, you can do what’s right.
As with any successful relationship, your transaction has to be built upon a foundation of honest communication. When buyers and sellers are clear from the start about their expectations and terms of the deal, they can avoid surprises that stop deals cold.
Communication should go hand-in-hand with extensive due diligence, which means having a trusted partner reviewing financial records, buyer- and seller-side quality of earnings reports and any other documentation that tells a company’s objective story.
Consultants can help sellers understand the actual value of their company so they set realistic goals based on market realities and not speculation. If there is uncertainty around a company’s value or future earning potential, experts can help parties identify alternative deal structures, including conditional earnouts.
At Sikich, our advisors specialize in guiding buyers and sellers through harmonious transactions. We do the research and ask the right questions to help keep mergers and acquisitions on track. Get in touch to find out how we can support the success of your next deal.