Avoiding M&A Failures

Losing something we thought we had in hand stings more than never getting it in the first place. That’s science. It’s called “loss aversion.”

If you aren’t actively pursuing the sale of your business today (you should always be thinking about that day, but for now we’ll say “actively pursuing” it), then you’re not sweating the details just yet. You’re going to work, charting your progress, and building your own personal empire. Progress feels good. You’re hoping for the best someday.

But if it’s time to transition away and you’ve got an offer on the table, you’re already picturing that ski slope or beach or golf course in your future, and then it slips away in the blink of a busted deal? That hurts.

Avoiding failed mergers and acquisition deals is a big reason to have a team of experienced pros at your side from the start. In virtually any deal, the team representing a buyer – whether a private equity firm, a competitor, or a larger company looking to add to its business – will enlist pros trained to pick through your books, study your operation, and make the best deal they can. They are looking for reasons to walk away.

A solid M&A team on the seller’s side will have guided deals to completion repeatedly. Sell-side advisors know how to demonstrate maximum market value, attract multiple bidders and boost the final price, spot and turn away unserious buyers, and structure the sale (most sales are not all cash).

Up to 75% of pending business sales fail. Avoiding failed mergers and acquisitions is both a skill and an art developed over years of analysis, experience, and preparation.

At SDR Ventures, we’re proud of our industry-leading 88% closure rate, but even then, some 24% of our deals have ended up with an alternate buyer, a buyer waiting in the wings after a primary bidder fell short.

There are things that are out of our control – a pandemic, a shift in consumer sentiment, a disrupter to an established sector – and there are things we can control, things like building a clean ledger, a smooth-running operation, and a diverse client base. Advisors spot those areas that can be cleaned up and turned around before they spoil a pending deal.

Some common ways deals go sideways include:

• Misaligned Shareholders: Right from the start, if ownership isn’t 100% on board, any deal is doomed from the start. Cold feet from shareholders or partners who didn’t really want to sell will tank a deal. Emotion is a real thing, and every deal depends on consensus.
• A Bad “Story”: Your financial records, sales, customer base, and established internal controls tell your business story. Is your business too dependent on one client? That’s a red flag. A suspicious growth story that doesn’t align with owner motivations, sloppy books, and a lack of repeatable business in the pipeline? Those are warning signs. A team of advisors can help you get your story straight before it’s picked apart under inspection.
• A Thin Bench: If a business is too dependent on one cog – say the owner – and that “cog” disappears with the sale, the business loses value. Michelangelo had a great business producing valuable artworks. But if he wanted to retire, it’s doubtful his empty studio would be worth much as a studio without him at the helm. Build a business that would continue to grow even if the owner turned off the cell phone and disappeared to hike the Appalachian Trail, and be prepared to demonstrate that.
• Lack of an Advisory Team: Nothing is as easy as it seems, and owners don’t know what they don’t know. Owners trying to juggle sale negotiations on their own can let business performance slip. Changes in market conditions or overestimating the future value and bickering over “the last dollar” are deal breakers. That’s where a professional, impartial, experienced advisory team – your team – can anticipate, avoid, and overcome.

To avoid failed mergers and acquisitions, losing a deal you thought you had in your hand, it’s important to understand what can go wrong and how you can anticipate and prepare. An experienced team on a business owner’s side addresses the details before putting out the for-sale sign. Understanding what can cause a snag, what can be a red flag, and tackling those issues takes time, patience, and know-how. The best advisory teams don’t just attract potential buyers; they navigate the process to a successful completion.