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Why Do Mergers & Acquisitions Fail? Avoid These Deal Killers

by | April 23, 2024 | Merger and Acquisitions, M&A, M&A Education & Market

Reading Time: 4 minutes

Entrepreneurs plotting their next big move often turn to merger or acquisitions (M&As), which offer not just an exit but a potential infusion of resources and expertise. It’s an exciting prospect, offering significant growth potential—but it’s also fraught with risks that could turn a promising deal into a costly flop.

The value of your company comes down to 2 main factors:

  1. What you’ve built so far
  2. The likelihood that it will continue and grow

If you detract from these, it adds risk for buyers. Generally, anything that increases risk will reduce the deal’s value, and sometimes threaten the deal itself.

While everyone wants a great deal, securing any deal at all is often the first hurdle. Without the right preparation, some transactions are doomed from the start.

So what causes mergers and acquisitions to fail, and how can you safeguard your M&A? Let’s explore the critical deal-breakers.

Deal killers related to a lack of preparation

A lot of deals die before they begin because one or both companies involved weren’t prepared enough beforehand.

1. Lack of due diligence

A big reason deals go south is that buyers skip the homework. Due diligence here means digging deep into a potential acquisition’s background to see if they really fit with your business. This covers everything from their financial health to their legal situations and even staff morale.

If you don’t thoroughly check out a company before buying it, you’re in for some nasty surprises later. So, make sure you do your homework.

2. Financing issues

Another big stumbling block is money—specifically, not having enough of it lined up when you need it. It’s easy to miscalculate how much cash you’ll need to seal the deal, which can lead to a mad dash for funds at the last minute. This scramble can mess up your deal’s terms or even tank the whole thing if financing falls through.

To steer clear of this mess, get your financial ducks in a row early on before signing any purchase agreements.

3. Regulatory hurdles

When planning your M&A, don’t forget about the red tape. Depending on your industry, you might face all sorts of regulations, like needing FDA approval in healthcare. If you don’t plan for these regulatory hurdles, they can quickly derail your plans.

To make sure you’re aware of and prepared for any compliance issues that could pop up, always consult with an industry expert before moving forward with any deal.

4. Lack of continued investment

Buyers are looking for companies that are not just successful now, but are positioned to thrive in the future. If you’re not continually reinvesting in your business—be it through updating machinery, adopting new technologies, or enhancing your service offerings—you could be setting yourself up for financial strain down the line.

Don’t neglect your company’s competitive edge just because you’ve got an eye on the exit.

5. Poor management team

It’s hard to put value on good management, but without it you’re not gonna get a deal. We all talk about multiples of EBITDA etc, but having a strong management team is huge. These leaders drive revenue, meet profit goals, and shape a positive corporate culture, directly impacting your company’s attractiveness to potential buyers.

Don’t underestimate the value of having a strong management team when it comes to getting a deal done

Deal killers related to a company mismatch

Most M&A deals fall apart because the companies just don’t mesh well. Leaders need to spot these issues early, and honestly decide if they can fix them. If not, it’s better to back out early. With thorough checks and smart planning though, you can dodge common snags and make your deal a win.

6. Incompatible business models

When one company is gunning for growth and the other is scaling back, you’ve got a recipe for conflict. It’s crucial that both companies understand each other’s goals from the get-go. Are these objectives aligned, or are they on a collision course? Figuring this out early can save you a lot of headaches down the line.

7. Different cultures

A major deal-breaker in M&A is often a clash of company cultures. If two companies operate on fundamentally different values, merging them can feel like mixing oil and water. The trick is to find some common values you can both agree on and build a new, shared culture around those.

8. Misaligned incentives

It is important that everyone involved in the deal has aligned incentives. Otherwise, there will be tension and finger-pointing if things go wrong. Make sure that everyone knows what is expected of them and that their compensation is tied to meeting those expectations.

9. Lack of synergy

Synergy is when the sum of the parts is greater than the whole. Or, to put it more precisely, you want the merged entity to be more valuable than both companies were separately, whether through cost reductions, increased sales, or both.

You need a solid plan on how you’ll achieve these synergies before you even think about signing off on the merger. Without a clear strategy, you’re just stacking blocks with no blueprint.

10. High customer concentration

Relying too heavily on a single customer can be risky. For example, if 80% of your revenue comes from a giant like Microsoft and one executive decision cuts you off, your business could face serious valuation problems overnight. Such high customer concentration can deter many potential acquirers, fearing the instability and sudden revenue drops that could come from losing your main client.

There are almost always exceptions

People often think in absolutes, thinking they’ll never be able to sell due to X or Y traits of their business. But too often owners fail to dig deeper to understand the market and explore their options.

For instance, consider a business with a high customer concentration. Certain industries might naturally have just a few big players, making a high customer concentration less of a dealbreaker than it seems. Buyers understand these things and adjust their risk assessment accordingly.

On top of this, most deal killers can be preemptively addressed, but that requires having the right advisors to help identify your blindspots and prepare your business for a sale.

Rely on your advisors

When you’re deeply involved in your business, it’s easy to view everything through rose-colored glasses. This optimistic bias can make it challenging to spot potential deal killers lurking in your operations.

That’s why leaning on external advisors is crucial. Consultants and seasoned professionals can provide the objective critique necessary to identify and address blind spots in your business, so the first step of any sale should be putting together your team of advisors.

Engaging with advisors allows you to step back and view your company from an outside perspective—vital if you want to avoid drinking your own Kool-Aid too heavily. They can point out weaknesses you might overlook and help strategize on how to fix them, driving up the value of your business in the process.

Even if your business faces significant hurdles now, the right guidance can help you navigate these challenges. For more details on how an investment banker can help, book a discovery call or connect with me on LinkedIn.

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