5 Reasons Mergers and Acquisitions Fail
Mergers and acquisitions are complex transactions that require stringent planning and execution. Despite the best intentions, many deals fall through due to various pitfalls. Understanding these common issues can help both buyers and sellers navigate the process more effectively. We explore five key reasons why mergers and acquisitions fail.
1. Lack of Transparency with the Buyer
One major reason mergers and acquisitions fall through is a lack of transparency with the buyer. Transparency is critical in building trust and ensuring a smooth transaction. However, it can often be compromised, both unintentionally and intentionally, leading to issues.
Sometimes, the lack of transparency is unintentional. For instance, the seller sets an overly optimistic sales forecast based on hopeful projections rather than solid data. When these projections fail to materialise, the buyer, who has likely based their financial expectations and investment plans on these forecasts, will notice the discrepancy. This can lead to a loss of confidence in the reliability of your information and the stability of the business. The buyer may start to question other aspects of the business and may even decide to pull out of the deal altogether.
More damaging is the intentional concealment of issues within the business. This includes hiding financial problems, legal disputes, or operational challenges. When buyers eventually uncover these hidden issues during their due diligence process, it can lead to a complete breakdown of trust. The buyer may feel misled and question the integrity of the entire deal. This jeopardises the current transaction, but can also harm your reputation in the market, making future deals more challenging.
2. The Business is Not Prepared for Sale
When a business owner rushes into selling without optimising their processes and ensuring everything is in order, it can significantly diminish the perceived value of the company. Buyers expect detailed information and clear answers about various aspects of the business, from financial performance to operational efficiency. If comprehensive and accurate data is not provided, it raises red flags, and buyers may lose confidence. The lack of preparation often means critical issues are not addressed, such as outdated financial records or inefficient operational practices. These deficiencies complicate the due diligence process while also leading to buyers questioning the overall stability and potential of the business.
Properly preparing a business for sale involves planning, optimising operations, resolving any outstanding issues, and ensuring all documentation is up-to-date and readily available. When sellers take these steps, they enhance the attractiveness of the business, increase its market value, and facilitate a smoother transaction process, significantly reducing the risk of the deal falling through.
3. Lack of Confidentiality
If news of a potential sale leaks out prematurely, it can have detrimental effects on the business. Employees may feel uncertain about their future and choose to leave, and clients might see this handover as an unstable uncertainty, and choose to move on. This can lead to a decline in revenue and operational disruption. The reduction in the business’s stability and value can prompt the buyer to withdraw from the deal.
Confidentiality breaches that see clients moving on and the business revenue declining can impact retention or "clawback" clauses, which are designed to protect the buyer’s interests if the business’s financial performance is uncertain. For example, if the business relies heavily on the seller's personal goodwill with nonrenewable clients, a portion of the purchase price might be held in trust, payable only if the business meets agreed net income targets over a specified period. Alternatively, a clawback provision could require the seller to repay part of the purchase price if these targets are not met. Breaches of confidentiality can undermine these arrangements, as the loss of key employees or clients during the transition period can prevent the business from achieving the necessary financial performance, thereby triggering clawback clauses and complicating the sale further. Maintaining strict confidentiality is essential to protect the business’s value and ensure a successful transaction.
4. No Formalised Agreements With Suppliers and Clients
The absence of formalised contracts for critical aspects of the business can negatively impact the sales process. Key contracts, such as supply arrangements and customer agreements, are vital to the stability and predictability of a business's operations and revenue streams. If these relationships are not committed to writing through formal contracts, terms of trade, or other binding methods, it introduces significant risk and uncertainty for potential buyers.
Buyers need assurance that the business can continue to operate smoothly and maintain its revenue after the sale. Without formalised contracts, there is no legal guarantee that suppliers will continue their arrangements, agents will uphold their commitments, or clients will renew their business. This uncertainty can diminish the business’s value, as buyers factor in the risks of potential disruptions and revenue losses.
The lack of formal agreements can complicate due diligence, making it difficult for buyers to assess the true viability of the business. Ensuring all key contracts are formalised is important for enhancing the business’s attractiveness and market value, and also provides buyers with the necessary confidence to proceed with the acquisition, reducing the likelihood of the deal falling through.
5. Finance Declined
For a sale to proceed smoothly, it is essential the buyer is able to pay. When financing the purchase, unconditional approval relies on thorough due diligence. Lenders will generally require detailed and accurate documentation to grant unconditional approval for financing. If these prerequisites are not met, the finance application is likely to be declined. As a seller, it’s important to ensure that the buyer has completed all due diligence processes and obtained all necessary approvals before approaching their bank. This includes having a clear understanding of contracts, financial records, and business operations.
It’s important for buyers to engage with their bank or financier well in advance of making an offer. This proactive approach helps buyers understand their actual financial capacity and reduces the risk of financing issues.
Ensuring Due Diligence is Completed Smoothly
Due diligence falls under the buyer's responsibilities, but there are several actions the seller can take to facilitate a smooth process. During due diligence, the buyer should thoroughly review the following areas:
Contracts: Examine agreements related to the sale of the business, existing arrangements with staff and suppliers, and partnerships.
Business Operations: Assess intellectual property, inventory, tools, and equipment.
Financial Records: Analyse income statements, profit and loss statements, and tax returns.
Expenses: Look into bank loans, utility accounts, and lease agreements.
To assist in this process, the seller can ensure that all key contracts are formalised and up-to-date, providing clear documentation for supply arrangements, agency agreements, and client renewals. Maintaining complete transparency about the business's financial and operational status, including potential issues, can build trust and reduce delays. Ensuring that all relevant information is organised and readily available can help streamline the due diligence process. By taking these proactive steps, the seller can enhance the business's attractiveness, increase its market value, and facilitate a successful transaction.
Seek Professional Assistance
If you need expert legal assistance with buying or selling a business, Bradley and Bray are here to help. Our experienced team can guide you through the legal complexities of mergers and acquisitions, ensuring a smooth and successful transaction. Contact us today to discuss your needs and take the next step toward a secure and profitable business deal. Reach out to Bradley and Bray for professional advice and support.
Disclaimer: This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers take no responsibility for any use of the information provided in this article.
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