Merger & acquisition deals hold the promise of increasing business value, fostering growth, and creating synergies. However, the reality is that many M&A deals fail to reach a closing. While a terminated transaction is certainly disappointing, there are lessons to be learned from this event. This article briefly explores some of the underlying reasons as to why deals fail to close along with insights that may assist buyers and sellers in handling these obstacles effectively.
Financial and Valuation Issues:
M&A deals often hinge on financial considerations and valuation. Disagreements over valuation methods, purchase price, and payment structure can instantly derail a transaction and lead to a failed M&A deal. Additionally, the seller’s perceived business value may differ from the market’s willingness to pay. Selling a business is typically the most significant financial transaction of an owner’s life. They must have a clear understanding of net proceeds (post-indebtedness, fees, taxes, etc.) to ensure it is sufficient for future needs. Accurate financial due diligence, transparent communication, and realistic valuation assessments are crucial to ensuring deal feasibility.
Disagreements Over M&A Deal Terms and Conditions:
Negotiating the terms and conditions of an M&A deal can be complex. Disagreements over deal structure, representations, covenants, or indemnification requirements can lead to a breakdown in negotiations and a failure to close the deal. Effective communication, compromise, and creative problem-solving are vital. A detailed and comprehensive term sheet, or letter of intent, is an effective way to reach mutually agreeable decisions at the outset before the parties move forward. This initial document will provide a road-map for preparing documentation consistent with agreed-upon terms, which can aid in reducing disagreements in the documentation phase of the deal.
Cultural and Organizational Misalignment:
Successful M&A deals require a certain level of cultural and organizational alignment between the parties involved. Incompatibilities in leadership style, organizational structure, decision-making processes, or operational practices can create challenges and raise concerns about post-merger integration. Conducting cultural due diligence, open communication, and addressing alignment issues early in the deal process are critical to ensuring compatibility. Furthermore, leadership meetings can help determine if values, approaches, and priorities align.
External Market Factors:
External market conditions and events can significantly impact the likelihood of a failed M&A deal. Economic downturns, industry disruptions, political uncertainties, or sudden shifts in market dynamics can alter the M&A landscape. The current inflationary environment has resulted in higher interest rates which may present financial difficulties, or even the inability to secure adequate funding. Staying vigilant, assessing market risks, and having contingency plans in place can mitigate the impact of external factors.
The above-mentioned factors add layers of complexity to M&A deals of all sizes. Enlisting the help of an M&A attorney with knowledge of transactional law, the art of negotiation, and merger & acquisition etiquette can help buyers and sellers surmount an impasse and achieve their desired goals at closing.
To obtain further information or engage one of our M&A attorneys for your deal, please reach out to request a consultation, or call us at 216-696-1422.
