Top 10 Ways a M&A Transaction Can Go Wrong
By What Can Go Wrong When Selling a Business
I read this great article today about the “Top 10 Ways and M&A Transaction Can Go Wrong” by Gary Miller of SDR Ventures. Here are some excerpts of this article:
“Many business owners are jumping on the bandwagon to sell their companies, trying to take advantage of the current hot market and frothy multiples being paid by buyers…Some sources estimate that 80% of small and middle market business owners who put their businesses up for sale never close the transaction. From years of observation, I have found that most deals fall apart (i.e., fail to close) for 10 basic reasons.
- Unrealistic Value Expectations: The number one reason deals fail to close is because a seller’s valuation expectations are too high.
- Unclear Story Elements: Business owners need to think like buyers. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win first place.
- Quality of Earnings: Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm to continue its due diligence.
- Length of Time: Every deal has a life of its own and its own momentum. Recognizing the ebb and flow of the deal momentum is critical to deal success. Time is the enemy of all deals. As the deal process drags on, both buyers and sellers start to lose interest…If the seller is not prepared well for the buyer’s due diligence process, deal momentum is lost.
- Material Changes: Material changes in the business’s operations can occur at any time. While these changes may be completely out of the seller’s control (e.g. recession, loss of a large client, loss of a key employee, etc.), these changes can often stop a deal from closing.
- Customer/Vendor Concentration: If a significant amount of revenues is concentrated in a few customers, or if critical supply chain raw materials are concentrated in one vendor, the buyer’s perception of risk is elevated substantially.
- Renegotiating Terms of the Deal: Renegotiating the terms, conditions, structure, and representations and warranties of a settled deal can be a deal killer. At the very least, back-tracking deal components that have been previously agreed upon kills deal momentum, adds time, and causes deal fatigue.” It also fosters distrust and can call into question all other components of the deal structure previously negotiated.
- Lack of Robust Internal Controls: Frequently, the buyer’s due diligence process will reveal sloppiness (or worse) in internal controls (e.g., weak collection processes for aged receivables, manufacturing error rates, aberrations in the financial statements, regulatory filing inconsistencies). A buyer may become concerned that the business is not well run…Once the buyer becomes concerned about the seller’s internal controls, the deal can go south in a hurry.
- Reaching for the Last Dollar: It is completely understandable that sellers who have put everything into their business want to get every dollar they can out of their business. Often, owners trap themselves mentally by fixating on a specific price for the company. Many owners will decide to pass on a deal, believing that the next potential buyer will pay more than the current potential buyer. Multi-million dollar deals have been lost over a few thousand dollars.
- Inadequate Advisors: Selecting a quality deal team is critical to deal success. In my experience, business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit. Selling a business is a once-in-a-lifetime event for most business owners. Most owners have never sold a business and do not have the skills to complete a deal on their own.”
If you want to read the entire article, click HERE.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $500,000 to $5,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.