While breakups aren’t anyone’s favorite topic, I have to share a cautionary tale that plays out too often in the transaction world. I’m talking about mergers and acquisitions gone awry—when a match seemingly made in corporate heaven goes to “it’s complicated” (or worse) in a hurry. Cue the romantic comedy intro song.
Transaction failures are more common than you may think. Studies point to failure rates for mergers and acquisitions hovering somewhere between 70 and 90%!
So, what causes so many mergers and acquisitions to end in anguish? Every situation has its own unique circumstances, but we identified four common reasons that buyers and sellers should keep in mind to make sure they get their happily ever after.
REASON 1: EMBELLISHING THE TRUTH
Selling a company is like preparing for a first date or interviewing for a dream job. You’ll do what it takes to make a positive first impression, even if that means reveling in the good and hiding the bad.
Intentionally or not, sellers striving to put their best foot forward may misrepresent the allure of their company. They could inflate their earning potential or earnings in general as well as their overall value and market strengths. Or they might underestimate their working capital needs.
Sellers can also be overly optimistic in how they frame their customer relationships and even market concentration—important aspects that you can’t easily find by perusing the balance sheet. It’s risky enough for a company to rely too much on any one customer, but when that customer is unhappy and on the verge of leaving? That’s a dealbreaker.
Misrepresentation can go both ways. We’ve seen deals fall through because buyers couldn’t raise the necessary capital as quickly or easily as they indicated.
REASON 2: OPERATIONAL ROADBLOCKS
Some transactions fail due to insurmountable operational roadblocks. Things may seem attractive on the surface, but then you discover record-keeping systems that consist of shoeboxes full of indecipherable sticky notes. If the seller wasn’t a stickler for detail, the issue could be more involved, like a lack of proper controls around internal reporting or balance sheets missing critical information.
Sellers may also list assets that actually deserve a liabilities label. For example, a warehouse full of inventory sounds positive until you examine the stock and realize it’s obsolete and unsellable.
While operational issues may not be malicious, they deserve consideration as major red flags all the same.
REASON 3: POOR CULTURAL FIT
Selling a company represents the biggest transaction of an owner’s life. The professional stakes are high, and the personal attachments are strong. This is their one true love, after all.
From that perspective, making a big profit isn’t always the seller’s only motivator. They want to know their business will be in good hands for their customers and their community. Sellers may change their minds if they learn that buyers have different company values or plans for an overhaul.
Cultural fit is particularly important when the seller intends to stay involved with the company post-transaction in a supervisory or employee capacity. Taking on the new non-ownership role requires an adjustment period and a sense of trust on both sides. Both sellers and buyers should feel comfortable that they can maintain a strong working relationship, making sure to define the relationship prior to deal close. Clashes that occur early on can signify the deal might be doomed before it’s done.
REASON 4: THE UNPLANNED AND UNEXPECTED
Despite all the double checking, investigating and analyzing, even the best transaction plans can go sideways fast through no fault of the buyer or seller. If life were a movie and transactions were romantic, think of this as the new girlfriend accepting a really great job across the country.
Take COVID-19, for example. (Can you believe we almost made it through the entire article without mentioning the pandemic?!) COVID-19 caused the postponement or cancellation of countless transactions. Major natural disasters can have the same effect, as can shifting political climates that destabilize markets, consumer confidence and other economic indicators.
You can’t prepare for the unpredictable. If you have a transaction on the horizon, pay close attention to what’s going on in the world and factor any and all anomalies into your decisions.
Getting to “Yes”
Don’t get too discouraged by all this talk of things not working out in the end. Plenty of transactions end with both buyers and sellers feeling victorious. By knowing what could go awry, you can do what’s right.
As with any successful relationship, your transaction has to be built upon a foundation of honest communication. When buyers and sellers are clear from the start about their expectations and terms of the deal, they can avoid surprises that turn deals sour.
Communication should go hand-in-hand with extensive due diligence, which means having a trusted partner reviewing financial records, buyer- and seller-side quality of earnings reports and any other documentation that tells a company’s objective story.
Consultants can help sellers understand the actual value of their company so they can set realistic goals based on market realities and not speculation. If there is uncertainty around a company’s value or future earning potential, experts can help parties identify alternative deal structures, including conditional earnouts.
Think of Sikich’s advisors as the really cool best friend in the romantic comedy. Our purpose is to guide buyers and sellers through compatible transactions. We do the research and ask the right questions to help keep mergers and acquisitions on track. Get in touch to find out how we can support the success of your next deal.
