4 Reasons Why M&A Transactions Fail To Close

Many M&A transactions fail to close

The past couple of years witnessed plenty of M&A transactions that have successfully closed. But, for every deal closure, there are notably more deals that start the deal process but do not get closed. Every year, thousands of dollars are squandered by buyers and sellers on transactions that go nowhere.

Many of these deals are lower and middle-market M&A transactions. It is essential to prevent being a part of a failed deal or, at least, reduce the losses. Typical reasons why M&A transactions fail to close are:

Failure of M&A deals: Seller not prepared for the sale

Failing to take the required steps to develop a business for a sale is the most obvious reason a transaction does not close. A potential seller examining the sale of its business should employ qualified M&A counsel and accounting professionals, in the beginning, to support, prepare for, and navigate through the sale process. The buyer will be interested to recognize and appreciate the seller’s intentions in proceeding with the sale. The seller needs to conduct a market evaluation of their business. This appraisal should include the seller’s corporate records, financial records, material contracts, litigation, and regulatory compliance so that they understand the current standing of its business. This review will help sellers to avoid surprises down the road and guarantee that the seller’s information presented to the buyer is as correct and comprehensive as possible. 

 The likely flashpoints that can occur here, which can delay the closing of the deal, are when the seller has not hired experienced M&A professionals to help in the transaction. The other hotspots are when the seller’s deal materials are fallacious, inadequate, or irregularly shown, and the buyer’s due diligence exposes one issue after another.

Failure of M&A transactions: Seller’s change of heart.

The sale process is a roller coaster of emotions, especially for family businesses and private partnerships with multiple owners. In such a deal, the M&A transactions will start smoothly, but as the sale progresses and when the purchase is coming to an end, the other partners begin to develop cold feet. At this point, the additional equity holders from the sellers have second thoughts, which can result in personality clashes. These non-aligned objectives can derail the closing process. In such situations, experienced M&A advisors can assist the seller in organizing and controlling the different personalities and prevent the emotional turbulence from stopping a deal collapse.

 The red flags are when the seller is a family business, and there is a lack of clarity to the seller’s objectives. In such cases, where two or more equity holders control the seller, multiple parties speak for the seller on key deal terms. Such cases can cause confusion, which can derail the deal closing.

Failure of M&A transactions: Buyer’s inability to secure funding

When appropriate financing is not accessible to the buyer, the sale will not consummate. The availability of funding depends on several factors. Some of these factors are within the buyer’s control, while others are outside the control. Sellers should conduct initial due diligence investigation of potential buyers to eliminate high-risk buyers and to confirm that their chosen buyer has the strength to obtain the capital required to close the transaction. A seller should identify buyers with a proven case history of being able to acquire financing and close deals. The buyer on his side must collect authentic information about the target. If there are real and conflicting surprises regarding the target company, the buyer will jeopardize its capacity to receive financing. The critical red flag for the parties to identify would be when the buyer has been presenting the deal to many lenders with no committals or when the buyer has a record of failed transactions.

Failure of M&A transactions: Time delay Destroys Deals

 There are cases when the deals fail to get close even with the best intentions of a willing, able buyer and seller. Such situations happen due to delay in getting the deal closed. The longer the deal process delays, the more probable bad things will occur that will negatively affect the sale and risk losing. A shift in trade policy, a geopolitical situation, or some other significant issue shall obstruct and, possibly, induce the end of the deal. 

Delays can be due to the seller’s lack of preparation or buyer’s difficulties in securing financing. In some cases, a delay can happen when there is a need for additional due diligence activities. These reasons do not result in a conducive climate to eventually resulting in the deal closure. Seasoned M&A professionals on both sides of the transaction can assist keep the sale moving forward at an appropriate cadence and manage the impact of external factors should they arise. 

The typical red flags are when agreed-upon deal timeframes keep getting delayed, critical details identified which need extensive and protracted due diligence, and when closing gets prolonged substantially beyond anticipation.

While there are multiple reasons deals do not close, the above cases are common causes M&A transactions fail to cross the final stretch successfully. A combination of two or more of the above reasons can ruin the deal because when one is present, the other causes also get involved as well, thus ensuring the deal’s end. The old maxim, “the best deal I did, is the one that I didn’t” may be right; nobody desires to spend time and money on a venture that is doomed not to close. The earlier one realizes the red flags of a failing transaction, and the earlier one can exit and reduce their losses.