We often hear about successful transactions, but many potential deals can fall through either during the process of negotiation or after due diligence has been completed. Even the successful M&A transactions can have its difficult moments. With that, here are five M&A deal breakers in transactions to be cognizant of.
1. Valuations & Price A strategic buyer may value a business higher than the seller might expect – or vice versa. In any case, the valuation expectations between a seller and buyer can differ and this can be a major source for a deal breaker. Managing the expectations of business valuations is a crucial task for M&A advisors.
2. Buyer Financing Some buyers can have more difficulty in getting funding arranged and this might ultimately end up as a deal breaker. Deals may have been leveraged up to 80% of the sales price in the past, but current financial institutions are more careful and typically ask for 50% equity contribution.
3. Legal Items Legal items can be a deal breaker as well. If the legal structure of the seller is not well set-up or too complicated this might result in a deal to hit a dead end. Although there are possible workarounds, the easiest one being an asset sale, it can mean the death of a once possible transaction.
4. Lack of Preparation by the Vendor A seller has the best chances for a successful business sale if he is well prepared and put in a lot of effort. It is great to show commitment as buyers usually have little time and only want to deal with serious sellers. There are many ways to show you are committed and well prepared. The best one is to hire a M&A advisor that helps in preparing a detailed Information Memorandum that showcases your company to potential buyers. This is a good sign to buyers that you are indeed serious about making a deal.
5. Seller Backing Out The selling process is just one more task the owners must execute while operating the business. Data accumulation and due diligence are tiresome and time consuming. This all puts a heavy burden on the shoulders of the business owner. If a business owner is not supported enough by its advisor, it’s common for the sellers to back out of the process in fear of not getting the right deal.