What we can learn from M&A deals that fail

By Generational Equity


A wise man once told me that sometimes the best lessons in life are our failures. We learn more from our mistakes than our successes; sadly, most folks spend more time basking in their triumphs than analyzing their failures.

This can also be said from M&A transactions. Sometimes the deals that fall through can be our best tutors because they teach us what to avoid. Generational Equity deal makers have ages of combined, sometimes painful experience from deals that fell apart. In fact, the old saying in the deal making world is that a deal is not a deal until it falls apart three times.

That is why our deal makers have the collective wisdom of Solomon and the patience of Job!

With this in mind, the title of a recent article in the Harvard Business Review made me think of why our services are so valuable to owners of privately held companies. It was What We Can Learn from Merger Deals That Never Happened.

Although the article focuses on several mega mergers and the folks working in the anti-trust department (which usually have little bearing on transactions in the lower middle-market) and therefore wasn’t directly applicable to our audience, it did remind me of a roundtable discussion I had with a few of our deal makers several months ago.

The question I posed to this group was if you could narrow it down to three reasons deals fall apart, what would they be? Interestingly, they all agreed on these:

  1. Get your documents in order.
  2. Be emotionally prepared to leave your business.
  3. Be prepared to answer tough questions.

Certainly M&A deals don’t close for dozens of reasons, far more than just these three. But the deal makers I was chatting with were in agreement that a good portion of theirs that failed (and most eventually did close) were caused by one (or more) of these three.

Assuming my unscientific poll around the cafeteria table is accurate, then you need to examine your business in relation to these, no matter if you are using professional M&A firm or not.

Here is why: If the documentation of your business is not accurate or does not address key information buyers are interested in, chances are good your deal will fail. You can fix this after the fact by learning why and addressing it. But that is not a good way to educate yourself because you most likely will have exposed your company to more than one buyer using bad data and then your second round with better info will be even more closely scrutinized.

Lesson learned:

Before going to market make sure your financials are accurate and that the info you are providing regarding your business is correct.

Secondly, you have to be ready to actually sell. This is one of the biggest reasons that sellers do not close deals: They get cold feet at the 11th hour when they think about two things:

  1. What the heck am I going to do after the sale?
  2. My entire identity is tied up in my company. Who am I if I am not the owner/founder?

These are not questions you want to suddenly consider halfway through due diligence with a buyer. It is amazing how many sellers are not ready when they think they are. This is one HUGE reason that buyers like looking at Generational Equity opportunities. By and large our clients are sellers because we put them through a demanding evaluation long before going to market where we really ensure that their motivation to sell is pure.

Again, waiting until the day before the deal closes to realize you really can’t depart opens you up to some serious issues, not the least of which is a severe loss of business and/or key employees if your confidentiality is breached.

Lesson learned:

Take stock of your motivation BEFORE approaching buyers. Are you really a seller?

And finally, you REALLY need to have thick skin before you negotiate with any buyer but especially an optimal buyer willing to pay a premium for your business. Why? Because the buyer will be asking you challenging questions about your company. They are going to drill deeply into your documentation and will question EVERYTHING.

So much so that many of our clients call us up at some point during due diligence and say, why is he/she asking me these things? Don’t they trust me? It is not a matter of trusting you, it is a reality that before any buyer is going to pay you millions of dollars for your company they are going to scrutinize, examine, and analyze the entire operation.

Due diligence is a grueling process and you need to be ready to face questions regarding your company’s weaknesses without taking these questions personally, which is hard to do if you are the founder. As one client said to me, “No one likes to be told that their baby is ugly.” But potential buyers aren’t really doing that. For most, it is just business. Your company is an opportunity among dozens. They have to pick the best one. Yours could be it but they have to ask probing questions to make sure. Here is what a few folks say about the due diligence process:

Lesson learned:

If you take probing questions personally, you may walk away from a great deal. Leave your emotions at the door.

The good news is that the odds of you actually closing a deal for your business go up dramatically if you hire an experienced M&A advisor like Generational Equity. Our deal teams have literally seen it all. Very rarely – if ever – does a transaction proceed flawlessly. Deal makers know that ultimately they are dealing with human beings on both the seller and buyer’s side. This always complicates things.

If you are interested in learning more about our services, you can do so by using these links or you can call me directly at 972-232-1125.

Carl Doerksen is the Director of Corporate Development at Generational Equity, part of the Generational Group.