The 17 most common reasons M&A deals die 💀
Deals are fragile and many don't make it. We break down why and tips to minimise the risks.
Last week, a former colleague called me. He had spoken with a PE house interested in buying his business.
There were lots of green flags. Their interest was clearly legitimate, and they were a serious buyer who had done their research on his business beforehand.
He was super excited. He’s been working towards an exit for the last year and really wants to sell within the next 12 months.
But I had a word of warning for him, that burst his bubble.
You should be thrilled to get some genuine interest. But don’t get too excited too early. There are so many reasons why M&A deals die – even when there’s a keen buyer, a willing seller and a high-quality company.
Getting a deal through to closing can feel like navigating a mine field… Despite the best intentions of both buyer and seller, there are so many ways a deal can fall apart.
When my exit closed, I felt more relief than joy. Everyone who sells their company knows that they needed a healthy slice of luck to get there.
Let's understand the top reasons why deals fail, with tips to minimise each risk. Plus, we have five pieces of general advice to increase the chances of getting your deal closed.
Group 1: Buyer Issues
Deals often because of issues with the buyer – either their strategy, personnel, financing or their own financial performance.
This is the hardest set of reasons to contend with, as they can be most out of your control.
Buyer changes strategy
The buyer's strategic focus can easily move during a deal.
They could choose to focus on another area of their business, or no longer want to double down on the strategy that drives the acquisition. If you are incompatible with their new direction, that kills the deal overnight.
One common trigger is poor financial results from the buyer's group. That often forces them to re-evaluate priorities, and expensive and risky M&A is easy to cut – especially if the deal looks non-essential.
The best tip here is to choose a buyer where their strategic imperative looks super strong, and unlikely to change. You want to be impacting their core business, rather than a nice-to-have add on to the core.
Refer back to The SIX strategies that drive M&A to understand your buyer's rationale and confirm the strength.
Sponsor leaves
The sponsor is the key person at the buyer who advocates for and drives the acquisition forward. This person champions the transaction internally, gathering support, securing internal approvals and generally pushing things forward.
They can be as senior as the CEO or CFO, but in a large organisation are more likely to be a regional or product Director.
They are key to getting the deal done.
If they get fired, fall ill, resign or get moved around internally, the deal can easily wither and die without their energy and driving force.
You should aim to build support from across the buyer's organisation, to build back-up in case your sponsor does leave. That will also help overcome the next issue...
Internal disagreements at the buyer
Some deals are more controversial than others. There can be conflict within the buyer about whether to proceed, with vocal opposition from certain people. That's usually due to differing opinions on strategic direction, risk tolerance or resource allocation (or just plain office politics!).
You want to build support from across the buyer's leadership team. Try to get in front of as many execs and business unit leaders as possible to get them on board and excited about the benefits of the deal. That's your best strategy to minimise this risk.
Buyer's CEO does not support the deal
It's common, especially for a large buyer, for the CEO and Board to not be involved in the deal until late in the process. Sometimes that can be just before the LOI is signed, which can be many months after your first engagement with them.
If the CEO doesn't personally support the deal, it will be very difficult to get done.
As above, build a wide base of support. Ask your sponsor if they have discussed the deal with the CEO, and ask them if there's any data or evidence they need to support those discussions.
Financing falls through
You should ask your buyer how they will pay for the acquisition.
Ideally, that's from existing cash on their balance sheet. If so there are no external lenders to be worried about.
But often the cash needs to be financed from an external party – a bank loan or additional capital from a major shareholder. And they can easily withdraw funding if market conditions change, or if the buyer has a dip in their financial performance.
So ask about financing up-front, and consider how risky that sounds in light of what you know about the buyer.
Group 2: Business Issues
We've covered the buyer, now let's discuss what can happen if there's an issue within your business. These issues are more in your control, and should be more preventable.
Let's get into it.
Poor financial performance
This is a key one.
Each month-end whilst the deal is being negotiated, the buyer will ask for your latest financial performance and KPIs and track these against your forecasts.
A big financial miss or a worsening of KPIs is a major red flag. If you are missing targets a few weeks after setting them, how can they trust your forecasts for the next few years?! That's a common reason to chip the price, or even walk away.
As CEO, you will spend most of your time on the deal. The buyer wants to speak to you directly, and many of their requests will need to be handled by you personally. That will pull your focus away from the business, and can lead to worsening of KPIs and financial performance.
There's no magic solution here – it's a careful balancing act and you should prepare to work two jobs whilst the deal is live.
Issues flagged in due diligence
Experienced buyers will do thorough due diligence, covering all aspects of your business, the market, your financial reporting and your legal position regarding IP, leases, employees and so forth. It's extensive, and exhausting.
You should expect due diligence to uncover any hidden liabilities, risks, legal problems, financial irregularities, compliance issues or operational inefficiencies.
You should run an internal review to assess what issues they might find. Your lawyers and M&A Advisor can help with this.
Hopefully there's nothing material, but if there is you will have to act...
You should proactively communicate the issue to the buyer, explain how it came about, and how you plan to fix it. That's a much more transparent approach than hoping they won't find out.
They will find out, and that's much more likely to destabilise or kill the deal.
A key team member leaves
It's not ideal if an important exec or critical team member leaves during the deal.
This is usually only an issue in smaller companies, or when the person leaving is really essential to the value of the business.
If there is key person in your team and you are concerned about them leaving, try to resolve that if possible.
Bad news in your market
Bad news regarding your industry can really spook a buyer, and make them reconsider the deal.
That can be technological disruption, emerging competitors or new data about customer preferences that could spell bad news for your product.
If material, they can change the strategic value of the acquisition for the buyer.
There's nothing you can do here, but cross your fingers and hope you don't get a badly timed piece of news during your deal. And if something does come up, be quick to address why it's not as serious as the buyer might worry.
Regulatory, political or economic changes
In a similar vein, a buyer might be spooked if new regulations or policies are introduced into your industry. That could be regulation that makes it harder or more expensive to sell or manufacture your product, or wider changes in tax laws or trade policies.
A new government or significant economic changes (like inflation spikes or currency fluctuations) can also affect the viability of a deal and prompt a buyer to reconsider.
See the general advice below on the value of moving quickly to reduce the window of risk in your deal.
One seller has a change of heart
Sometimes, one of the sellers may simply change their mind about selling the business. That could be for personal or financial reasons, or renewed passion for the business.
If the reluctant seller has a substantial shareholding (above 10-20%), that could kill the deal if the buyer insists on 100% ownership and full control.
The best action here is to make sure all the key sellers are onboard with the deal and the key terms at the outset.
Check out Get aligned with your co-founder before you sell and Finding your walk-away number, which discuss these issues in more detail.
Group 3: Deal Issues
These are blockages that arise while negotiating the deal, rather than issues from within either the buyer or seller.
Valuation disagreement
This is the obvious one.
You get excited about a deal, and it seems like you and the buyer can find common ground on the valuation.
But once they get into the detail of your performance, forecasts, KPIs and other data, the number they offer might not be what they had suggested.
That blow comes when you see their draft LOI when they finally commit to a number, or later in the process when they try to price chip down from the price they previously offered.
It might be that their price falls below your walk-away number.
There are possible structures you can use to bridge the 'gap in valuation' – like moving some of the price to an earn-out or other deferred or contingent payment model.
But if those don't work, and you feel the business is worth more than they are offering, you might need to kill the deal.
Other contractual terms can't be agreed
It's not just price.
Negotiations often stumble over specific contractual details in the sale contract.
This usually comes down to risk allocation. The contract pushes liability for certain risks onto the buyer or the seller through the indemnities, warranties, tax clauses and other things like non-compete clauses. You might feel like the buyer is pushing too much risk onto you, which makes the deal too risky to take.
It's a shame if a deal dies over the details of the contract. As long as both parties are being reasonable, good lawyers can find compromise and a position that both sides can live with.
Integration Concerns
If your business will be tightly integrated into the buyer's group, they will care deeply about how that integration will happen.
That's a key theme for them during due diligence. They are exploring how they would work with your people, processes, technology and how the planned synergies can be delivered.
If that integration looks more difficult or costly than hoped, that can give them cold feet.
If these issues are really serious, they can threaten the value of synergies which underpin the valuation they are offering to pay. That can lead to a price chip.
How can you minimise this risk? Ask them directly what they care most about on the integration side. Put yourself in their shoes, and work hard to prepare the evidence that shows that integration could be seamless.
Cultural misalignment
Although it can be fluffy and nebulous, corporate culture plays a significant role.
This boils down to: Are your and buyer's teams going to work well together (and enjoy doing so)?
If the parties sense that the cultures are incompatible, that might be enough not to proceed. That could be strong differences in values, management styles or workplace environments.
Sometimes it's more personal - ego clashes between key players on both sides can hinder negotiations, creating a hostile environment and make collaboration difficult.
Anti-trust concerns
Larger deal may require clearance from regulatory bodies before the deal can close. This is ensure that the combined business would not create an anti-competitive position in your market. Most commonly, this is when two large competing businesses merge and the combined business would have a dominant market position.
This is usually handled as a condition precedent. The deal is signed, but completion (payment and transfer of ownership) is conditional on getting any anti-trust clearances. There may be other CPs too. If you don't satisfy them, the deal can't close.
If you have large share of your market, you should get legal advice on this at the start of the process. The most useful action here is to choose a buyer who is less likely to trigger anti-trust issues... but sometimes this is unavoidable.
Group 4: Out of the Blue
Black swans
These are unexpected events with severe consequences.
That might be a global pandemic, natural disaster or event like 9/11.
These cause huge uncertainty and risk that can cause buyers to pause or abandon deals.
These are by nature unforeseeable, so the only advice is to move as quickly as possible to get the deal done. This narrows the window during which a black swan could strike.
General tips
There are five pieces of general advice that cover off the majority of the risks here.
Follow these five tips, and you will greatly increase your chances of getting the deal done.
1) Pick the right buyer: The 'right' buyer has a strong strategic rationale for buying you, is experienced in M&A and has the means to pay the price you want. They are hard to find but, if you can, many of the risks fall away.
Check out Four types of M&A buyers and The SIX strategies that drive M&A.
2) Build strong relationships: You want to be well-known and liked across the buyer's group. That builds consensus across their group, reduces the dependence on one sponsor, and helps due diligence move more smoothly.
Check out How to build relationships with potential buyers and Who's on your buyer's team?
3) Work collaboratively: Smart sellers know M&A is a team effort, and work with their buyer to get a deal done. Being overly combative, aggressive and stubborn makes it so much harder to get a deal done. You should be collaborative, transparent and helpful, building trust and helping them to get the deal over the line.
Check out You are on same team as your buyer.
4) Move quickly: Time is of the essence in M&A transactions. The longer the deal takes, the wider the risk window for issues to arise like a sponsor leaving, regulations changing or a black swan event happening. Try to move the deal as fast as you can, build momentum and never delay.
Check out The 24-Hour Rule When Selling Your Company.
5) Prepare thoroughly for DD: Due diligence is when risks are identified, buyers get cold feet or try to chip the price. Get prepared with a comprehensive data room, and proactively identify and addressing potential any red flags.