Why do 7 out of 10 merger and acquisition deals fall through?
In today’s post, we’re going to discuss seven of the most common reasons behind the failures of even the most promising M&A arrangements.
Mistake #1 Having No M&A Plan
When Benjamin Franklin said, “If you fail to plan, you’re planning to fail,” he wasn’t wrong. And we’ve seen this time and time again among buyers and sellers.
As a buyer or seller, you have an ultimate goal – the purchase or sale of a business. In order to successfully achieve this goal, there must be a comprehensive strategy in place.
A well-thought-out plan is exactly the type of strategy you need to make your acquisition or merger a success.
But what’s contained in such a plan? Mostly questions such as:
- What’s your ultimate play i.e. diversification, geographic expansion, talent acquisition?
- How do you intend to finance this M&A?
- Who will be your M&A advisory team?
- What’s your ROI model?
- What deal size are you after?
Summary: Know what you want to execute, know what your end goal is, and what success looks like for you.
Mistake #2 Valuation Errors – Overpaying
Business valuation is the process of determining a company’s fair value. Valuations are typically done as preparations for an acquisition.
As a seller, it gives you an unbiased view of how much leverage you have while negotiating with buyers. However, businesses aren’t always valued correctly.
When valuation errors are made, buyers may overpay for the business which is part of the reason why more than 70% of M&A transactions perform poorly in terms of meeting their ROI targets.
So how can you as a buyer be assured that you’re not overpaying for a business?
One of the best ways is to have any business you wish to purchase independently valued by third-party valuation experts.
This also has secondary benefits which include access to comps and various other financial industry insights.
Summary: “How do you avoid overpaying? How do you avoid making valuation mistakes? Hire valuation experts.“
Mistake #3 Assuming Too Much Debt
Yes, we’re in a buyer’s market. Interest rates are exceedingly favorable but this is no reason to be reckless and take on more debt than you need to.
In the long run, because of the floating nature of rates, your monthly principal might end up increasing making it difficult to keep up with repayments.
You need to carefully think about all of this as you factor different scenarios with your interest rates model. It is better to err on the conservative side here.
Summary: Interest rates are at historical lows. Money is so cheap and organic growth is very hard.
Mistake #4 Overestimating Growth
Having a growth model is advantageous as it helps you gain a clear idea of what you’re expecting once you’ve acquired the business. However, ego and emotion tend to drive these models.
This leads to cloudy judgments and faulty growth and synergy models. Leave emotion at the door when dealing with sellers. Be forthright and ask them direct questions about the best ways to grow the business. After all, no one knows the business better than they do.
Find out what strategies they have tried, which have worked, which haven’t, and why they think those initiatives didn’t work. The insight they give will be invaluable and will give you a better overview of what growth is actually possible with the business.
Summary: “People pay owners for what they built, but they buy a business for what they think they can do with it in the future.”
Mistake #5 Insufficient Due Diligence
Due diligence is one of the most complex steps of M&As. There are so many dynamics and moving parts to consider and factor, and even more so now with the COVID-19 situation.
As someone unfamiliar with the business and perhaps even the industry, it cannot be emphasized enough how much you need an M&A advisory team on your side.
They will underscore and examine things such as:
- The positive and negative impacts of COVID-19 on the business
- The historical performance of the business
- Recommendations for leverage and debt
Summary: Diligence is hard. It’s taken a whole new perspective because of COVID-19 and there is now so much more to consider.
Mistake #6 Poor Balance Sheet Evaluation
The most common financials we see people stressing about are the tax returns and the P&Ls. While these are important, of even greater weight are the balance sheets.
For it is the balance sheets that inform you of the operating costs. How much you’ll actually need on a daily basis to keep things running smoothly.
The goal of studying the balance sheets should be to understand the networking capital needed by the enterprise to keep its doors open. It can be worked out as follows:
Networking Capital = Current Assets + Current Liability
Summary: People don’t spend enough time with the balance sheet. The balance sheet will tell you a lot including how much cash you need to operate daily.
Mistake #7 Deficient Integration
When it comes down to integration, there should be a key point person whose sole responsibility is the oversight of everything to do with amalgamation.
This lead will be in charge of the three pivotal post-integration areas: people, culture, and communication.
Integration should not be an afterthought. Integration considerations should begin during the due diligence phase so that from Day One, everything runs as smoothly as possible.
Summary: Integration touches every part of the operation. A detailed plan is required here. Somebody should own the integration process.
What Next?
You don’t have to make the mistakes we’ve discussed in this post.
If you’re not sure how to navigate the buyer/seller market and you’d like to find a way forward, our team of seasoned M&A experts is always ready to help.
Sun Acquisitions boasts an experienced M&A team that can assist you with preparatory efforts whether you’d like to buy or are selling a business. Don’t hesitate to contact us.
