M&A Deal Killers and When to Walk Away

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Mergers and acquisitions had a massive spike in the last couple of months for various reasons. But no matter how good the motivation is to acquire a business, there are certain things not to overlook especially if the intention to purchase a business is to create value and transform an organization. If a potential deal would do more harm than good, it's best to walk away. This article will discuss the most common deal killers and when to walk away from a deal.

It is important to note that the list below is not in any particular order. Every deal has a different rationale which will have other priorities and levels of integration. 

M&A Deal Killers 

1. The Seller is Involved in Illegal Activities  

This is easily one of the top deal killers. If the seller is involved in illegal activities, walk away. Not only will you inherit those liabilities if you ever close the deal, but it will irrevocably damage your brand and reputation in the market. One of the easiest ways to discover this is through pending litigations. If you are buying a public company, this information would be easily accessible. 

In addition, the seller might have illegal practices inside their day-to-day operations. For instance, the seller intentionally pays their employees below minimum wage, which could be construed as unlawful, therefore a potential lawsuit. 

2. Exposures and Risks of Company Agreements 

Similarly, as the buyer, you will inherit all of the company's agreements. This includes but is certainly not limited to vendor agreements, customer agreements, and employee agreements. 

If the seller has incurred too much liability or exposures from these agreements, you can either exclude them from the deal (if the seller allows it) or walk away. There are instances where the seller has promised too much to customers or employees that you do not want to, or cannot, fulfill. 

Typical examples are exclusivity, unusual product obligation, termination rights, and non-transferable contracts that can be extremely valuable to you as the buyer, depending on the deal rationale. It is also possible that the seller has agreed to an agreement with another party that prohibits you from operating your primary business. These can hinder you from creating value and should be considered as deal killers. 

3. Inaccurate Information of the Business 

Business owners sometimes exaggerate the qualities of their business. However, if there is a massive discrepancy between what was said and the actual product or technology, it's time to reconsider the deal.

For example, you may want to purchase a technology/product because they said it is world-class. If it turns out to be ordinary, easily copied, and not state-of-the-art, it's enough reason to walk away. 

4. Material Accounting Errors 

Accurate accounting is crucial in any business, especially when evaluating a business to buy. It is a common problem for small companies because they're trying to save money by hiring inexperienced accountants/bookkeepers. Whether intentional or not, you may be incurring massive tax liabilities.   

The tax penalty can be computed and deducted from the overall purchase price agreement.

5. Lack of Proper Ownership 

As ridiculous as it may sound, this is very common around intellectual property. There are a lot of litigation claims, and counter-claims regarding this matter. Often, company executives are not aware of what they own, and what they can sell.

Do an audit of the seller's codebase to determine if the seller has proper ownership of the code and has the right to transfer it. 

6. Loss of Critical Customers 

There are instances where the target company loses a large client in the middle of the acquisition. It could be an expiring contract, or the customer wants to take their business elsewhere. Either way, this could be a reason to kill the deal.

Once this happens, assess how much revenue will remain in the business. If the client is only worth 20% of the revenue stream and the deal rationale remains intact, you can still pursue the deal by reducing the overall purchase price.

However, if the client who just left is worth 50% of their revenue stream, it's something to consider.  

7. Loss of Key Employees 

It is undeniable that there are certain employees that you cannot afford to lose. These are the people who generate a ton of value for the company and to the deal rationale. 

For instance, you are buying a unique technology; you cannot afford to lose the person who designed the technology. It won't be easy to manage, replicate, repair, and ensure that another company cannot copy the technology without that person. 

If this person leaves in the middle of the transaction for some reason, it may be wise to reconsider the deal. 

8. Unreasonable Demands During Negotiations 

Arguments and contentions are very common in negotiations. It's no secret that the seller wants a high price for their business while the buyer wants a low purchase price. Thankfully, there are ways to bridge the price gap, such as carving assets out of the transaction or using earnouts. 

Although, there are instances where the seller has unrealistic expectations and refuses to negotiate for the asking price. In this case, there's nothing you can do other than overpay or pull out from the deal altogether.  

Aside from money, there are other issues that may arise. We've heard founders who want to stipulate a permanent parking spot in the vicinity, no alteration in an office, or let the buyer pay for a phone subscription fee for ten years. 

9. Seller's Issue 

Sometimes, the seller is not very committed to selling their company. Either someone convinced them to sell it, there is a sudden need for cash, or perhaps the founder of the business passed away. Selling a business can be emotional, especially for small private companies. 

You will quickly notice the signs if the seller is not serious about selling. The first sign is the slow response to your diligence questions. Dragging out the process will cost you valuable time and money. And even if you chose to suck it up and wait, the next sign would be unreasonable demands during negotiations. 

10. Unexpected Turn of Events in the Market 

Outside of anyone's control, sometimes the market or economy just goes wrong, and the target company may no longer be a smart acquisition. A perfect example of this is the COVID-19 pandemic. During the lockdown, many markets went down, such as the food and travel industry. 

11. Massive Cultural Differences 

One of the most controversial takes in M&A, many practitioners do not believe that culture can kill a deal. However, it highly depends on what you mean by culture, and it is a vast word that encumbers a lot of a company's identity. 

Suppose you plan to integrate the target company into your organization fully; in that case culture heavily matters. For example, if one company works from home and acquires a company that is accustomed to going into the office, management will need to figure out which working environment they will use moving forward.

12. Buyer's issue 

No matter how much diligence you perform, sometimes, the problem is you! Business can go down unexpectedly, financing suddenly disappears, or you suddenly get acquired during diligence. These are all unlikely scenarios, but very possible. 

Also, the CEO or board of directors might suddenly change their mind and disapprove of the deal. In this case, there's nothing you can do but cancel the transaction altogether.

Last word

While there are a lot of potential M&A deal-killers, acquiring a company, if done right, is a powerful tool that can transform a business overnight. With an excellent operating framework combined with proper tools, you can fully realize projected deal value. If you want to learn the modern way of doing M&A, make sure to visit our website at www.mascience.com

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