Why deals don’t succeed, and the 5Ps driving great business purchases

Often transaction failure is driven by a lack of understanding of the role that emotion plays in a deal. Emotion is such an important part of understanding the potential issues that may arise in a deal that I am now of the opinion that it is one of the largest causes of deals falling over before they get to completion where either the buyer or the seller (or both!) has not regularly been involved in M&A transactions.

Of course, emotions are not the only cause of transaction failure.

In fact, there is a long list! It includes:

• Lack of planning and preparation. The most common cause for a deal falling over before the finish line is a lack of planning and preparation by one (or both) of the parties. For example, often the seller simply will not have due diligence information ready as it is requested, forcing a long delay as they scrape together items from often a long buyer due diligence list. This engenders distrust immediately in the mind of the buyer, sets the deal off on the wrong course, and creates early speedbumps that can ultimately be the downfall of the deal. Alternatively, we often see instances where a buyer walks into a deal but doesn’t have finance or their deal team in place, or simply has not taken the time to properly educate themselves about what they will need to see the deal to conclusion. The consequence is that the process slows down, and never regains momentum (and in some instances where the business is in high demand, buyers can lose the deal to another buyer who is ready to go). Finance is a particular issue in the current market, and buyers that haven’t properly secured money in advance can find that finance might be a lot more difficult and time consuming than they had initially anticipated, and in many instances can’t be resolved in time to save the deal.
• The wrong advisers on a deal team. The advisers for one or both of the parties are slow, uncommercial or aggressive in their dealings, and end up creating so many barriers to the deal that the parties never reach agreement and the deal falls over.
• Adverse outcomes from due diligence. The buyer’s investigations find that the value that was expected in the business is not there, or that the risk in the deal is too high. This however can sometimes be a good reason for transaction failure. If during the deal it comes to light that the business is not as expected, and the failings can’t be dealt with by commercial or legal means, often it is appropriate that the transaction is abandoned.
• Seller disharmony. Disputes can emerge among the selling party if there are multiple sellers who don’t agree on key terms. This can also occur with buyers if there are multiple parties forming a buyer group. But this is much more rare than issues of alignment among multiple sellers.
• Third-party consent issues. Third-party consents required for the transfer of contracts in the business (for example franchise agreements, key distribution agreements, supplier contracts, large client contracts, leases) that haven’t been planned out properly in advance can block the transfer of key value in the business.
• Lack of process. Failure can occur when there is a lack of process for the deal and no-one driving a timeline for due diligence and contract negotiations.
• Communication issues. If the communication between the parties is inefficient and driven by emails forwards and backwards, with drafts and redrafts taking months, the parties can slowly lose trust in each other until the deal ultimately falls over.

As you have seen, the list for why deals might fail to achieve their success metrics is quite long. The way to minimise the likelihood of issues impacting your acquisition is to have a clear focus on the drivers of success of the transaction itself, and of the business after completion.