News Why might an M&A process fail (and how to prevent it from happening) – part one

At some point, it is likely that all business owners will consider their exit options and so will be interested in what makes a successful M&A deal. Often talked about are the success factors involved in deals but the factors that can cause deals to fail are not typically discussed, so we are running a series of blogs around this topic to help raise awareness.

Given our extensive experience of handling exit events, we thought it important that these factors are discussed to allow owners to better plan and prepare for exit.

One of the primary causes of deals not happening is if the senior management team is not considered strong enough. This can be the case with both financial and strategic trade acquirers and can be particularly acute if the sellers expect to exit in full and leave the business at the point of sale. The buyer or investor is assuming that the management team will continue to run and most likely grow the business successfully post their investment.

There are a number of other reasons why deals can fail, some of which are detailed below.

Legislation

The Competition and Markets Authority (CMA) can review the acquisition if it thinks it is anti-competitive. For example, if the combined businesses have at least a 25 per cent share of any reasonable market, this can cause a CMA intervention. We recommend enquiring as to whether the buyer considers there is a risk that CMA will enquire early in the deal process, so all parties are aware of the situation and associated risk of scrutiny.

Other legislation you might need to be aware of is the National Security Investment Act. If your business falls under the remit of this new legislation, the deal will then require UK government approval to complete. This presents the risk of the takeover being blocked if the government is uncomfortable with the buyer. This legislation involves certain sectors of the economy which are seen as being sensitive to national security.

Economy

The deal process can also be influenced by economic uncertainty and any subsequent impact to or reduction in trading results and/or prospects. For example, if a recession is likely, this could lead to questions over the deliverability of the business plan and, therefore, a restructuring of the transaction or, in the worst case, the withdrawal of the buyer or investor. This can be quite sector-specific depending on prevailing conditions.

Processes/infrastructure

If your business relies on Intellectual Property (IP), then there is value in asking a specialist legal adviser to review the ownership in advance of starting the deal process, to make sure that IP is sufficiently protected. Poorly protected IP and/or the realisation that the IP the company thought it owned actually isn’t can seriously impact company value and buyers’ willingness to transact.

Likewise, it’s important to have a robust project plan in place prior to beginning negotiations. Poor quality or ill-thought-through information along with overly aggressive tactics can have a negative impact on the outcome of the deal. Whilst all well-run processes will necessarily be agile in how they respond to buyer feedback, being well prepared, having a clear direction of travel and being able to communicate will significantly improve the chances of the deal succeeding.

In any deal, communication between parties is key. Misunderstandings that arise later in the process based on things that both sides thought they had agreed on can be terminal. It is well worth having advisers who understand your business and have a detailed knowledge of the deal process and commercial terms so that they can advise you on any offer you receive, ensuring you fully understand the implications and nuances.

If you’re planning an exit strategy from your business and need advice, visit https://bhpcorporatefinance.co.uk