News Why might an M&A process fail (and how to prevent it from happening) Part Two

We all hear of the M&A success stories in the news, but what about when a deal doesn’t happen? BHP is running a series of blogs around the reasons deals can fail to help raise awareness of this rarely discussed topic and allow business owners to prepare accordingly.

In part two of the series, we explain how the people involved in a deal and the company’s customers can have a significant impact on the deal outcome.

People

Deals can take a long time to complete. This increases the chances that the current owner or new investor could have a change of heart or react to market conditions and decide that they no longer want to proceed. This is a difficult one to mitigate against, albeit having an advisor that can drive the process timetable and keep everyone focused on the end game will help.

There are always a number of risks beyond your control, for example the unfortunate possibility of a key individual passing away or leaving the business during the deal process. Again, little can be done to plan for this but the likelihood of such an event causing the deal to fall over is high due to the uncertainty it will cause.

While Covid is hopefully no longer as significant an issue, potential travel restrictions as a result of the pandemic could mean that a buyer is unable to meet the seller or management team, making it difficult for them to transact.

Customers

Your customer base could also affect the completion of a deal. If the business loses a significant customer for example, depending on the size and relative reliance of the customer, that could have a detrimental effect on buyer appetite and, in the worst-case scenario, result in the deal falling through.  More often than not, it will involve a recut and reanalysis of the business plan and the terms of the deal being renegotiated to reflect the new normal.

Typically, buyers will want to carry out some level of referencing on key customers during their due diligence process. Clearly, making sure you are close to your customers and knowing what they say about your company’s products/services will help ensure you are confident about the outcome of this.

We have also seen deals halted by litigation proceedings in the past. A major customer bringing a claim for negligence, for example, may put off a buyer who might be worried about the credibility of the business and question its reputation for the quality of its products or services. Whilst the size and impact of this claim may or may not be significant (and may possibly be insured), there is a wider point about the importance of buyer confidence in a process and how this particular issue might impact on that.

Having a small buyer population will add execution risk to a full sell-side marketing process. In this case, your advisor is likely to suggest warming up the strategic buyers in advance, understanding their appetite and timing restraints for example, thus maximising your chances of delivery of the deal.

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 are looking for advice, visit https://bhpcorporatefinance.co.uk