Making the decision to acquire a business can be a complicated process fraught with risk. Even when the financials look good and the potential rewards seem great, there are several reasons why a buyer might decide to walk away from a deal. Understanding these reasons can help sellers prepare for negotiations and improve the likelihood of a successful outcome. Here are some of the most common reasons why quality buyers might decide not to proceed with a deal:
The company is not what it seemed: During due diligence, the buyer may discover that the target company is not what they expected. This could be due to operational issues, poor recordkeeping, inadequate systems, or other concerns. If the buyer believes that these problems will make the deal too risky, they may walk away.
That’s why it’s important to “go ugly early.” In other words, put all the positives and negatives on the table right away, to reduce the chance of surprises ruining a deal later on.
Financial concerns: When evaluating an opportunity, buyers are looking at a company’s financial health and future earnings potential. If, during due diligence, they find significant financial issues, such as declining revenue, over-aggressive addbacks to prop up EBITDA, or inaccurate financial statements, the buyer may stop the deal process.
Cultural red flags: An acquisition involves the integration of people and organizational cultures. Buyers and sellers should have had culture discussions before the letter of intent stage. But sometimes new information reveals itself as the parties work together. If the buyer perceives significant culture differences, they may walk away to avoid potential integration challenges or disruption to their own corporate culture.
Liability concerns: As part of due diligence, buyers will be looking at a range of risk factors. They don’t want to face an unexpected lawsuit or deal with the aftermath of someone else’s improper corporate conduct. Concerns here include ethical and legal issues, including non-discrimination and employment practices, regulatory requirements, and contracts, as well as tax liabilities.
Environmental issues: Many transactions will include an environmental site analysis. Even if you aren’t selling the real estate with the business, the buyers may want assurances that the business hasn’t been the source of any unknown leaks or contamination. Unfortunately, environmental events do occur, and some sellers find themselves tied up in years of environmental remediation issues before they are able to alleviate buyer worries and put their business back on the market.
Strategic shifts: Sometimes changes in the buyer’s business strategy can prompt them to reconsider an acquisition. It’s possible the company’s board of directors or investors won’t approve the deal. Even something as simple as the buyer losing a key executive who championed the deal can sideline an otherwise healthy transaction.
Unresolved negotiation issues: Negotiating an M&A deal requires reaching a consensus on a wide range of deal terms, including price, payment terms, contractual obligations, warranties, working capital, and other deal-specific issues. If the buyer and seller cannot resolve key negotiation points, it can lead to deal termination. Resolving these issues can be a critical point of failure for many deals.
That’s why it’s a good idea to work with an experienced M&A lawyer who knows what’s normal and customary for your industry and won’t obstruct your deal with overzealous demands. You want legal council who will protect your interests, but you also want a proven deal maker, not a deal breaker.
This is also why you want the buyer to outline as many deal terms as possible in the letter of intent (LOI). At the LOI stage, you still have other buyers at the table, giving you more leverage and options.
External factors: Finally, some deals get foiled by external factors outside the buyer’s or seller’s control. For example, COVID-19 killed or delayed many deals. The dot.com and housing busts, 9-11, political shifts, supply shortages, rising interest rates—these are just some of the many events that have stopped deals from moving forward.
It is important to note that walking away from a deal can be costly for both the buyer and the seller. The buyer may lose the money they have already spent on due diligence, and the seller may lose the opportunity to sell their company. However, in some cases, walking away is the best option for both parties.
Before entering into an LOI with a buyer, your advisors can help you check their references and deal history. You want a buyer with a track record of completing deals and staying true to commitments.
Jim Friesen, MBA, CPA, CM&AA | Founder + Partner
Portage M&A Advisory
