When a Buyer might need to Walk Away from an M&A Deal

Persistence in an M&A process is great, but not at any cost.

Its important to know when to push forward and when to back away from a deal.

Based on deals I've executed, from a Buyer's perspective, there are some areas to watch out for.

Let's assume that initially:

1) there did seem to be a good strategic fit

2) the target showed a willingness to engage

Here are some red flags that may arise through the diligence and negotiation process with the Target.

There are absolutely strategies to overcome many of these issues (and proactive deal teams know how to do so).

But it sometimes makes sense to step back and re-evaluate the deal strategy if too many of these show up during the process.

??Red Flag 1: Target cannot provide clean financials or explain historical performance.

For private companies, a QoE (Quality of Earnings) is highly recommended to validate reported financials and arrive at normalized numbers.

And working through these adjustments with the Seller is to be completely expected.

However, sometimes, a Target can take months to provide basic financial statements, or might be unable or unwilling to answer straightforward financial diligence questions.

This might make it very challenging for the Buyer to properly value the target. Or to lose confidence that the Buyer can even accurately report the Target financials cleanly post-close.

??Red Flag 2: Acquisition will not help the Buyer to achieve its strategic outcomes

Often this shows up when taking a bird's eye view of the target's entire business.

Examples are issues around the customer base, products and services, operating model, go-to-market strategy - i.e. fundamental to the target's entire value proposition

While the target might be profitable and successful on a stand-alone basis, the original acquisition thesis no longer holds true (or has become very shaky)

??Red Flag 3: Target has overly aggressive tax practices or other compliance issues

This usually surfaces during financial and legal due diligence.

While some amount of tax optimization strategies are common, sometimes the QoE unearths potential tax liabilities, possible fines, or overly aggressive tax optimization strategies.. which the Buyer might not want to sign up for

Similarly, compliance (e.g. regulatory, HR) issues can also be very hard and expensive to rectify.

??Red Flag 4: Target's inability or unwillingness to prioritize deal issues or compromise on smaller issues

This happens more often if the target does not hire an advisor and wants to DIY.

Issues such as losing the ability to pass personal expenses through the business (like many private targets do), retaining an (unqualified) family member in a senior position or even wanting to hold on to a specifc offing building hijack the target's attention.

And the target is unwilling to budge - often at the expense of losing sight of material deal terms.

??Red Flag 5: Wrong cultural fit

Mismatches in cultural fit (from complying with the more burdensome processes of a larger organization to WFH privileges to dress code) do crop up.

Some can be worked through, some cannot.

If there is a risk of losing key talent because of issues that cannot be worked through, or if the Buyer has serious questions about the Target's talent being engaged post-close, the Buyer might need to re-think the deal strategy.

From a Buyer's perspective, what other areas tend to be red flags in an M&A process?

And while this post focused on Targets' issues, Buyers aren't immune!

Watch this space for red flags that Targets should watch out for when working through a sale process.

#mergersandacquisitions