United States: M&A: Why Lower And Middle-Market M&A Deals Fail To Close - Know The Warning Signs

Trade journals are full of articles discussing the plethora of M&A deals that have recently closed. However, for every closing there are far more deals that begin the process but are not completed. Each year, hundreds of thousands of dollars, if not more, are spent by buyers and sellers on deals that go nowhere. How can you avoid being a party to a doomed deal or, at least minimize your losses? What are the red flags to watch out for? Here are 4 of the more common reasons why lower and middle-market M&A deals fail to close:

  1. Unprepared Seller.

    First and foremost, failing to take the necessary steps to prepare a business for a sale is the most common reason a deal does not close. At minimum, a prospective seller considering the sale of its business should: (i) engage experienced M&A counsel and accounting professionals early to help prepare for and navigate through the sale process, (ii) identify and understand the seller's objectives in pursuing the sale, and (iii) undertake a pre-going-to-market review of the business (e.g., corporate records, financial records, material contracts, litigation, cyber matters, regulatory compliance, etc.) so that the seller knows the current status of its business (warts and all) to avoid surprises down the road and to ensure that the seller's information provided to the buyer is as accurate and complete as possible. Red flags: (i) seller has not engaged experienced M&A professionals to assist in the transaction, (ii) seller's deal materials are inaccurate, incomplete, or incoherently presented, and/or (iii) buyer's due diligence reveals one troubling surprise after another.
  2. Seller's Cold Feet or Diverse Sale Objectives.

    The sale process is an emotional roller coaster ride particularly for family businesses and closely held companies with multiple owners. While an M&A deal may start off smoothly with such sellers, as the deal progresses and they realize that a sale is really going to happen, the family member(s) and/or diverse equity holders may have second thoughts, personality clashes and/or non-aligned objectives, any of which can derail the closing process. Experienced M&A legal and financial advisors can help a seller coordinate and manage the diverse personalities and the emotional ups and downs to prevent a deal collapse. Red flags: (i) seller is a family business and there is a lack of clarity as to the seller's objectives and/or who speaks for the seller on key deal terms, or (ii) seller is owned by two or more equity holders and there is a lack of clarity as to the seller's objectives and/or who speaks for the seller on key deal terms.
  3. Buyer's Failure to Obtain Financing.

    Obviously, if suitable financing is not available to the buyer, the deal will not close. Whether or not financing is available depends on many factors, some of which are within the buyer's control and some are not. Sellers should perform some preliminary due diligence review of potential suitors to screen out high-risk buyers and to otherwise confirm that their selected buyer has the ability to secure the funds necessary to close the transaction. Whenever possible, a seller should seek out buyers with a demonstrated track record of being able to secure financing and close deals. Similarly, it is critical that the buyer receive reliable information about the target. If there are repeated material and adverse surprises regarding the target, the buyer's ability to obtain financing will be compromised. Red flags: buyer has been shopping the deal to many lenders with no commitments and/or the buyer has a history of failed deals.
  4. Time Kills Deals.

    Even with the best of intentions of a ready, willing, and able buyer and seller, the longer the deal process drags on the more likely bad things will happen that will adversely impact the deal and jeopardize closing. A change in trade policy, a geopolitical event, a health issue, or some other major event, is always looming just around the corner, waiting to disrupt and, potentially, cause the death of, the deal. Delays can be attributable to the seller's lack of preparation or buyer's challenges in obtaining financing (as discussed above). Delays may also be caused by the need for additional and time consuming due diligence activities. Whatever the cause, the effect is usually not helpful nor conducive to ultimately getting the deal closed. Experienced M&A advisors on both sides of the deal can help keep the transaction moving forward at an appropriate cadence and manage the impact of extraneous factors should they arise. Red flags: (i) agreed upon deal milestones keep getting delayed, (ii) conditions or facts are discovered which require extended and protracted due diligence, and/or (iii) closing gets extended materially beyond what was originally anticipated.

    While there are myriad of reasons deals do not close, this Client Alert presents some of the more common reasons lower and middle-market M&A deals fail to successfully cross the finish line. As a practical matter, it is often a combination of two or more of the above that sink the deal because when one is present, one or more of the other reasons are present as well thus ensuring the deal's demise. While the old adage, "the best deal I did is the one that I didn't" may be true, nobody wants to waste time and money on a deal that is destined not to close. The sooner you can recognize the warning signs of a doomed transaction, the sooner you can exit and minimize your losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Practice Guides
by Mondaq Advice Centers
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions