When Dr. John Binkley and his associates at Generational Equity read PitchBook’s latest quarterly report on global M&A activity, there was plenty of good news.
The M&A market worldwide continues to be highly active – in 2Q, 4,735 transactions were completed in North America and Europe, totaling around $988 billion. While the number of deals fell slightly from 1Q’s number (2 percent), the overall value increased a remarkable 24%, bolstered by several mega deals and continued economic optimism in most industries.
“The M&A market is inexorably linked with business sentiment, corporate fundamentals and macroeconomic forces that can impact factors like access to financing. With all these indicators continuing to trend positively, the global M&A boom shows no signs of stopping.
“Altogether, 2018 is unlikely to eclipse the record-setting numbers achieved in 2015, but it is on pace for another $3 trillion+ year.” – PitchBook 2Q 2018 M&A Report
M&A Activity at Record Highs… But Broken Deals Also Rising
This reinforces what Dr. Binkley and Generational Equity have been saying for quite a while, that this is the strongest seller’s market in M&A for decades. The favorable economic conditions and vast amount of capital in the market right now have driven valuations up significantly. It’s unquestionably one of the most exciting markets in recent memory.
However, alongside this engaging report by PitchBook was another stat that Dr. Binkley felt warranted further discussion. By analysts’ estimates, a total of $541 billion in global M&A transactions has been withdrawn in 2018 so far, representing a 23% increase YOY. A number of high-profile deals driven by this excellent M&A activity have broken down, while several others are in a precarious situation.
Of course, breakdowns in negotiations in the M&A industry are hardly new. With the sale and acquisition of businesses at any level tied to so much capital, it is inevitable that the pressure and importance of securing a good return on investment for buyers leads to deals going no further than the negotiating table.
Many factors can make or break a deal, both on the buying and selling side. Everyone is after the most value possible, and some are more unwilling to make the necessary concessions. If you aren’t prepared for the emotional rollercoaster that the exit process and negotiations present, you leave yourself open to issues arising at the 11th hour that cause deals to break down.
As PitchBook’s report suggests, this is happening all too frequently in recent years. This could simply be an expected result of the accelerated activity in this thriving seller’s market – more deals in total means that more deals are left incomplete. However, it is very likely that many of these non-completed deals were completely avoidable, and could have been salvaged.
There’s an old saying in deal making – a deal is not a deal until it dies twice. As Dr. John Binkley has experienced numerous times since founding Generational Equity, factors that cause M&A activity to break down can often be overcome with the right knowledge and professional support.
Here, Dr. Binkley outlines what he considers four key M&A deal breakers, and what you and other business owners can do to help prevent them when you choose to exit your company.
4 M&A Deal Breakers… And How to Overcome Them
1) Accurate, Honest Documentation
First and foremost, it is essential to get your numbers in order. The level of documentation buyers expect when they acquire a company is unfathomable to anyone who hasn’t been through the process before, and it needs to be accurate and honest.
Inaccuracy can be one of the biggest roadblocks to completing a deal. This plays a big role in the trust between buyers and sellers – if buyers notice any mistaken figures in either your historical or projected financials during due diligence (and they almost certainly will), then this can stop negotiations in their tracks and leave you scrambling for answers.
Innocent mistakes can be forgiven – deliberately misrepresenting your figures is more likely to cause an irredeemable breakdown in trust. While the temptation to alter or overstate numbers to hide any flaws and push up your company’s value can be strong, in Dr. Binkley’s experience honesty is the best policy. With the thoroughness most professional buyers apply to due diligence, your odds of sneaking in erroneous information are slim.
Presenting your company as it is to buyers, with explanations prepared for areas that could be considered concerning, is far more likely to build trust and keep negotiations going. The need to have accurate documentation is also a very good reason to hire an M&A firm to represent you. The first step in the proven Generational Equity process is a complete and thorough evaluation of the client’s business, including the recasting of the historical financials, a critical step in the evaluation process.
2) Seller’s Remorse
Selling a business can be an emotional experience, as it represents the end of a chapter in an owner’s life. Not handling that emotion has been is the cause of many deals not closing, as sellers realize that they aren’t quite as ready to make the next step as they first thought.
While everybody has a right to change their mind, this could cost you substantial time and money in negotiations, and give you a bad reputation when you are ready to sell (and open your business up to breaches of confidentiality).
So, long before you enter negotiations with your preferred buyer, make sure you’ve asked yourself these questions to test your readiness:
- Why do you want to sell?
- Have you discussed the reasons with your family?
- Do you have plans for life after business?
- Are you ready to see your company in the hands of someone else?
3) Poor Deal Structure
Often, the deal structure and schedule for acquiring a company isn’t as straightforward as a one-off cash payment. With M&A deal structures like earn-out agreements and others now commonplace, there is potential for negotiations to fail if one side wants an immediate cash payment while the other supports a more gradual, contingent payment structure.
Overall, Dr. John Binkley and Generational Equity’s dealmakers advocate for as simple a deal structure as possible. Cash is king in the M&A industry, and this helps to ensure that both sides of the agreement understand its terms and can move onto their respective next steps.
However, with so many approaches to structuring mergers and acquisitions today, it is unwise to be completely rigid in your approach to negotiations. If you can keep it simple, that’s greatly preferred, but both buyers and sellers in this age need to stay flexible in options, while strong enough to push the approach they prefer.
There’s no hard-and-fast answer to avoiding this potential deal breaker, but it’s recommended to have an experienced advisor at the negotiation table that is familiar with balancing this sticking point. This is a key service that Generational Equity deal makers bring to every client engagement. They have the experience to negotiate deals that meet the financial needs of the client, even if it means withdrawing a deal where the buyer is not willing to negotiate the terms.
4) No Professional Advice
Finally, a major reason why M&A negotiations break down is a lack of professional advice. Most business owners will only exit a company once in their life, and therefore will be unfamiliar with how the M&A journey works. While they may be shrewd negotiators in their own industry, this often represents a very different environment.
Research by Intralinks into abandoned acquisitions has demonstrated that the number of legal and financial advisors retained by both sellers and buyers were the fourth and fifth biggest influencers of whether a deal would fail or succeed.
Professional M&A advisors, like the team at Generational Equity, have been through these negotiations many times over; they understand the obstacles in completing deals and how to best overcome them. Their experience in successfully closing transactions can prove priceless in keeping negotiations flowing and towards an ideal conclusion for both parties.
Avoid M&A Deal Breakers to Make the Most of Your Exit Plans
PitchBook’s insight into the value of M&A activity that have failed to be completed in 2018 should be a wake-up call to business owners considering their exit strategy. With such significant value in the balance, it can be all too easy for negotiations to fail from completely preventable situations.
Dr. John Binkley hopes that this insight into four M&A deal breakers and how business owners can avoid them will be beneficial when you decide to exit your company. Most of these circumstances can be avoided with the right team and expertise surrounding you, so make sure you contact a professional M&A advisory firm like Generational Equity to help you navigate the most challenging aspects of negotiations and the overall exit process.
If you’d like to learn more about potential deal breakers, negotiations for selling a company or other important aspects of exiting a business, visit Generational Equity’s insights page for regular, up-to-date guidance.