What are the most common M&A deal breakers?

EBITDA/Normalized EBITDA, SDE, EV, VTB – What do they mean and why are they important?
June 24, 2019
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What are the most common M&A deal breakers?

Although it isn’t a question that everyone involved in the process likes to discuss, it’s important to recognize these issues in order to avoid potential deal killers in the future. Here are the top reasons we see for deals getting derailed.

Time

A common saying within our office is, “time kills deals!”. The longer it takes to move a deal across the finish line the more time for potential issues to arise and ultimately prevent a deal from closing. Unanticipated delays may happen but it’s important to keep these at a minimum and continue to keep the buyer motivated to move forward. All parties should maintain timely correspondence and deadlines should be set with the goal of meeting the closing date.

It can be a stressful process for both the buyer and seller. Until the deal closes, both parties still have some uncertainty so its important to work with a Confederation M&A advisor to keep everything moving forward in an efficient manner.

Working capital

The capital required to run the day-to-day operations is called working capital. It’s calculated as current assets less current liabilities. The ‘working capital peg’ is important to the purchaser of the business. This is to avoid scrambling to find additional capital to inject into the operation to pay payables, purchase inventory or make payroll. It’s also important to the seller because they don’t want to leave excess capital in the business that they worked hard for.

Working capital discussions are typically a negotiating point that can arise early in the engagement or could be a final negotiating point with a deal. Confederation M&A advisors will use their experience from prior deals and industry standards to negotiate a fair ‘working capital peg’ for both the seller and buyer.

Due diligence surprises

Surprises during due diligence can quickly change expectations. Unwanted surprises can lead to delays in the process or a reduction in the price. In the worst-case scenario, they can cause a buyer to back out of a deal. Some common due diligence surprises include:

  • issues with employee contracts,
  • customer agreements, and
  • undisclosed litigation

Transparency is important. Hidden items will likely be uncovered through due diligence, therefore it’s best to save everyone time and money and deal with these up front.

Poor quality of information

Information given to potential buyers must be clear, accurate and sufficient for interested parties to make a well-informed decision. Poor, misstated or inadequate information can lead to surprises which can ultimately spoil a deal. Understanding the financials is important, but there are other aspects of the business, such as operations, supply chain and market trends, that need to be clearly understood.

Confederation M&A advisors work with sellers to professionally prepare a detailed Confidential Information Memorandum (CIM). The CIM will answer the majority of questions a potential buyer will have regarding the business, including the deal structure, products/services offered, human resources, customer information, growth opportunities, financial overview and much more.

Lack of flexibility

During due diligence, certain items may arise which can cause the terms of a deal to change from the initial agreed upon offer. Some common reasons include:

  • the bank adjusting their lending terms,
  • an unknown issue arising during a property inspection, or
  • a discrepancy in a customer contract

Confederation M&A advisors will work to ensure the LOI and final purchase and sale agreement are as close as possible. It’s important that both buyer and seller remain open to possible adjustments to a deal structure. As long as the adjustments are tweaks rather than complete overhauls, it’s usually in the best interest of both parties to be accommodating to revisions with the aim of getting the deal across the finish line.

Thinking of buying or selling a business? Contact one of our advisors today.