While both sides of a merger or acquisition hope the deal will go through without any issues, that’s not likely to happen. Issues are expected during this process, but they shouldn’t be enough to cancel the deal. Buyers, however, will want to make sure they understand what could be a deal breaker and what they should watch out for during the entire process so they know if they need to walk away.
What is a Deal Breaker?
A deal breaker can be just about anything that causes the buyer or seller to cancel the merger or acquisition. Buyers are going to want to make sure the merger or acquisition is going to go as smoothly as possible and that it will be a success in the end. To try to reach this goal, they’ll want to look for anything that could be a large problem. These large problems are the deal breakers that could mean a merger or acquisition is just not a good idea any longer.
Knowing When to Walk Away
When a lot of time has been spent working on a merger or acquisition, it can be easy to think that large problems will be solved eventually. The issue is, it may cost a lot more in the long run to solve the issue or it might be impossible to actually solve. Deal breakers should be carefully considered to make sure the deal could be successful and that the merger or acquisition is not going to be the end for either of the businesses. Buyers and sellers will want to make sure they know when to walk away from any deal that could be potentially a poor decision.
Miscalculations or Higher Than Expected Costs
When price starts to be discussed, there’s a lot to go into it. Buyers can be shocked when the seller prices the business more than they expected. Sellers might be surprised when buyers value the business much higher or lower than they expected. The value often goes hand in hand with forecasting the potential financial future of the business, which can be difficult to do.
Miscalculations can come when there are inflated numbers for the business or the financial history doesn’t equal the financial past of the business. It’s better to be conservative with the calculations for the future of the business to get a more accurate idea of the current and future value of the business. Since mergers and acquisitions can take time to complete, miscalculations can become apparent during the deal. If this happens, careful consideration of what was miscalculated and the impact it has will need to be done to ensure the deal is still a good deal.
Unclear Terms for the Merger or Acquisition
The Letter of Intent (LOI) is basically what the final deal will include. This should include more than the price. It should include all of the terms of the deal, the closing date, any protection if the deal falls through, and more. This is often more important than the price because the terms are what both sides will need to agree to. With the LOI, make sure all terms are as clear as possible. Unclear terms could lead to issues down the road where one side believes something is happening and the other side believes it should be handled differently according to the terms. Unclear terms in an LOI should be rewritten before it’s accepted or the deal may not be able to go through.
Business Erosion During the Process
Mergers and Acquisitions can take up to a year to complete, which can lead to huge changes for the business being sold. Employees, clients, and vendors may be uncertain of the business’s future, so there may be changes with them during the deal. Advisors should be able to handle this during the negotiations, but it’s possible the business changes to the point it’s no longer a good deal. If this happens, it’s best to walk away.
Irreconcilable Differences Between Businesses
For mergers and acquisitions to be possible, the businesses need to be able to blend together. Looking into the cultures of both businesses is crucial as this enables buyers and sellers to ensure the deal is going to be one that is beneficial for most businesses. It’s important to find this out as early as possible, before the negotiations get too far. If the businesses have mismatched strategies, the systems applications cannot be combined, or if there will be any other major issues between the two businesses, it may not be a good deal for the buyer.
Insufficient Planning Before Merger or Acquisition
The planning that goes into a merger or acquisition is crucial. Proper planning makes the entire process possible and can help attract more buyers or help the deal go smoother. Sellers will want to watch out for deals where the buyer is not prepared for the merger or acquisition and doesn’t know what the business is worth, the true value of everything the business has, or what needs to be done to complete the merger or acquisition.
Inflexibility of Seller or Buyer
Mergers and acquisitions involve a ton of negotiations. There are points that the buyers and sellers will need to discuss before they can find a common ground to agree on. If the buyer or seller is not willing to negotiate, it could be a sign that there is a lack of seriousness in the deal. Buyers who are not willing to negotiate might mean they aren’t really interested in buying the business and sellers who won’t negotiate might not be ready to commit to the sale yet. Inflexibility on either side can mean the end of the deal.
Buyer Financing Issues
Buyers need to be able to purchase the business. Many times, they need to be able to get a loan to cover the cost of the business. However, it’s possible the buyer will have trouble getting funding to purchase the business. When this happens, it may end up being a deal breaker if the funding is not eventually obtained. Sellers will not want to delay the sale indefinitely while they wait for funding to be arranged.
Data Privacy Issues
Data privacy will be crucial for both businesses. Before the merger and acquisition can be completed, this needs to be discussed between both sides. There should be a discussion over how information is collected during the merger and acquisition process, what happens to the data after the deal is complete, and how the data will be kept secure during and after the process. If the information that needs to be kept private cannot be secured and kept private, the deal may not be viable.
Issues Meeting Regulations
Some businesses will need to meet laws and regulations. This is common in highly regulated businesses like those in healthcare, finances, or businesses that deal with children as consumers. The business should already meet all regulations, domestic and international, and should provide disclosures about the regulations for the buyer. If regulations are not already met, it could mean the business is going to have issues in the future that the buyer will need to deal with. This could mean the deal is not a good deal for the buyer and it may be better to walk away.
Extended Delays Throughout the Process
The entire process can take up to a year or longer. When the seller isn’t prepared, the buyer cannot obtain financing, or there are other issues that delay the process, the deal may not be able to be completed. Some delays are expected through the process and should be handled as they occur. However, if there are too many delays because of one side, if the delays go on for too long, or there just isn’t progress being made in the deal, there is more time for potential issues to occur. Delays can be a sign that the deal should not go through or that one side is not really ready for the sale. Extended or numerous delays can definitely be a deal breaker.
Due Diligence to Find Deal Breakers
There is a lot that goes into the sale of a business. Buyers and sellers should be aware of potential deal breakers and which ones they can impact to make it less likely the deal will fall through. During the merger and acquisitions process, the buyer needs to ensure they do their due diligence. This enables them to find deal breakers like incompatibility that simply cannot be fixed to allow the deal to go through. Doing this enables them to make sure they can find these issues before it’s the final hours of the deal to minimize the time and money spent on a deal that simply won’t work.
If you’re planning on going through the mergers and acquisitions process, understanding potential deal breakers will allow you to see when you should negotiate further or when you should walk away from the deal. Pay attention to the potential deal breakers here and do due diligence to ensure you know how to handle the process and what could happen during the merger and acquisition.