How an M&A deal can go sideways and what to do about it

The 2018 M&A deal environment in the Philadelphia area was particularly strong across the middle market. And while the pace might not match the previous year, considerable deal activity is expected through 2019. Buyers and sellers looking to capitalize on the market should be mindful of the mistakes that can derail a deal, and how those mistakes can be avoided.

Smart Business spoke with Richard Snyder, director of audit and accounting at Kreischer Miller, about M&A pitfalls and what preparation ahead of negotiations can help buyers and sellers avoid them.

What tends to trip up M&A deals?

Any time the buyer doubts the quality of the information provided, there is a high risk of negative consequences. These first show as a loss in value and can eventually lead to the loss of a transaction. This may arise when information and documents requested by the buyer are slow to be provided, the seller cannot provide adequate explanations about certain details requested by the buyer, or information provided by the seller differs from the underlying support and details that come out of the due diligence process.

Complex issues such as customer concentrations, ongoing litigation, and environmental remediation may pose significant risks to a company that a buyer cannot overcome. These and others may impact the purchase price or may be too great a risk for a buyer, which results in the buyer walking away from the deal.

What happens if a deal goes sideways?

A great deal of resources are utilized by both the buyer and seller in a transaction. If a deal goes sideways, both lose the time and resources they put into the transaction. The seller’s management team loses valuable time that could have been spent on the operation of its business. Additionally, sellers may spend a considerable amount of money on professional services and other fees as part of the deal process. The business may continue to be for sale and a failed sale may make it less attractive in the marketplace.

A buyer may lose the lost opportunity cost to pursue other deals in addition to professional fees and other costs. However, it is important to note that the cost of failed mergers and acquisitions may far outweigh the costs spent on a potential transaction and walking away if the transaction is not right for both sides.

How can buyers and sellers increase their chances of success?

Sellers need to be prepared for the sale of their business by making sure they have a full understanding of the sale process and the necessary resources. Their books and records should reflect complete and accurate financial reporting and the owners should have a full understanding of risks that could affect the company’s valuation and potential salability. Understanding the latter gives the seller the opportunity to be upfront with a buyer and address potential issues before the sale process begins, which could offset any negative impact on a transaction.

On the buy side, it’s always important to have a sound due diligence process, and an understanding of the deal environment and the target’s industry and regulatory environment. Accurate valuations are also important in determining an appropriate purchase price, as well as having a plan for the integration of the business post transaction.

Who should be a part of the buyer and seller deal teams?

Sellers should have a good transaction attorney, accountant and possibly an investment banker. The investment banker will assist in preparing marketing information, taking the business to market and finding prospective buyers. It’s always a good idea to have an experienced accountant and attorney on the business advisory team. These advisers should not only understand the company, its industry and the deal market, but they should also have transaction experience.

Buyers often have internal teams that can run a financial analysis and conduct due diligence on a target. However, some buyers also work with an outside team on the financial due diligence.

There are multiple reasons deals don’t go through, but a significant obstacle is a lack of preparation. Having good advisers on both sides who are experienced and understand M&A is very important to a successful deal.

Insights Accounting & Consulting is brought to you by Kreischer Miller