Why deals don't succeed, and the 5Ps driving great business purchases

What determines if business deals are successful or not? The answer is often emotion, but that’s not the only reason a deal will fall through.

In the following edited book extract from Buy Grow Exit, Joanna Oakey shares the key factors in making a great purchase decision.

The most common reasons deals don’t succeed

Studies on M&A success rates (or more particularly, failure rates) revolve around large acquisitions, and mostly on the activity of public companies.

There is a massive lack of data on the success rates of SMEs in this area.

Firstly, SME mergers and acquisitions is a smaller market. M&A is a strategy used regularly by listed entities to enable their organisations to continue to grow. But, as we have discussed, SMEs are often completely unaware of this as an option for growth for them.

The second reason is that data from public companies is much easier to obtain, given they have reporting obligations to the market, whereas private companies have no similar reporting requirements.

The final reason I believe also lies in the approach of SMEs.

Reporting on ‘failure’ rates suggests that there is some measure that has been established to indicate whether there has been success or failure, and that someone has the ability to analyse this and come up with an answer.

In my experience, many SMEs who are acquiring don’t have a predefined measure of what ‘success’ looks like.

They don’t have KPIs that they are looking to meet. And they often lack a clearly defined plan for the acquisition and transition so that they can ultimately reflect on it as a success or a failure. And this is in itself perhaps the biggest failure of all.

So, if you are intending to embark on an acquisition (or multiple acquisitions), take note of this high reported ‘failure’ rate. While I don’t believe that this number is fully representative of what SMEs would report from their acquisitions, these statistics do serve as a reminder that if you are going to look to utilise acquisition as part of your growth plan, you need to take care to do it right and you must have in mind a clear vision of what success looks like.

How emotions can kill an idea

Often transaction failure is driven by a lack of understanding of the role that emotion plays in a deal. Emotion is such an important part of understanding the potential issues that may arise in a deal that I am now of the opinion that it is one of the largest causes of deals falling over before they get to completion where either the buyer or the seller (or both!) has not regularly been involved in M&A transactions.

Of course, emotions are not the only cause of transaction failure.

In fact, there is a long list! It includes:

Lack of planning and preparation. The most common cause for a deal falling over before the finish line is a lack of planning and preparation by one (or both) of the parties. For example, often the seller simply will not have due diligence information ready as it is requested, forcing a long delay as they scrape together items from often a long buyer due diligence list. This engenders distrust immediately in the mind of the buyer, sets the deal off on the wrong course, and creates early speedbumps that can ultimately be the downfall of the deal. Alternatively, we often see instances where a buyer walks into a deal but doesn’t have finance or their deal team in place, or simply has not taken the time to properly educate themselves about what they will need to see the deal to conclusion. The consequence is that the process slows down, and never regains momentum (and in some instances where the business is in high demand, buyers can lose the deal to another buyer who is ready to go). Finance is a particular issue in the current market, and buyers that haven’t properly secured money in advance can find that finance might be a lot more difficult and time consuming than they had initially anticipated, and in many instances can’t be resolved in time to save the deal.
The wrong advisers on a deal team. The advisers for one or both of the parties are slow, uncommercial or aggressive in their dealings, and end up creating so many barriers to the deal that the parties never reach agreement and the deal falls over.
Adverse outcomes from due diligence. The buyer’s investigations find that the value that was expected in the business is not there, or that the risk in the deal is too high. This however can sometimes be a good reason for transaction failure. If during the deal it comes to light that the business is not as expected, and the failings can’t be dealt with by commercial or legal means, often it is appropriate that the transaction is abandoned.
Seller disharmony. Disputes can emerge among the selling party if there are multiple sellers who don’t agree on key terms. This can also occur with buyers if there are multiple parties forming a buyer group. But this is much more rare than issues of alignment among multiple sellers.
Third-party consent issues. Third-party consents required for the transfer of contracts in the business (for example franchise agreements, key distribution agreements, supplier contracts, large client contracts, leases) that haven’t been planned out properly in advance can block the transfer of key value in the business.
Lack of process. Failure can occur when there is a lack of process for the deal and no-one driving a timeline for due diligence and contract negotiations.
Communication issues. If the communication between the parties is inefficient and driven by emails forwards and backwards, with drafts and redrafts taking months, the parties can slowly lose trust in each other until the deal ultimately falls over.

The five essential drivers of a successful purchase

As you have seen, the list for why deals might fail to achieve their success metrics is quite long. The way to minimise the likelihood of issues impacting your acquisition is to have a clear focus on the drivers of success of the transaction itself, and of the business after completion.

The 5Ps driving great purchases

Preparation: being ready to buy when you find the right business. Being ready to pounce!
Primary value: understanding the key value in the business, and how that value will transfer.
Protection: understanding the risks in the transaction and in the business, and putting in place the right elements to manage and minimise that risk.
Process: ensuring you are approaching the deal, the due diligence and the contractual components with the right process in place.
Purchase structure: a critical consideration in structuring the offer, with consideration of:
- what the sale is – share sale, unit sale, business sale or asset sale;
- the timing of payment; and
- how the purchase price is paid. Will it be paid in full at completion, or partly deferred? Is it a set payment, or will it be partly contingent on future performance, or some sort of milestone? Will there be a retention sum to protect against future risk?
This is an edited extract from Buy Grow Exit by Joanna Oakey.