Deal failure: the transaction process
Updated: Feb 7
There are two major types of deal failure: those that fail during the transaction process and never close, and those that close successfully, but fail to deliver a return on investment. The first relates commonly to a poorly planned (or run) process, while the latter is linked to the lack of post-merger integration thinking. Underneath all the causes, there is a lack of understanding of the nature of the business being transacted and of appreciation of its singularities and value.
As not all data is public, and even less so on failed deals, it is hard to pinpoint exactly how many deals can be deemed a “failure”, but a recent article by the Harvard Business Review put the figure at somewhere between 70% and 90%.
In our experience, there are three main process related reasons for deal failure. And since we believe that learning from the mistakes others make goes a long way to helping with your own journey, here they are:
1. Unprepared seller
Failing to take the necessary steps to prepare a business for a sale is the most common reason a deal does not close. As we mentioned in a previous post getting transaction-ready and optimising the outcome are closely related.
The key is to understand your objectives through the sale, identify the right type of buyer that most closely will fulfil those and prepare the business to make it most attractive to those buyers. Additionally, you should undertake a review of the business so that you are fully aware of what will be perceived as positive and negative by prospective buyers and can avoid surprises down the road. This will also prepare for the due diligence later on in the process, with readily available and accurate information.
2. Unwanted surprises
Lack of transparency between the parties involved in the deal will result in inevitable failure sooner or later. As surprises come up and even become common through a process, confidence erodes, and a lack of trust between the parties settles in. Therefore, even in the case where you can complete the deal, it is unlikely this will be a successful experience for you and your team at this point.
It is essential to be prepared (per the point above) and be ready to show complete transparency through the transaction. Through due diligence, prospect buyers are expected to have full access to everything to finalise the transaction. Being open and transparent throughout the process develops trust and builds on the relationship.
One of those surprises, which no-one wants to see, is a downturn in the numbers through the process. Whether a drop in revenue or even the pipeline – these can heavily impact the trust in the value of the business. One of the reasons behind this is that as the process takes time, key management team may start concentrating on the deal and lose sight of important business activity.
3. Time Kills Deals.
And one of the biggest causes of all time. An M&A process that drags on and on eventually grinds to a halt. Delays are often attributable to a lack of preparation. Experienced advisors will play a key role in leading discussions and can set the pace through due diligence and negotiations to keep the transaction moving forward. However, to keep this pace, you and your business must be ready for what the process will bring.
There are, of course, a number of other reasons why deals can fail during the transaction process, but the above three are the ones we see most often. Ultimately it is all about being very prepared for expected and unexpected circumstances, being transparent throughout the process, and being timely in your approach.
Our next piece will focus on the major causes of failure after deal closure, such as cultural misalignment.
If you have questions, or would like to discuss any of the above points in further detail, please reach out to us.
As always, if you need any help or would like to chat about any of the above, please don't hesitate to reach out!