Woody Allen once famously had a character say: “A relationship, I think, is like a shark, you know? It has to constantly move forward or it dies.”
In our world, the same can be said of m&a negotiations. In other words: “Time kills all deals”. As an investment banker that has been involved with many mergers and acquisitions over the years – I’ve come to live and die by this mantra.
We’ve seen it many times, the probability of a successful deal completion declines as time passes; if enough time passes before a deal closes, it will, most likely, die.
So what happens that can cause a deal to die, despite an initially motivated buyer and seller?
Here are a few examples, not in any particular order:
- The financial performance of the target changes.
This can be either an improvement or a decline in the business. It doesn’t have to be a negative – which I think is the gut reaction of a lot of people. If it is an improvement, the seller may no longer be willing to sell for a price and terms that the buyer is willing to pay. If it is a decline in performance, the buyer may be nervous that the business will trend downward and may become uncomfortable with moving forward, or may try to renegotiate price.
- The financials of the buyer changes.
There could be a change in the buyer’s ability to fund the deal. A buyer’s investment that went sideways, an unexpected cash crunch, or a lending relationship that went south – all of these events could result in a buyer having less capital available to fund the deal.
- A shift in the market, economy, or either the buyer or seller’s specific industry.
All three of these elements combined – or even one alone – could impact a buyer’s strategic and investment goals.
- A more attractive opportunity may be discovered by the buyer.
- Deal fatigue.
This is a big one. Buying or selling a business can be a very time-consuming, stressful, and distracting. Over time, one or both parties could have lost interest in doing this particular deal. Over-negotiation of terms can lead to this, too.
- Unexpected litigation, a claim, or another significant problem could arise for either the buyer or seller.
This one doesn’t come up too often, but can still happen.
- The death or ill-health of either the buyer or seller deal champions.
- New regulations or laws that pop up that could impact the business (on both sides).
There are warning signs and tactics that my fellow M&A bankers use to help get us over some of the humps. With all of that, I’ve been the victim of this many times over the years. I suspect it will happen more than a few times again before I stop doing deals.
So what can be done to avoid this problem? The best way to handle the risk of “time killing all deals” is preparation, even before going out and speaking with potential buyers of the business.
If vision, strategic objectives, and the financial characteristics cannot be succinctly communicated and clearly articulated at the start of discussions, it should probably be back to drawing board.
Dedication to do the necessary work upfront to identify the benefits of a transaction and how it will come together is a must. (I’ll leave that topic for another blog and another time – titled “Herding Cats”!)