Page 12 - TACC 2025 Program

Why Do M&A Transactions Fail?

Selling a business is like running a marathon. You wouldn’t want to trip on your shoelace in the final mile.
Unfortunately, many potential mergers and acquisitions (M&As) don’t make it to the finish line. Deals can
evaporate, seemingly into thin air, after both parties have invested significant time and money.

Cooler M&A Market Conditions Lead to Failed Deals

After a historic boom in 2021, the pace of M&As began slowing in 2022 and has returned to more normal
conditions. Buyers are no longer willing to pay inflated prices or gloss over potential liabilities and
unaddressed concerns in a target company. The result is a less forgiving market with a higher potential for
deals to die, as buyers are willing to walk away from a deal that doesn’t make financial sense. Deal fatigue
can also take its toll; sellers might decide they simply can’t go through another round of diligence.

Whoever closes the door on the deal, a failed transaction represents lost time and money for everyone
involved. To avoid wasting effort and resources, sellers can take steps that increase their chances of a
successful transaction. Understanding why deals fail is an excellent place to start.

Four Reasons for M&A Failures

With inflation easing and the Federal Reserve seemingly poised to begin lowering interest rates, the
remainder of 2024 looks ripe for increased M&A activity. But many of these deals will not make it to the finish
line. The specific set of circumstances that leads to M&A failure is unique to each situation. Still, a breakdown
in negotiations often stems from one of four fundamental problems.

1. Lack of clarity around the seller’s objectives. about financial performance, potential regulatory
Sellers often put the business on the market before compliance risks, legal concerns, and more. Wary
making necessary preparations, including working of unknown risks, savvy buyers move on in search
through the financial and emotional implications of of a deal that offers more clarity about what they’re
selling the business. The seller or the seller’s family acquiring.
members may have shifting goals around price
or other aspects of the sale, such as their future 3. Misalignment between pricing
involvement or deal structure. Intrafamily conflicts expectations of buyers and sellers.
about how and when to sell — or whether to sell at Sometimes, the pricing expectations of buyers
all — can throw up hurdles that slow down or fully and sellers are too far apart to resolve. The parties
derail a sale. may enter the conversation in good faith, but if
they are driven from the outset by two differing
2. Poor-quality financial statements. sets of clashing assumptions, that gap can
Often, inadequate preparation also means a seller prove insurmountable. In other cases, external
lacks the financial documentation that a buyer needs factors such as the cost of capital may change as
to conduct proper due diligence. Missing records, negotiations drag on, making it less likely that the
non-current information, and other indications of parties can find common ground.
poor record-keeping can leave buyers in the dark