During my 25 years as a mergers & acquisitions (M&A) lawyer, I am frequently asked to identify the most common mistakes that cause an M&A transaction to fail. Honestly, I continue to be amazed at the frequency with which transactions fail because of fundamental and repeated mistakes, many of which could be avoided. Most experienced business lawyers have their own list of common mistakes. My list is very meaningful to me and my clients, because I believe the success rate of completing transactions would rise substantially if these mistakes did not occur.
1. Failure to Make a Commitment and to Dedicate Needed Financial and Manpower Resources
The initial mistake made by most buyers is believing that suitable acquisition candidates can be identified without much difficulty. Acquisition candidates usually do not fall from the sky. Identifying acquisition candidates requires commitment, planning and dedication of resources.
The commitment must be made at the top of the company to pursue growth by acquisition. Financial and manpower resources should then be allocated to the project. Certain people, either inside or outside the organization, must be dedicated to implementing the acquisition search process in order for the process to begin. Failure to preliminarily dedicate resources to the acquisition process sometimes indicates a deeper reluctance on behalf of the buyer to develop and pursue an acquisition strategy.
2. Failure to Develop a Sound Strategy Based Upon an Understanding of the Marketplace
If you want to identify suitable acquisition candidates, you must have an acquisition strategy based upon clearly defined objectives within a marketplace that you understand. Defining objectives requires you to focus on how your company’s value can be enhanced through strategic acquisitions.
A profile of an ideal acquisition candidate should be developed. A buyer without a strategy and clearly defined objectives, might be overwhelmed with so many prospects and offerings that it will not even have enough time to review all the prospects. Even worse, you may miss entirely the one candidate out of many that may be a good acquisition fit.
3. Paying Too Much for Target Companies
Overpaying for a target company is a huge problem. If you have identified a real prospect and you intend to make an offer, an experienced financial advisor should be consulted to assist in analyzing the value of the target company to the acquirer’s business. The use of an outside professional to value the target company should be strongly considered in order to eliminate bias in the valuation and to help value the target from several perspectives.
4. Failure to Employ Experienced M & A Legal Counsel
Before any offer is actually made, engage counsel experienced in mergers and acquisitions. All lawyers are not experienced in the very complicated mergers and acquisitions field. Experienced deals lawyers not only know the rules and practices of the M & A road, but they can also bring a wealth of experience to the table to resolve and compromise difficult deal points that could become problematic. Furthermore, an experienced deals counsel can save you money in the long run because he or she will not have to reinvent the wheel in structuring and papering the transaction.
5. Complete the Due Diligence Process Before Reaching Agreement On Terms
The due diligence process should begin as soon as the letter of intent is executed. Certain due diligence tasks with long lead times, such as environmental audits, should commence immediately. These long lead time tasks are costly, frustrating and time-consuming, but are an absolutely critical part of the due diligence process. Examining the books, records and “people” in the company can also be time-consuming. The seller will pressure the buyer to complete the process as soon as possible since the buyer’s offer will almost always be contingent upon the successful completion of the due diligence process. The buyer should always use experienced deals people in conducting due diligence including attorneys, financial professionals, and business people who are knowledgeable with the seller’s business.
6. Failure to Develop and Follow a Negotiation Plan
A negotiation plan should be developed and followed by the acquisition team. The first step in developing a negotiation plan is to rank the issues to be negotiated in your order of importance. As a general rule, the material issues should be negotiated to near conclusion before the non-material issues, sometimes treated as an entire separate category, are negotiated. Remember, what may be material to you may not be material to the other party. You might be able to trade off concessions on what you consider non-material issues to get concessions on the material issues.
The leaders of the acquisition team should be kept informed on all issues and provide strategic guidance to their professional advisors on negotiating these issues. They should never “go-around” their acquisition team by negotiating directly with the opposing party, unless these negotiations are part of the negotiating plan. Back door negotiations undercut the credibility of your professional advisors and undermine any apparent authority that the seller’s team believes your professional advisors possess. The buyer should always be able to walk away from a deal that does not seem to make sense. Never allow yourself to be put in a situation that creates momentum to close a deal when a final decision has not been reached.
7. Assuming Parties Will Do What They Say
During the negotiation process, you may receive assurances “off the book.” While you may not want to appear suspicious, if the assurances are important to you, you should insist they be memorialized in writing. The other side should not object unless their reasons are less than candid. If the assurances cannot stand the light of day, you should be concerned with the value of the assurances or with the credibility of the other side, or both.
Sometimes your own position needs to change during a transaction, and your credibility will be challenged accordingly. Modifying your position during a transaction is not uncommon as you learn new facts during the due diligence phase that materially affect the value of the transaction. Never deny what you have done. Admit you have changed the “deal” and state the reasons why. Being forthright may not save you from being strongly criticized by the other side (you would do the same), but at least you can avoid being labeled “dishonest” (or worse) and proceed with the transaction.
8. Permitting a Transaction to Drag and Become Stale
A deal has only so much life. Momentum is critical. If a deal sits, momentum is lost and the parties are allowed to review their positions, their attention span will dissipate, and the chances of the deal closing will greatly decrease. Be decisive. Never let a deal sit too long.
9. Failure to Pursue a Deal Diligently Through Closing
If the deal has moved to closing, never assume the deal is done until it has finally closed. Keep up the momentum through closing even if you believe the deal is done.
10. Always Be Able to Walk Away From The Deal
The acquisition process is not for the fainthearted. Expect the unexpected and the unexpected will then become normal. Always be able to walk away from a deal if it is not right. Deals that were closed at the last minute with cold feet usually end up being deals that never work.
How many of you have made these mistakes before? If so, it is all right because everyone else has made these mistakes before. The only people who have not made mistakes are those people who have never done a deal. Learn from the mistakes made before you to greatly increase your chances of closing the deal.