In a market with 70 – 90% transaction rate failure, how do you ensure your M&A success?
The deals market took a significant hit in the first half of 2022 when compared to the same period last year; a combination of the conflict in Ukraine, rising inflation rates and investors generally becoming reticent caused M&A values to fall by 21%. As a result, startups looking for either an exit or investment are finding far fewer opportunities on the table, and especially after a period of record high valuations and activity, it’s going to take a while for companies to adjust their value expectations – particularly scaleups. Adding to this, data from Harvard Business Review illustrates that a staggering 70-90% of M&A fall through, even during the best economic conditions. In light of this, Claire Trachet – leading M&A expert and CEO/Founder of business advisory, Trachet – explains why this number is so high, and how startups can ensure their particular deal gets over the line.
Trachet argues that it was a “volume culture” that began post 2009 amongst the big firms that led to so many M&A falling through. Due to the insecure nature of these deals, companies would take on as many clients and prospective deals as possible so that if one fell through, there would still be income from another transaction. By taking on a smaller advisory firm, founders are weighting the odds in their favour, as all of the adviser’s resource is likely going to be placed on that one M&A. Choosing the right partner to guide you through the process forms one important part of getting a deal over the line, but it’s also vital to be informed as a founder too. With that in mind, Trachet shares some of the most common stumbling blocks for startups amidst the current M&A market, and explains how to combat them.
Due diligence is an opportunity – not something to be afraid of:
“The majority of deals fall through at the due diligence phase. Most commonly, this is because startups have not enlisted expert advice early enough to help them identify and resolve any issues. Contrastingly, rather than a part of the process to be afraid of, experienced advisers can actually even add value to a deal during the due diligence process, rather than have it slashed or thrown out entirely. The simple message here is prepare early, and bring in the right people to help you conduct ‘pre-due diligence’. Think of this like a dress rehearsal before the real performance.”
Fit is important, enlist the help of a corporate matchmaker:
“Another key reason deals fall apart is due to a lack of alignment in terms of culture between the business and prospective acquirer. So, it’s of vital importance to get a good understanding of how the other party operates prior to getting deep into negotiations, otherwise problems can occur down the line. Sharing the same values and vision really helps in fostering a smooth negotiation process – all it can take at times is a bad feeling for a deal to fall through. This is where it is, again, invaluable to have someone that has been through these processes before and can source the ideal buyer for your company.”
Momentum is key, avoid hold-ups at all costs:
“I always stress to my clients the importance of being deal ready before heading into any potential transaction. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly.
“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”