M&A Buyer Red Flags: 5 Signs Your Buyer Isn’t a Good Fit
What’s the most important factor in a successful M&A deal? If you’re otherwise well-prepared for the process, it’s choosing the right buyer. A good buyer comes into the process prepared to competently operate your business from day one.
What’s the most important factor in a successful M&A deal? If you’re otherwise well-prepared for the process, it’s choosing the right buyer. A good buyer comes into the process prepared to competently operate your business from day one. And they’ll often share their plan for doing so. A bad buyer could be unprepared, unable to get funding, or a competitor who is just window shopping to gain access to trade secrets. Mergers and acquisitions that fall apart erode good will and waste time and money. You need to spend at least as much time vetting would-be buyers as they spend vetting you.
First-Time Business Buyers
A first-time buyer is a red flag because these buyers often don’t know what they want, how to manage the sale process, or how to run the company after closing. This doesn’t mean you can’t or shouldn’t sell to a first-time buyer. It does demand a bit of caution and extra due diligence. Talk to the buyer about their intentions prior to signing the purchase agreement, and ensure the agreement outlines a clear plan for taking the sale from signing to closing.
Difficulty Getting Funding
If a bank or investment firm doesn’t want to give a buyer capital, they may see something you don’t: bad credit, a history of default, or a lack of experience running a business similar to yours. Heed the warning. Your purchase agreement should contain contingency clauses addressing funding issues.
Lack of Interest in Due Diligence
Good buyers are inherently risk averse because they understand how truly costly a poorly run company can be. If a buyer doesn’t seem worried about this, they may fundamentally lack an understanding of the demands of running a business. Or worse, they may have no intention of ever making it to closing. If a buyer is so disinterested in due diligence that it feels like a relief, consider their motives. Slow due diligence means a slow, and possibly failed, transaction.
No References or a Bad Reputation
Your team should be able to tell you something about the buyer, especially if they’ve bought a company before. Buyers must also be prepared to provide references and give you some information about what to expect from them as a buyer. If they can do neither, if they have a history of failed deals, or if their prior deal partners have nothing positive to say about them, it’s time to reconsider.
A Gut Feeling
You didn’t get to where you are today because of your bad instincts. Odds are good you’ve relied on your gut when making a wide range of business decisions. A merger or acquisition should be no different. Spend some time identifying your primary goals for a deal, sketching out your ideal buyer, and ensuring you’re emotionally ready to sell. If you feel confident in moving forward but you have a bad feeling about a prospective buyer, trust your gut. Spend some time interrogating your sneaking sense that something’s not right. You’re not obligated to sell before an agreement is signed, so continue the hunt until you feel good about the buyer.
Beware of initial negativity
Getting a deal done takes a tremendous amount of effort, discipline, steel nerves, and ability to quickly discern risks. When buyers attitude turns negative in the deal, it’s usually a brief moment before it becomes a free fall into deal collapse. If you get that impression early on, just move on to someone else. You simply won’t close with that party. Now if they’ve turned negative due to an action on your (seller’s) behalf, it’s imperative that you have the self awareness to make a change quickly or else the next buyer may see the same problem.