The Top 5 Reasons Buyers Back out of Mergers and Acquisitions
When you sell a business in Chicago, it’s insufficient to merely build a great business and then hope for the best. You need to think like a buyer, so you can cater to the buyer’s needs and give them precisely what they want.
When you sell a business in Chicago, it’s insufficient to merely build a great business and then hope for the best. You need to think like a buyer, so you can cater to the buyer’s needs and give them precisely what they want. Signing a purchase agreement is just the first step on the long road to closing. As buyers dig more deeply into your business, they may decide it’s not the sound investment it once seemed to be. Here are the top 5 reasons buyers back out of M&A deals.
Lack of Forward Momentum
When either the buyer or the seller is insufficiently invested in the deal, it can lose momentum, causing it to eventually die a slow and costly death. You can help prevent this by screening a buyer’s level of interest, and asking for references to weigh how previous deals went. On the owner side, it’s critical to ensure you are truly ready and motivated to sell your business, with a specific price in mind and a clear plan for what comes next.
Due Diligence Issues
Due diligence is a chance for the buyer to test your claims about your business. If the numbers or the paperwork don’t support what you say, the buyer may request a change in price, or walk away entirely. If you don’t have the right paperwork or don’t promptly respond to due diligence requests, expect things to begin spiraling. You can prevent this by gathering all the documents you need before you put your business on the market.
Financial forecasts must be grounded in reality. If you predict your business will suddenly become more profitable than ever before, or that it will defy wider market trends, be prepared to justify these predictions with hard data. Buyers are inherently risk-averse, which means they won’t trust unreasonably rosy forecasts. Ensure you have data to support every claim you make.
Financial Stability Issues
If the buyer’s financial status changes, they may have no choice but to walk away. This is why it’s so important to pre-screen buyers to assess their solvency. Buyers who can only barely afford your company are a bad bet, because it means a small change in the market or in loan interest rates may suddenly price them out of your business.
Sudden Market Swings
It’s possible to plan for most pre-closing issues, but some are unpredictable. The COVID-19 pandemic showed how sudden market swings can tank even the best-planned deals. You can’t predict everything that will happen in the market. You can, however, take proactive steps to make your business adaptable to change. This means having the flexibility to change operations, an emergency budget that can help you pivot when necessary, and several different streams of revenue. Recurring revenue is also critical to solvency, since it offers a bit of insurance when the market shifts. Change is inevitable. Companies with a strong plan, exceptional managers, and a willingness to innovate may thrive in the face of chaos, making them even more valuable.