Why so many deals fail.
Of the business owners I speak to, and the attendees at our Masterclasses, the vast majority have experienced some form of deal opportunity which has not concluded, or has failed dismally below original expectations. Invariably the owner is left asking what on earth happened, why did this look like such a good deal, but resulted in endless frustration, wasted energy and time?
Firstly, it must be said that business owners rarely have the experience to match that of the typical acquirers they approach, or are approached by. As a result, the power balance invariably lies with the acquirer, resulting in an unlevel playing field where the seller simply does not know all the rules of the game. In addition (acquirers, please close your ears!) in my experience acquirers behave particularly badly when they know they are the only ones at the table. For any acquirer, it is easy to spot the opportunity in a potential deal – but once that has been identified, it is the risks in the deal that dominate. The temptation to start the negotiations with a high deal value, and then to whittle this number down through negotiations and due diligence, is just too strong.
Another common reason is that owners tend to wait too long before making their decision. While times are good, they believe that times will stay good forever, and when times turn tough, they realise that they want out. Over the past five years I was personally involved in taking 100 companies to market. In my estimation, 22 of these made their decision too late and either the outcomes of these deals were way below their initial expectations, or they never managed to sell.
Another obvious reason for failed deals (which is certainly obvious if you have been reading these articles over the past few months) is a lack of choice. Choice is a common factor in deal failure or success for two reasons: firstly, because it is so incredibly difficult to assess value when you only have one proposal on the table, and secondly because choice tends to keep your acquirers honest. There is nothing like a bit of Deal Heat to ensure that the pace of a deal is maintained and that the playing field remains level.
For many business owners their only experience of equity transactions, or attempted deals, is in the case of BEE transactions. Without digressing into the pros and cons of BEE regulations or ownership requirements, all too often owners of businesses under BEE pressure look for the shortest possible route to black ownership, thinking this will result in the least impact on their day-to-day business. In the vast majority of cases, these deals either fail before a transaction is done, or post-transaction when they are very difficult to unwind. In most cases, it is the business owner’s lack of deal experience that delivers such poor results. All the principles of preparation, choice and synergy, among others, must still apply when looking at a minority BEE transaction as they would in the case of a 100% sale.
There are numerous other reasons for failed deals, but just one I want to focus on (at risk of lacking objectivity) and that is a weak advisor, or an advisor who is not incentivised to deliver maximum deal value. Too many advisors are effectively incentivised to deliver a deal as quickly as possible (that is how they earn their fee) and do not have the capacity to follow the process required to deliver that essential deal heat. In addition, it is always important to know where your advisor earns their fees – all too often they are more incentivised to look after the acquirer than they are to look after you, their client.