As in many industries, we love to talk about our wins in the M&A space, because they change clients’ lives for the better. But I’m also a firm believer that you should both celebrate your accomplishments and share when things haven’t gone your way, and a sad reality about middle-market mergers and acquisitions (M&A) is that a significant percentage of business deals fall apart before closing, often in the later stages and despite the best intentions of everyone involved. Unfortunately, I’ve witnessed this up close many times.
So what happens if you’ve invested months of time, money, and emotional energy into a process only to watch it collapse unceremoniously?
I’m here to offer honest advice about what you’re likely to feel and what to do next—emotionally, legally, financially, and strategically. Because if we’re looking for a silver lining, I’ve seen cases where a failed deal ended up being little more than a bump in the road for a business owner on the way to a satisfying result.
Why M&A deals fall apart
When you work as hard as most entrepreneurs do on their potential sales, there’s a natural expectation of a reward at the end of the journey. But I’ve watched negotiations come undone for many reasons over the years. Here are a few of the most common:
- Surprises that cropped up during due diligence (e.g., legal issues, financial misrepresentations)
- Financing failures for buyers
- Valuation disagreements when a seller thought they were being undervalued
- Dips in company performance that gave a buyer cold feet
It’s important to distinguish between controllable and uncontrollable factors. Controllable factors can be improved by thorough preparation before or even during a transaction, often in partnership with an experienced M&A advisor. Uncontrollable factors—such as some performance problems influenced by unforeseeable world events—may have to be accepted as bad luck.
Understanding the root causes of a deal’s collapse can shape how you react, which affects your strategy going forward.
The human factor: processing the emotional fallout
The emotional impact of a deal falling through may be the hardest thing for an entrepreneur to stomach. A busted deal can feel like a personal rejection, and a business owner in this situation is likely to feel sadness, anger, and frustration These are totally normal and understandable reactions, and there’s not much a business owner can do besides feel their feelings and do the hard work of getting through them.
After the initial shock and anger wears off, some owners find themselves in a bargaining stage. They ask, even after any hope of reviving the deal has passed, “But what if I were to . . . ?” I understand this, too, because so many things in business can be attacked through a sheer force of will. Reviving a dead deal is unfortunately not one of them.
Eventually, sellers will have to accept the reality of the situation. There’s no rulebook for when this will happen, because everyone processes it at their own speed. I’ve even seen feelings of hurt and anger from a failed deal remain after an owner has completed a separate deal!
After a deal falls through, it’s important to talk to outside advisors—your M&A guides, peers, or a therapist—to decompress before you strategize about next steps. The risk is in making reactive decisions during an emotional low, such as rushing back to market before fundamental business problems are addressed or before you’re feeling ready for the rough and tumble nature of another M&A process.
You’re likely to get good advice from people who were not involved in the deal process and from trusted partners within it, like your investment bank team. The latter group has almost certainly been through deals that fell through before, and their experience and perspective can be an immense help.
Steps to take after a business deal collapses
After you’ve brushed yourself off and emotionally processed the collapse of the deal, it’s time to review what went wrong. Here are some useful actions:
- Review the purchase agreement. Look for no-shop clauses to understand when you can make your next move, understand and collect any break-up fees you might be owed, and be sure to honor confidentiality obligations.
- Conduct a postmortem with your M&A advisor. Document what surfaced in due diligence and what you need to fix before trying again.
- Protect your business operations. Reassure employees and customers who are already aware of the attempted deal, taking care to be honest but upbeat. Address any disruptions caused by the sale process.
Manage all information carefully—anyone who doesn’t already know about the sale process certainly doesn’t need to know that it didn’t succeed this time.
Fixing what the deal exposed
Even if you’re disappointed, you can treat the buyer’s findings as an opportunity that other sellers don’t get. You now have a due diligence roadmap for fixing financial, operational, or legal gaps that the buyer flagged.
Start by prioritizing quick wins while still paying attention to longer term structural improvements before heading back to market. Work with your advisors to close any valuation gaps that arose between you and the seller during negotiations.
Then, reassess your go-to-market strategy. Was the buyer pool right for your company? Are there still promising buyers who are potentially interested? Was your story properly packaged to appeal to the kinds of investors you want to interest?
Sellers who relaunch after a failed deal often achieve favorable outcomes—perhaps even more favorable than they would have achieved initially. Just make sure you have an answer to the question, “What happened to your last deal attempt?” That way, you can re-enter the next transaction process with greater confidence.
Facing the road ahead
I’ve faced more than one failed deal and have counseled owners through their own disappointments, so I know how tough it is to pick yourself up off the ground and try again. But it IS possible if you tend to your own well-being, come to understand why the process fell through, and address any shortcomings.
Lean on your M&A advisors in this trying time, because they’ve no doubt guided sellers through this exact situation more than once. If you’re looking for an experienced guide to prepare for your own transaction, reach out today—we’d love to have a conversation to get started.
AUTHORED BY:
Chris Younger | CEO | Class VI Securities, LLC | Class VI Family Office, LLC
Chris co-founded Class VI in 2005 with a mission to Enable the Entrepreneurial Spirit. Sharing a passion for what entrepreneurs mean to our community, Chris and his business partner David Tolson felt they could do a better job for business owners and have had a great time helping clients ever since.
Prior to Class VI, Chris spent more than 20 years gaining experience in executive management, marketing, sales, law, and mergers and acquisitions.