5 Common Reasons Acquisitions Fail (and How to Avoid Them)
Photo from MicroAcquire Inc.
Time becomes more valuable than money as you get older.
Once you’ve established a business and are financially secure, you might reconsider how you spend your time.
Those early starts and late nights are unsustainable in the long run, so you might sell your startup for some much-needed rest or to spend more time with friends and family.
But the acquisition process is also an investment – of time (weeks or months), money (escrow and legal fees), and effort (fielding inquiries). Unfortunately, it doesn’t always pay off.
You might spend weeks preparing due diligence documents, a few thousand dollars on legal counsel, and burdened your teams with extra work only for everything to collapse at the last moment.
Far from being a celebratory event, you might come to curse the wasted time and wish there had been a better way.
While we’re slowly consolidating the acquisition process with technology, we still have some way to go. But the good news is that you can prepare for and deflect any nasty surprises during the acquisition process when you’re aware of what might go wrong.
Why Acquisitions Fail and What to Do About It
1. You Let Emotions Creep Into Your Asking Price
I get it. You’ve spent years building your startup, and you want your asking price to reflect your hard work and passion. The truth is, your startup is only worth what a buyer will pay for it. I don’t mean you should accept lowball offers but recognize that while your emotional investment might’ve helped the business succeed, it won’t help your buyer earn a return on investment.
Asking price is the number one reason acquisitions fail. First, you might not attract offers, and second, if you refuse to budge during negotiations, you risk the buyer walking away. Instead, set a realistic asking price, and leave yourself some negotiation room. Ask yourself whether the extra dollars are worth losing this buyer and the additional time it might take to find another.
2. Your Need for Cash Trumped Your Need to Sell
Cash might be king but not everyone’s a loyal subject. Your buyer, for example, might not have the cash available to acquire your startup outright. They might have invested elsewhere or be awaiting financing. You and the buyer will also want to minimize your tax obligations, and the buyer mitigate the risks inherent in acquiring a startup without a crystal ball confirming a return.
Negotiations don’t end when the buyer agrees to your asking price. You must also decide how the buyer will compensate you, called the deal structure. They might ask to pay a down payment and the rest in installments where you act as financier (seller financing). Or, they might ask to pay installments only when you hit certain performance targets (earnout) to reduce risk.
I interviewed a founder recently who accepted stock in the acquiring company as part of the deal. You can choose from many different deal structures and learning what each one entails will help you negotiate one that makes you and the buyer happy. But if you need cash, perhaps to start a new business, consider getting pre-qualified for Pipe financing.
3. You Didn’t Prepare for Due Diligence
Complacency during due diligence is like driving with your eyes shut. You might know the road, perhaps even traveled it every day for years, but you still risk veering off course or crashing into an oncoming vehicle. Similarly, with acquisition diligence, you need to guide your startup safely through each of the buyer’s questions while substantiating your answers.
In many ways, due diligence starts when you begin talking with a buyer. The nearer you get to closing the acquisition, the stricter and more involved due diligence becomes. While such intense scrutiny might feel a little unnerving (and exhausting), imagine how it would feel if the buyer were to discover something unsavory about you or your startup.
The fallout from a small oversight might be equally small. Your startup isn’t perfect – none are. But the buyer will expect you to have done due diligence on yourself before they do it to you. You must declare or fix anything that might impact the buyer’s perception of your startup. Transparency isn’t just a moral obligation here but a necessity if you want to close.
4. You Failed to Articulate the Buyer’s Opportunity
From the moment a buyer starts talking to you about an acquisition, they’re thinking about risk. They’re actively searching for problems with your startup – anything that might justify walking away to a better opportunity or knocking down your asking price. Your startup probably won’t be the only one they’re looking at, either, and if you don’t keep them hooked, you might lose them.
Throughout the acquisition process, you must continue to affirm the opportunity for buyers. Consider what makes your startup special in their eyes. Where are the growth levers? What features have customers requested? Which markets have you yet to enter? Emphasize where the buyer’s expertise could fuel growth, how they’re the missing jigsaw piece.
Your pitch deck and confidential information memorandum (CIM) should both market your startup in the best light possible. Once buyers have bit, it’s up to you to keep them biting until they’ve signed an asset purchase agreement (APA). If you’re unsure how to market your startup or want to understand the M&A market better, hire an advisor to help you.
5. You Were Hit By Unforeseen Circumstances
Let’s say you’ve done everything right. You’ve found a buyer willing to pay your asking price. You’ve maintained their interest and sailed through due diligence. You’re about to sign an APA before entering escrow and closing the acquisition. But wait – the buyer suddenly has a change of heart. They reach out, apologize, and the deal slips through your fingers.
Unfortunately, this is common. While it might simply be a change of heart that upends your acquisition, other examples include: buyer’s financing falls through, a better product or service arrives that makes yours obsolete, regulatory changes that render your product or service costlier to offer, or market dynamics such as increased competition and waning public interest.
You’ve probably guessed that your biggest defense against such failure is time. The longer it takes you to sell your startup, the more you’re exposed to some unforeseen circumstance derailing your acquisition. Set deadlines for each stage of the acquisition to lock in buyer interest, and prepare a data room early to quicken progress towards that APA.
If the above has got you worried about selling your startup, please don’t be disheartened. Your first buyer might not work out, or even your second, but you’ll find one eventually. Listing your startup on MicroAcquire puts it in front of over 120,000 buyers, and if you avoid the pitfalls described above, I’m confident you’ll achieve a life-changing acquisition faster than you think.