Not all M&A deals conclude with a successful closing. During the period between signing a letter of intent (LOI) and closing, the deal may break up for a number of reasons. Sometimes the reasons are unforeseeable, but many times these situations can be anticipated and potentially avoided.  

1. Letter of Intent

Getting a letter of intent signed is a critical milestone, but it doesn't guarantee the deal will close. Since the LOI is generally non-binding, both buyer and seller can pull out of the deal until a final purchase agreement is signed. Sometimes the seller will get cold feet, change his mind, and decide not to sell. Also, during due diligence, buyers may uncover new risk exposures that lead them to reconsider a deal. Buyer financing also represents a critical item. Depending on market conditions and how much debt a deal requires, a buyer could have difficulty getting funding arranged, and this might be a deal breaker. However, most larger strategic and financial buyers have well-established banking relationships that lessen this risk.  

2. Due Diligence Findings

The probability a deal will close depends heavily on the buyer's due diligence findings. In particular, a key test is whether the Quality of Earnings report (prepared by the buyer's advisor) findings match the buyer's expectations. It's critical to conduct a pre-deal financial review so that the business is marketed accurately with reliable information. Issues uncovered during due diligence may result in a change of deal terms and may prevent the deal from closing. Sellers are often unwilling to accept a lower valuation than what was presented in the LOI.  

3. Time

Most of the deals take, on average, between 6 to 12 months to close. Significant changes, either positive or negative, in the company's performance may occur during that time. Such changes can, and most of the time do, impact the company's valuation and the ultimate sale price leading to disagreements over deal terms which may kill a deal.  

4. Net Working Capital Target