4 Common Reasons Why M&A Deals Fall Apart


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 matches 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

The net working capital target/adjustment is another potential deal killer. A net working capital target is used to ensure the seller is not liquidating A/R or inventories, or slowing payment of accounts payable prior to close. In the case of a deficit of net working capital at close, the buyer may reduce the purchase price by the amount of the shortfall. As a result, the seller may end up with less cash at close than expected and walk away from the deal.


In summary, there are many potential deal killers when it comes to business sale transactions. Business owners should be aware of these key issues before entering in to a sale process. Consulting with an M&A advisor such as Lutz M&A and planning in advance of marketing your business for sale can help mitigate these deal killers.


Merger & Acquisition Basics Toolkit





Dani Sherrets is a Financial Analyst at Lutz with over three years of relevant experience. She specializes in merger and acquisition advisory services and business valuation.

  • National Association of Certified Valuators and Analysts, Member
  • Certified Valuation Analyst
  • BBA, Academy of Economic Studies, Bucharest, Romania
  • MBA in Finance, Bellevue University, Omaha, NE


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