As part of our series “Conversations on Experienced M&A,” Martin Wilderer interviews Christoph Löslein addressing the two questions:
- What causes M&A projects to fail?
- What strategies help to prevent this?
Martin Wilderer: Hi Christoph. Let’s dive into another round of real-world M&A practice. Last week, we discussed success secrets in M&A projects. Today, let’s look at the other side. In your opinion, what are the main reasons why an M&A project fails?
Christoph Löslein: Good question, but first, let me ask a question back: at what stage in the process?
I have to ask because once a well-established process is underway, real “screw-ups” (excuse my language)—processes that fail due to errors made by anyone involved—are, in our experience, rather rare.
Of course, we remember cases where sellers, very close to closing (1-2 days before), got cold feet and decided not to sell at all. That’s a failed process, very unpleasant for all sides. As advisors, we can only influence this to a limited extent by preparing the seller early on for the post-signing scenarios and how they will likely feel.
Martin: Okay, let me be more specific. What about projects that fail midway or, hopefully, only threaten to fail?
Christoph: If we assume that the financial situation of the selling company doesn’t deteriorate during the process, which can lead to a breakdown, then, in my observation, failure is often due to four main reasons—or sometimes a mix of them:
- First, significant negative findings in the initial review phase, due diligence—so-called red flags.
- Second, disagreements on terms.
- Third, changes in the situation for the buyer.
- Fourth, negative external factors that often arise unexpectedly.
Starting with the last reason, which doesn’t necessarily lead to failure but can cause significant delays: external events. These can include macroeconomic changes, such as a rapid increase in interest rates, or massive political events (9/11, Ukraine conflict). Such events are beyond the control of buyers and sellers and often lead all parties to pause to observe the impact on the business, for example, in refinancing a transaction.
A common reason for failure is due diligence results, revealing issues the sellers themselves hadn’t anticipated. Examples include hidden liabilities, dependencies in the operating business interpreted differently by buyers and sellers, or findings suggesting challenging integration that could impair synergy use, thus lowering company value and possibly complicating refinancing.
Next, disagreements over the target company’s value. This is more the rule than the exception, and it’s rarely surprising. It’s often underestimated that while the offered price is important, it doesn’t reflect the full value or implications of the transaction. Complex negotiations may follow, involving price derivation, payment terms, integration, employment, and guarantees. If the totality of these factors shows no overlap in expectations, this can also lead to termination.
What can go wrong on the buyer’s side? Unfortunately, more than sellers would like: financing issues, resistance or lack of alignment among key stakeholders, a strategy shift, or management changes are just some of the reasons why buyers withdraw.
Martin: Failure isn’t an option; everyone has invested too much, both directly and indirectly. What strategies can help to prevent it?
Christoph: Let’s go through the four main causes step by step.
External factors: Here, the clear recommendation – from the seller’s perspective – is to avoid putting everything on one card! Potential buyers can have very diverse backgrounds, such as type, strategy, risk appetite, and geographical focus, and naturally interpret such external influences differently, even when they are significant. Even in the most challenging circumstances, M&A activity has never come to a standstill in the past 100 years, and we are far from that, even with a general slowdown here. The markets are still above-average liquid.
Regarding red flags, i.e., negative findings from due diligence, there is – quite contrary to the negative touch they naturally carry – good news: There are hardly any that could not have been recognized earlier, and many of them can, with appropriate preparation, be avoided or at least explained. Besides, nobody likes negative surprises, so you should already know beforehand what potential buyers do not like, especially regarding business metrics. High customer concentration is a typical example. And if you are well-prepared, you can also recognize whether a red flag is simply a welcome opportunity to optimize the terms.
Disagreements about terms can be avoided. Too often, we see that buyers and sellers quickly settle on something, mostly a company value, quite non-bindingly but still as a negotiation basis. This often goes wrong and at least carries conflict potential. Regarding terms, everything must be put on the table, and as much as possible should be agreed upon in writing; only in this way can surprises be avoided, and as much mutual trust as possible be built. The opposite also exists: everything possible is negotiated, but the price (the proverbial “butter at the fish”) is not or only insufficiently quantified.
The reasons on the buyer’s side for a termination cannot always be known in advance, but a good advisor should be able to analyze and react to a good part of them already in advance.
Martin: You mentioned that sellers have sometimes pulled out of a process late. What conflicts led to that?
Christoph: I can fortunately speak from limited experience here, but I have witnessed it with colleagues and have seen it here at Board Advisors as well.
The sale can be an emotional roller coaster for sellers. Many go through it for the first time, and even entrepreneurs who have founded and sold multiple companies are not immune to it. It sometimes comes as a surprise, as we, as entrepreneurs, are often trained to make rational decisions and tend to ignore emotions—perhaps too often.
Common reasons for a withdrawal include: a strong and previously unreflected emotional attachment to the company. Concerns about employees, location, culture, and the changes that might affect these aspects often turn into genuine fear.
Martin: What’s your conclusion?
Christoph: The technical aspects of an M&A process can be handled well through early and thorough preparation and professional project management, which also significantly reduces risks.
The greater challenge lies in the emotional aspects, and those responsible for the M&A process need to understand and harmonize the emotions of buyers and sellers. It’s highly individual; every company is unique, and each buyer-seller combination is singular.
Final tip: I recommend that sellers speak with other entrepreneurs who have gone through this process. It can provide valuable insights and support, not only for this aspect.
Martin: Christoph, thank you for the conversation, and I look forward to continuing it soon.