At Fordhouse, we consider dozens of investment opportunities for our partner businesses. While we have very specific criteria for acquisitions which means that many businesses are out of scope, there are also many deals which fall through for other reasons. Here are the ones we encounter most often
Selling at the wrong time: a lot of lost opportunities are great businesses which are well run by a talented team. However, if your business is trading below average (low EBITDA) or has recently lost customers (even if the situation is under control), then it is unlikely to fetch a valuation that works for you, even if you are turning it around. Many owners have targets for exits (specific times and specific numbers) but if the business is not in top shape, then a sale which works is challenging. Take time to regroup, restructure parts of the operation which are lagging and carefully plan for an exit once business is humming.
Financials worse than initially indicated: this is the most disappointing reason for a deal falling over but an important one to mention. Our approach to putting together an offer is to request only the most important bits of information required. This saves everyone’s time and speeds up a typically drawn out M&A process. What this means is that the key deal assumptions (EBITDA, revenue quality) is then validated in due diligence. Sometimes however, due diligence reveals that these metrics are far away from what was initially indicated. This is rarely down to vendors being disingenuous but usually caused by the initial data being an output of low quality MI. Make sure that you keep a finger on the pulse of your business.
Replacement costs: it is standard practice for the departing owner manager’s costs (salaries, expenses) to be taken out of the P&L and a replacement salary to be added. Many owner managers are involved in their business day to day and an acquirer will need to spend money to replace this post completion. On our experience, many vendors push back on this or underestimate their role in the business which frequently prevents a sensible agreement being reached.
Not seeing the bigger picture: there are many moving parts of an acquisition, and the process is a complex one. It is important to not get hung up on details and focus on the larger play of successfully selling your business. Some vendors get hung up on details such as working capital adjustments or get fixated on a precise number. Stay focused on what is at stake. Post completion, it won’t matter whether the excess cash you took out was £10k higher if the deal didn’t pull off. A good corporate finance advisor can often solve this – they will take care of the details and be your guide through the process.