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How to Continue North When Your M&A Deal Goes SOUTH

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Nothing is worse than giving or receiving the notice that the M&A deal is off!  While it would seem that an impending breakup should be obvious to both parties, that’s not always the case.  Sometimes, it just comes out of the blue.  In my 5+ years as a technology M&A advisor, I have been on both the receiving and sending side. And let me tell you: neither side is fun.  Many times, months of hard work and attention have been put into the deal before the last nail gets put into the coffin; all on the heels of a very exhausting few months of due diligence, contract negotiation, and endless calls.

But What Now? What Should a Seller Do Next?

When an M&A transaction fails, the most important steps are to:

  • Swiftly assess the situation
  • Communicate transparently with stakeholders
  • Re-evaluate your strategic goals
  • Consider alternative options
  • Take steps to minimize negative impacts on your company’s operations.

This may include reviewing your due diligence process, addressing internal issues, and potentially seeking advice from legal and financial experts to navigate the aftermath. When I look back at deals that failed to close, it usually comes down to one reason: trust!

Trust, Communication, and Expectations

Trust is the number one reason a deal will fail to close.  Trust usually has to be earned through the due diligence process. Sometimes that happens early on, but many times, it’s not solidified until the close…if even then. Unfortunately, without it, every move and request is questioned, and little room is left for misinterpretation or misunderstanding.  Typically, trust is eroded by the following:

  • Hidden information: Withholding critical details during due diligence.
  • Unrealistic expectations: Setting unrealistic goals or timelines that can lead only to disappointment.
  • Lack of transparency: Not being upfront about challenges, risks, or unwritten plans. Transparency is fundamental to building trust in negotiations.
  • Poor communication: Failing to keep all parties informed and engaged, or a lack of timeliness in the communication. I have seen many deals that have not handled the “timeliness” of the communication well, even when communicating regularly.

In an M&A transaction where sensitive information is shared and strategic decisions are made, trust acts as a stabilizing force. It provides reassurance to both parties that their interests are respected and that the negotiation process is not merely a transaction, but a collaboration.

What To Do After Your Deal Dies: 10 Key Actions

Regardless of why the deal died, every seller must determine the appropriate next steps.  Just stopping the process is not sufficient.  It’s time for you and your shareholders to come together to determine your next course of action (ideally not the next day while you are still emotionally upset, but within a short period of time).

Below are 10 key actions you should take as soon as a deal is terminated:

1. Analyze the reasons for failure:

  • Review the due diligence process to identify any missed red flags. 
  • Examine potential issues with valuation, cultural fit, or strategic alignment. 
  • Assess whether there were external factors contributing to the deal falling apart. Were there personalities that clashed, making an exchange of information difficult?

2. Communicate clearly with stakeholders:

  • Inform employees, investors, and customers about the failed transaction. 
  • Be transparent about the reasons for the deal falling through while maintaining confidentiality where necessary. 
  • Address concerns and questions promptly. 

3. Reassess your strategic goals:

  • Evaluate whether the original rationale for the transaction is still valid. Is there another way to reach the same goal in the same amount of time?
  • Consider alternative growth strategies if the failed transaction significantly impacted your strategic plan. 

4. Explore other options:

  • Depending on the situation, you might look at pursuing partnerships, joint ventures, or smaller acquisitions. 
  • If necessary, consider restructuring your operations to adapt to the changing market landscape. 
  • Is there another suitor that you had to put off due to exclusivity that you now might want to learn more about?

5. Focus on operational stability:

  • Minimize disruption to your existing business by maintaining focus on core operations. No doubt this failed attempt took you away from running the business, especially as a small business owner.  It should be “business as usual.”
  • Ensure employees remain engaged and motivated during the transition period. 

6. Seek professional guidance:

  • Consult with legal advisors to address any contractual obligations related to the failed transaction.  Immediately ask for the exclusivity period to be terminated.
  • Seek financial expertise to assess the impact on your financial position and any potential adjustments needed.  This might be a good time to assess if a Quality of Earnings report should be prepared by the seller in advance or if an existing one should be updated.

Other important considerations:

7. Reputation management:

  • Take steps to protect your company’s image by communicating effectively and addressing any negative perceptions that may arise from the failed deal.  Ideally, this should only take place internally.  However, there are times when customers have been notified of a potential transaction as part of the due diligence process.  These customers should be called immediately to let them know that the transaction has been terminated and that it is business as usual.

8. Legal implications:

  • Be aware of potential legal liabilities associated with the failed transaction, and consult with legal counsel as needed. Have any disregarded entities been created in preparation of a transaction, and do these need to be terminated?

9. Employee morale:

  • Address potential concerns among employees and provide support during this transition period. This is especially important for those employees and management who worked very hard during the due diligence process.  To them, this may seem like a waste of time or, worse, a failure.  They need to be assured that this is only a temporary setback and that the company will continue pursuing options, should that be the direction management wants to take.

10. Owner(s)’ mental health:

  • Take time to regroup mentally.  A failed transaction doesn’t mean YOU failed.  Most sellers feel a combination of anger, frustration, and some depression.  After all, that number in the LOI won’t hit your bank account anytime soon.  So, those dreams, goals, or other adventures will need to be put on hold for the moment.  I always tell my sellers that a failure really means something is better down the road.  Remember, you are now much savvier as a seller and will be sure to not make the same mistakes again.

Conclusion

In the aftermath of a failed M&A deal, it’s crucial to recognize that while the process has ended, the journey isn’t over. Each setback provides an opportunity to learn, adapt, and move forward stronger than ever. By proactively addressing the issues that led to the deal’s collapse, you can better position yourself for future success. Remember, resilience and adaptability are key in the ever-evolving landscape of M&A. Stay focused, stay committed, and your next opportunity may be closer than you think.