Punching Out! Top 10 M&A Deal Killers

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

1. Seller's revenue and/or profits drop while in the market, or worse, during due diligence.

This is probably by far the number one reason, and it is also very difficult to prepare for. Buyers generally like to see that a company has a few years of growth in sales and profits, and projections with backlog that support further growth. Unfortunately, the electronics industry has been choppy since 2008, so it has been difficult for many sellers to string together three years of continuous growth. A drop in sales can cause a buyer to reduce price and terms for a company, or to back out altogether. Ways to combat this issue are to create stable, high-value revenues and to develop systems that allow a company to have good visibility into future revenue.

2. Due Diligence Surprises

Buyers hate surprises during due diligence. This can cause buyers to back out of deals, delay the process while they decide how to react, or to reduce the price and terms. At the least, it will create a lack of trust, which can hurt the deal later in the process.

There are three main types of surprises: things that no one knew of or that happened during due diligence; things that the seller knew but did not disclose; or things that the seller disclosed, but the buyer either missed or interpreted things differently.

In most cases, conducting a pre-sale due diligence check will help to reduce surprises. If something comes up while in due diligence, it is important to disclose the issue quickly to the buyer. For example, the seller may hear from a main customer that they are moving their business to China. It would be important to disclose that fact to a buyer before they find out either through the grapevine or through customer due diligence.

3. Slow Responses

Time kills all deals, so the longer a seller takes to respond to buyer questions not only drags out the process, but can cause the buyer to lose trust and interest. Slow response time shows that the seller is not serious, is too swamped (maybe the owner is too important and their departure would hurt the business), or their systems need to be upgraded. Sometimes, the seller’s advisors do not have experience in M&A, or they are too busy, which causes delays.

Ways to prevent this issue are to be prepared, have good advisors who help guide you through the process, and to focus on the deal. Some sellers hire an inside part-time advisor to help them with the process.

4. Inaccurate Information

If a buyer finds that the information provided is not accurate, or that the books have been overly cooked, this can cause the buyer to back out or reduce their offer. Financials or other reports may not be accurate, or forecasts may be overly optimistic. Sellers may claim that they have state-of-the-art equipment and facilities but, if a buyer finds out that all the equipment is over 10 years old and there is a pile of used chemicals in the corner, they may not be very happy.

Sellers tend to exaggerate the value of their company. For example, we often hear statements such as “sales have increased 10% every year since establishment in 1985” (but sales are only $5 million and down from the previous year), or “the company is a leader in the industry” (if sales are $5 million the company is not a leader, except in maybe a very tiny industry segment). If your company has survived throughout the ups and downs of the industry, you must be doing something special, but make sure your claims are not over-inflated.

A seller can have their CPA review or audit the financials, or provide a sell-side quality of earnings report. There is a cost to getting these, but it is well worth it. Your advisors can help the company prepare for a sale.

5. Unrealistic Expectations

Sellers often have unrealistic ideas of the value of the company. This can cause buyers to back away, as they do not want to waste time if a deal is not going to happen. The best way to get a premium for a company is to be well-prepared and to build the company over time. A good sale process can create competition for the company, but it is a lot easier to create competition if the seller has good financials, great equipment, and above-average technology and quality.

6. Over-Negotiating

Some sellers and buyers cannot stop negotiating. It is important to be able to read the other party to know if they are a “one and done” negotiator, or they will negotiate until the other party threatens violence. Most people are in the middle, but everybody gets tired of re-negotiating points that were already discussed.

It is best to be prepared about the expected value and terms, and your advisors can help you decide what is important and what is not.

 7. Buyer Issues

Most issues are on the seller side, however, sometimes things come up with the buyer. The buyer’s business can go down, they may not have financing in place, or the buyer themselves can get acquired during due diligence. There’s not much a seller can do, except keep the buyer on a short leash and move on to a backup buyer if the first buyer starts to drag their feet. Usually, if a buyer is not moving quickly to complete a deal, there is something going on in the background on the buyer’s side.

8. Outside Market Issues

This is also mostly out of the seller’s control. Usually, if the general market or economy is bad, the market for all sellers is not good. However, if your company is doing well in a down market, that could make the company more attractive.

The best ways to counteract this issue is to always be prepared to sell, and to not try to time the market exactly. When the economy is really good, everyone is trying to sell, and buyers may not be able to react before the market goes down.

9. Partner/Stakeholder Disputes

An investment banker’s nightmare is the partner or stakeholder who suddenly disapproves of the deal at the last minute. If the deal is near a closing, any hiccup can cause a lot of concern as well as delays. It is important to discuss the sale with all partners and stakeholders, including family and key employees.  Be sure to keep everyone informed of the process.

10. Not Ready Emotionally

This is the investment banker’s other nightmare; we all have stories of sellers who got cold feet at the last moment. Sellers sometimes drastically change the deal at the last minute, which is a way of indirectly saying they are not ready. The seller has the right to do what they want, but it may be difficult to go back to certain buyers if they have been burned before. An owner should work with their advisors to prepare for a sale, but in the end the owner must decide on their own if they are ready to part with their ‘baby’. 

These are the top deal killers, but of course there are a wide variety of other reasons. In general, preparing the business and the owner for a sale is a good idea, as well as having trusted advisors to help the seller through the process.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, FL member FINRA and SIPC. To read past columns or to contact Kastner, click here.

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2018

Punching Out! Top 10 M&A Deal Killers

01-25-2018

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

View Story
Back

2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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