Why most acquisitions fail? Most entrepreneurs don’t become aware of this until it all falls apart.
As I discuss in my recent book, Selling Your Startup, the data shows that the vast majority of business acquisitions fail post-closing. Whether you were selling your company for financial or other reasons, this is still very impactful.
So, why do so many M&A deals fail? What outcomes does that failure result in? How can you prepare for a successful acquisition, and prevent everything from being derailed?
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. Why Acquisitions Happen
- 2. SPACs
- 3. Acquihires
- 4. Financial Acquisitions
- 5. Roll-Ups
- 6. Strategic Acquisitions
- 7. Other Types Of Exits
- 8. Traditional IPOs
- 9. Mergers
- 10. Financing
- 11. Popular, But Perilous: Most M&A Deals Fail
- 12. Failed M&A Closings
- 13. Post-Closing Failures
- 14. Integration Issues
- 15. This will inevitably show up in the numbers and stock value.
- 16. The Pain Of Failed Acquisitions
- 17. How To Prevent Failed Acquisitions
- 18. Preparing For A Great Acquisition
- 19. Summary
Why Acquisitions Happen
There are many reasons for acquisitions. Some are planned or intended by startup founders even before the launch of their companies.
In other cases selling becomes necessary, or the only logical move for founders. Or perhaps in more cases, the acquiring company initiates mergers and acquisitions.
Reasons you may sell your company include:
- Your business model was to create value and cash out from the beginning
- You’ve fallen into a financial crisis, and fundraising isn’t an attractive option
- It’s the best move for the mission and company
- You get an offer that you can’t refuse
Types of buy-side acquisitions include:
SPAC deals are a form of financial acquisition. Though certainly a less traditional one. Through SPACs, sponsors can make a great deal of money.
They use this as a backdoor method of taking private companies public in a streamlined fashion. It gives sellers access to public markets and status, but it is typically just a short-term financial play on the buy-side.
This is a well-known form of acquisition, which really became popular and visible in the early 2000s.
This is a play by the acquiring entity to acquire and lock up great talent. Either to, in turn, acquire their capabilities or remove competition.
3. Financial Acquisitions
As the name suggests, ‘financial acquisitions’ focus on the financial benefits of acquiring a company.
These may be transactions that corporate or private equity firms initiate. Typically in search of more stable returns and yields.
Roll-ups happen when an acquirer seeks to consolidate within their space. This may be vertically or horizontally.
This may be a part of a long-term strategy to dominate the market and improve internal financials. Or as part of a larger M&A deal, before the acquirer, in turn, has their own IPO other exits.
Or seeks to raise another, larger round of later-stage funding.
5. Strategic Acquisitions
Roll-ups and acquihires can be forms of strategic acquisition. Though the emphasis here is about acquiring a strategic market advantage or goal for the buyer.
This can center around expansion, reducing costs and improving profitability, defending against the competition, eliminating competitors, or propping up growth rates and reporting data.
Even as you understand the different kinds of acquisitions, you must take the time to learn why most acquisitions fail.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Other Types Of Exits
There are other ways for startup founders to exit their companies as well.
This includes the following.
1. Traditional IPOs
Traditional IPOs are still a preferred way for some founders to take their ventures to the next level. It cashes out early startup investors, and brings in more capital from the crowd with an initial public offering.
It also gets more liquidity in publicly traded stock markets.
Often, instead of a pure cash acquisition, companies merge together. Sometimes with equals, but often with much larger companies.
There can be advantages of this exit for those who want to preserve what they built.
Financially exiting your position in your startup company doesn’t necessarily have to mean selling the whole company.
It could be cashing out your personal investment by simply bringing in more outside capital. Or it could be selling your personal stock to other private investors or partners.
You may retain a minority stake and stay on in some capacity. Or move on to another venture you are more excited about now.
Eventually, most startup entrepreneurs will seek some form of exit, whether for financial or business reasons.
Those that have brought in outside capital and investors are essentially committing to eventually cashing out in an exit.
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Popular, But Perilous: Most M&A Deals Fail
One of the dark secrets of the business world is that while they are popular, estimates indicate that over 90% of mergers and acquisitions fail in the execution.
Some may not believe they care about what happens to their corporate babies after they set them free in a sale. Yet, the ultimate outcome can certainly be impactful psychologically and tangibly in whatever is next.
Most do care. So, understanding this risk, just as with launching a new business in the first place, should help prepare you for the journey.
To de-risk it, and to increase your chances of success, take the time to understand why most acquisitions fail.
Failed M&A Closings
The first challenge is of course getting the deal closed. There are a variety of reasons that M&A deals can fail to complete.
One of the biggest and most underestimated is changes in the business and M&A environment, economy, and during the process.
M&A deals can take months or a year to close in some cases. That’s a lot of time for things to change. Buyers could back out for any of these reasons, or just out of fear of them changing.
Trends and the target business itself can change a lot during this time as well.
Perhaps even more common is that the deal falls through during the due diligence phase of the deal.
Buyers will conduct deep and thorough due diligence, with many parties, personnel and personalities involved. If the business is not as advertised, then it can fall apart.
At a minimum, sellers must expect ongoing negotiations as things come up throughout the deal. They should also be aware of why most acquisitions fail.
Even more common and perhaps impactful is a failure in the execution after the closing.
This collapse in performance is hyper common in SPAC deals and IPOs. The data shows that most SPAC stocks drop back to their starting point soon after they rocket and early investors cash out.
The same is often seen even in huge IPO deals. Often as the result of poor decision making by new executives or under pressure to meet quarterly earnings reports.
Founders should keep these trends in mind when negotiating any stock compensation, earn-out and vesting periods, and calculating what they really might make in this type of an exit.
We also often see companies sold off again soon after being acquired by big companies. In some cases, they may have just wanted to eliminate competition.
Or they wanted to extract a certain asset, product or technology, and decide to discard the rest of the business.
However, the most perilous of all is failure in the integration of companies.
Companies may be allowed to fail after an exit for a variety of intended reasons. Though when integration is attempted, it is the intent of the parties to really make this work.
Unfortunately, integration is a beast. It is one of the top reasons these deals end up being failures.
Executing an integration isn’t easy, even for the biggest, longest-running corporations and experts that have done it before.
The logistics can be challenging. Merging and integrating teams, finances, software, and operational processes is not simple. It can be incredibly complex and may take a lot of time.
Customers are often treated much differently after an exit. Prices can be hiked and services stripped away in an effort to create profitability.
Or disjointed communications can burn them when it comes to customer service. It is often the most loyal and longest-running customers that get burned.
This will inevitably show up in the numbers and stock value.
There can be a lot of problems that are born out of differences in expectations, focus, and aspirations in a newly formed and merged venture.
It can take a lot of work to get everyone on the same page, enroll them in the vision and give them clarity on their roles and priorities.
Culture clashes are frequently the root cause of integration failures. Company cultures are typically extremely different between startups and mature acquirers.
It is night and day. Everything from mentality to processes, to work ethic, and rules are different. The add to this merging staff from different locations and in different languages and it can get far more complicated.
Every second you can invest in melding these cultures can pay massive returns. It can make all the difference. All the same, be aware of the reasons why most acquisitions fail.
Knowing how to value your company could be critical for successfully culminating an acquisition. If you need more information about pre-money valuation vs post-money evaluation techniques, check out this video I have created.
The Pain Of Failed Acquisitions
So what if you sell your company and then it fails in the next couple of years?
Many acquisitions are not all cash acquisitions. Even when they are, a lot of the proceeds can be held in escrow for a wide variety of line items.
Much of your compensation may be locked up for years in earnouts and vesting arrangements too.
Whether or not you stay actively involved after the closing, the success of the acquisition and ongoing performance can substantially and directly impact how much you really get paid for your company.
Remember that it is entirely possible to sell your company for a billion dollars and to walk away with nothing if the paperwork isn’t structured well.
These financial losses can extend to your investors, cofounders, and key team members with stock options too.
Perhaps most important is the ongoing success of the mission. If you really care about your team, your customers, and your mission, then you want it not only to survive but for it to thrive, along with all those involved.
The ego and return on your time may be impacted if things don’t go well. Though, perhaps even more important than that is how this exit and its outcome influences what is next for you.
A great exit can go a long way to set you up to attract the right team, investors and funding, and other partners for anything else you start and work on in the future.
How To Prevent Failed Acquisitions
Fortunately, there is a lot that you can do to reduce these risks and increase the odds of a successful closing and post-closing.
- Preparing your company thoroughly for the due diligence process
- Targeting and choosing the right buyer of your company
- Vetting potential buyers carefully
- Locking in the right terms in the purchase agreement to gain legal protection, secure alignment, and establish budgets and control to make sure you can succeed
- Testing integration well in advance of inking a deal
- Building personal relationships with acquirers to get through tough processes and ensuring a post-closing match
- Start integrating companies as early as possible, and investing in blending company cultures
- Being clear with everyone on all sides about expectations, goals, and limitations
Preparing For A Great Acquisition
Key steps for preparing for a great acquisition and integration include:
- Developing relationships and networking in advance of a potential sale
- Educating yourself on selling your business
- Finding the right advisors to guide and support you through it
- Strategizing and positioning for the right acquirer months and years early
- Understanding the issues and how to prevent them
Why most acquisitions fail. It is a hard truth that many don’t talk about. They certainly don’t advertise it to entrepreneurs upfront.
Of course, launching a startup and getting to an acquisition in the first place carries similar challenges and odds. So, if you’ve come this far, you can make it.
A failed acquisition and integration can have deep, broad, and long impacts. Yet, there are many things you can do to preempt issues and improve success.
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