Well over half of all merger and acquisition negotiations do not result in a deal. Many people see that as an M&A failure rate of more than 50 percent, but agreeing to a bad deal is far worse than walking away from it. Doida Crow Legal previously wrote about three prominent red flags that sometimes surface in due diligence. Those areas of concern are far from the only red flags that could potentially signal a bad business deal. In this installment, we cover three more that should raise your antennae.
1. The target business presents unrealistic financials.
An important part of due diligence on the buyer’s part is making sure the target company’s earnings, debt, and other important financial figures are in line with the industry average. You might have found a diamond in the rough, and you should investigate further to confirm. Oftentimes, though, the old adage will not steer you wrong: “If something seems too good to be true, it probably is.” If the target company’s implausible financials are accurate, consider whether or not your team would be able to replicate the results.
“When a target business is advertised as having an absentee owner and lots of seller discretionary income, you have to wonder why the owner would be selling for a 3x multiple?”
– Trevor Crow
2. The target company’s management team does not want to showcase the team.
Among due diligence of some of the more technical aspects of a business, potential buyers can gloss over the workplace culture. Hurdles in post-M&A integration are often due to not paying attention to the “human elements.” Some acquisitions will not involve meshing two teams together, but many require two formerly separate workforces to work together. Be careful about proceeding when a business seller does not seem eager to let you meet the company’s key employees.
3. Lack of cybersecurity measures.
Cybersecurity due diligence is becoming a discrete due diligence category. As states (like Colorado) pass laws that further restrict what companies may do with user data, companies also face stricter penalties for data breaches. The target company should be able to explain the data it currently gathers from website visitors and clients. The seller should also explain how the company uses the data, including the ways it profits from data. Not budgeting for data security at all is an even bigger red flag.
Closing a deal for the sake of closing a deal could put your company in peril. Doida Crow Legal understands the desire to get a huge deal done before the end of the year. However, if you were never in a position to walk away from an M&A or other business deal, you were never really in control.
Business owners can employ a number of strategies to avoid falling in love with a deal. We will discuss that in a later blog—stay tuned!—but, in the meantime, your best resource is an experienced and thoughtful deal team. Knowledgeable legal counsel is a key component of an M&A team, and Doida Crow Legal is prepared to guide your firm to satisfactory results.