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5 Top Buyer Concerns During the M&A Due Diligence Process

    
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According to a variety of studies, the failure rate of M&A deals is at least 50 percent, and may even be as high as 70 to 90 percent. With the risk of failure so high, both parties have an obligation to meticulously perform M&A due diligence and address any buyer concerns before they snowball into real problems.

In this article, we’ll discuss 5 of the top buyer concerns during the M&A due diligence process, so that you can anticipate and avoid them before they derail your next deal.

1. Lack of transparency

Without complete transparency on both sides, your M&A deal is very likely doomed to failure. An M&A transaction is one of the most important events that your business will ever go through, and both parties need to be fully aware of the risks and implications of the deal. Potential buyers will likely have a long list of questions that you can only answer by providing sensitive documents such as financial statements, company strategies, and more.

To get in front of this issue and improve transparency, many companies use a virtual data room (VDR), an online repository that makes it easy for both parties to share confidential files. VDRs come packed with features that protect the security and integrity of documents, such as encryption and user access control.

2. Inflated valuations

Many sellers see other businesses in the same industry selling for very high valuations, and conclude that they should be able to sell their own business for a similar price. Yet valuations are based on a wide range of factors, including the company’s future earning potential and the sellers’ negotiating ability.

If you want to take an aggressive negotiating stance by setting a high asking price, be prepared to back up your reasoning with good arguments and solid evidence. Otherwise, potential buyers might decide to walk away from the bargaining table before negotiations are even underway.

3. Questionable strategy

No M&A buyer would purchase a business if they knew that it would decline in value after the transaction. As such, smart buyers have their eyes and ears open for warning signs that your business may be on a downslide—after all, that's a major reason why sellers are looking to hand off the company in the first place.

Some of the biggest potential red flags that may scare off a buyer during an M&A deal are:

  • An aging or dwindling customer base, especially if the majority of your revenues come from a small number of customers.

  • A lineup of products and services that is too heavily dependent on one or two items.

  • The inability to keep up with changes in the industry, including technological evolution.

  • The presence of newer or savvier competitors in the same space.

4. Cybersecurity risks

Data breaches and cyber attacks are constantly in the headlines, and businesses face greater IT security risks than ever before. According to the Ponemon Institute and IBM, the average cost of a data breach for U.S. companies is now almost $4 million.

Would-be M&A buyers will be on the lookout for possible security flaws and issues in your IT environment, and many will insist on a third-party security audit. In addition, make sure that your business is in compliance with data privacy regulations such as HIPAA, GDPR, and Sarbanes-Oxley, which can entail heavy fines if your company is found in violation.

5. Macroeconomic issues

In some cases, buyer concerns may be motivated by macroeconomic issues that your company can do little or nothing about, such as a fear of an impending recession. As the most recent example, M&A transaction volumes in Q2 2020 were at the lowest level since 2004, as many businesses took a "wait and see" approach in the face of substantial uncertainty.

While closing an M&A deal is more difficult when buyers are worried about the economic landscape, it's by no means impossible. By making the argument that your business is well-positioned to survive or even thrive during a downturn, you can broaden your appeal among potential buyers and help soothe any apprehensions they have.

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