5 M&A Transaction Red Flags

All solid merger and acquisition deals share one commonality: They grew from a foundation built on trust and transparency. This isn’t just a talking point. It’s something that has proven itself time and again.

From a seller’s standpoint, trust and transparency are critical to successful M&A transaction experiences because they reduce selling stress. Letting go of a business can be emotionally difficult. Trusting the buyer as well as the M&A advisor makes the process easier to absorb and accept.

Of course, buyers value transparency and trust in business, too. They feel more comfortable knowing that all the cards have been laid on the table. That way, they can evaluate those cards and purchase a company with confidence.

Here at Barney, we try to make good M&A matches that put all parties at ease. Accordingly, we vet buyer stakeholders to promote healthier buyer-seller relationships. To be honest, a lot of what gets deals across the finish line isn’t capital or timing. It’s the trust and honesty that comes from forming a relationship during initial meetings and the due diligence period as well as forthrightness in all matters to reduce the chance of surprises.

Our framework of transparency works well because we understand how to bypass common pitfalls. Yet not everyone who wants to sell or acquire a company knows the red flags when buying or selling a business. If your future includes entering a legal business contract from either standpoint, watch for the following indicators. They’re usually markers that something’s amiss.

Red Flag #1: The buyer offers too much cash at the close.

We’ve all heard the adage that if it seems too good to be true, it probably is. The same holds in the M&A world. Unsophisticated buyers who don’t understand structuring acquisitions will sometimes throw out lofty numbers to get attention.

The problem comes when the letter of intent is signed. Often, they either re-trade the deal or realize they can’t get the funding they anticipated receiving.

Red Flag #2: The buyer doesn’t offer enough cash at the close.

Welcome to the other side of Red Flag #1. In any M&A transaction — especially one involving a digital agency — the cash offered at close is king. If a buyer suggests paying less than 30% at close, you probably want to go a different direction.

Here’s the issue: Having contingent consideration or upside in a transaction is important. However, it’s just as important that the riskiness of the contingent consideration is kept at a comfortable level for the seller. Ultimately, it’s best to push for every dollar you can get upfront.

Red Flag #3: The seller appears to be unorganized.

No leadership team. No business development team. Scattered financials. These all point to the probability that the seller isn’t ready.

Investors want to buy businesses built to scale. They want to see streamlined workflows and consistent processes in place. Above all else, they’re eager to put their capital into a well-oiled machine, not one that might break down at a moment’s notice.

Red Flag #4: A stakeholder’s intuition says, “This is wrong.”

It can happen whether you’re a seller or buyer: Your Spidey senses start tingling. Something doesn’t feel right. Even if you’re in the middle of a deal, listen to your gut. Maybe you’re just lacking confidence or feeling overwhelmed, which are emotional responses that can pass. But perhaps you’re noticing subtle warning signs.

Walking away from the process doesn’t make you a bad businessperson. In fact, it could save you or your company from a major mistake. Certainly, you’ll want to talk with your M&A advisor about your worries in private. Nevertheless, don’t assume that you must sign any contract if you’re not convinced it’s the right direction.

Red Flag #5: Buyer or seller issues start bubbling to the surface.

Deals informed by transparency are more likely to succeed. However, transparency doesn’t mean admitting to something when you’ve been “caught.” It means doing everything possible to lead with transparency.

For instance, almost all companies undergoing M&A transactions create and share virtual data rooms. All pertinent stakeholders can be given access to the virtual data room to foster good communication. Having a centralized, shared platform encourages dialogue and reduces the friction that comes from having too many “I forgot to mention this …” moments.