Why Deals Fail: 5 Reasons
All buyers wake up the day after closing a deal and believe they have just finished a great deal with incredible growth potential and fantastic profitability. All sellers wake up the next day and believe all their problems have been solved.
In reality, no deal is a slam dunk.
Whether you are a buyer or a seller, there are some simple things that can turn even the most savory-seeming deal into a lemon. Here are the recurring themes of deals gone bad:
The wrong motivation
Shareholders pursue transactions based on a variety of motivations. Sometimes, the ultimate decision to sell boils down to personal vanity, selfishness, or greed. People at the top of the leadership pyramid can be seduced by the huge ego boost that comes from getting a big deal closed.
Whether you are the buyer or the seller, it’s worth checking your motivations. There are many good reasons that a merger or acquisition could be right for you.
There is nothing wrong with taking some chips off the table and diversifying your wealth. Cleaning up debt through a recapitalization can be just what a company needs to catapult into a new wave of growth. Finding a financial partner may be the best choice to drive the business forward.
Test your motivations and those of your fellow shareholders. This one area is perhaps the biggest reason that deals so often deliver frustrating results.
People buy businesses because they see an opportunity for gain. Yet opportunity does not always translate into reality. Achieving growth requires focus and commitment. In some cases, it may require a restructuring. Haphazardly jumping into a new business and making what seem to be simple changes to the business model can have a catastrophic affect. Modeling the entire business financially, without careful regard to brand positioning, marketing and targeting, can quickly produce disastrous results. Changing the formula of success even slightly can be the difference between Coke and New Coke.
No focus or the wrong focus
One of the first things a new buyer tends to think about is efficiency - increasing margins through cost reductions.
Cost-cutting is fine. Greater efficiency often does drive greater profitability. But focusing primarily on cuts can hurt morale and the business by failing to focus on other equally, or potentially more important things, such as increasing sales and income.
Time can be the enemy in the months following a transaction. A lack of focus, or placing too much emphasis on the wrong thing, can open the door for competitors to capture market share and potentially steal valuable customers. After the deal is done, there truly is no substitute for focus-;the right focus.
I know this doesn’t seem possible. I remember presenting an advertising campaign to the executives of Cerner Corporation several years ago. As an ambitious marketing director, I was eager to put my mark on the company’s growth.
After each executive gave resounding approval of the campaign, I was stunned when the CEO, Neal Patterson, put the campaign on hold. Why?
I learned a very valuable lesson that night. Neal explained that our company already was having challenges meeting all the calls and requests for meetings and potential sales. To launch a highly successful campaign at that point could actually ruin our growth.
Unmanageable growth is not healthy for a business. Buyers and sellers alike may think: “We’ll take that problem. Bring it on!” All growth requires discipline. Without it, rapid growth can turn into rapid collapse almost overnight.
It’s a bad marriage
Some deals are doomed from the start. No matter how good the transaction looks on paper, the parties just don’t fit together very well. People get married who are in love every day, and a lot of those marriages end up in divorce court. Problems don’t automatically improve after marriage; they get amplified and usually get worse. Nobody can foresee all the potential pitfalls that may come with a new business relationship. However, it is worth taking your time to make sure you’ll be compatible, if the transaction will require you to work together for a number of years.
If you wake up one morning and wonder, “Why did I do this deal?” ask yourself some simple questions. What was my original motivation for doing the deal? Do we have a clear strategy? Are we focused on the right things? Are we growing in healthy ways? How can we get back on track and work together to achieve common goals?
Getting things back on track is not always complicated. But it always requires commitment.
BRENT EARLES is a senior vice president at Allegiance Capital Corporation. He has written and compiled 15 books, including H&R Block’s popular “Just Plain Smart” series of books published by Random House. Brent has worked in a variety of industries including telecom, healthcare, media, consumer products, technology and retail.
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