Deal Maker or Deal Breaker? The Hidden Factors That Can Make or Break an M&A Transaction
Mergers and acquisitions are often viewed through the lens of valuation. Business owners want to know what their company is worth, buyers want to understand the purchase price, and both sides spend considerable time negotiating financial terms.
However, the success or failure of an M&A transaction rarely depends on the purchase price alone.
A transaction can have an attractive valuation and still fall apart because of undisclosed information, inconsistent financials, employee concerns, poor communication, unrealistic expectations, or a lack of trust between the parties. In many transactions, the financial terms are only one piece of a much larger equation.
The discussion between entrepreneur and business attorney Alex Prasad and valuation expert and financial mediator Melissa Gragg highlights several of the less obvious factors that can determine whether an M&A transaction becomes a deal maker or a deal breaker.
The Purchase Price Is Only the Beginning
Valuation is important, but agreeing on a purchase price does not mean the difficult part of the transaction is over.
Working capital, indemnification provisions, earnouts, quality of earnings adjustments, employee retention, intellectual property, competing investments, and other due diligence findings can significantly affect the final economics of a transaction.
Working capital is one example. It may appear straightforward when included in a letter of intent, but the final calculation can become highly contentious because it directly affects the amount of money ultimately received by the seller or paid by the buyer.
The lesson is clear: business owners should understand the complete economic structure of a transaction rather than focusing exclusively on the headline purchase price.
Trust Can Become a Financial Issue
M&A transactions involve extensive documentation, but they are ultimately conducted between people.
Every transaction will encounter unexpected issues. Due diligence may uncover something that was misstated, omitted, misunderstood, or simply overlooked. The response to that discovery can influence the entire transaction.
When one party immediately assumes that the other side is attempting to hide information or manipulate the purchase price, the issue can quickly become adversarial. Legal fees increase, negotiations become more complicated, and both sides may begin protecting themselves rather than working toward a closing.
A more productive approach is to investigate the issue directly and understand why it occurred.
This does not mean ignoring serious problems. Instead, it means distinguishing between an intentional concealment and an issue that resulted from a lack of knowledge or inadequate preparation.
Trust does not eliminate risk, but it can make it easier for both parties to address problems when they inevitably arise.
Disclosure Is Better Earlier Than Later
One of the most important principles in an M&A transaction is that information generally becomes more damaging when it is revealed late.
A seller may not believe that a particular fact is relevant. For example, the seller may have a minority investment in another company that could potentially be viewed as a competitor. From the seller's perspective, the investment may have nothing to do with the business being sold.
The buyer, however, may see the situation differently.
The important question is not simply whether the seller believes the information matters. The more useful question is whether the buyer would want to know about it.
Early disclosure allows the parties to evaluate an issue while there is still time to address it. A disclosure made at the beginning of a transaction can become part of the buyer's overall understanding of the business.
The same information revealed shortly before closing can appear significantly more serious because the buyer has already invested substantial time, money, legal fees, valuation work, and management resources into the transaction.
Late surprises can turn manageable issues into deal-breaking problems.
Due Diligence Should Begin Before the Buyer Arrives
Business owners preparing to sell should not wait for a buyer to identify weaknesses in the company.
A seller-side due diligence process can uncover issues before the company reaches the market. This can include reviewing financial statements, contracts, intellectual property, ownership interests, employee arrangements, customer relationships, operational processes, and other areas that may receive attention during the buyer's investigation.
Preparing this information in advance gives the seller an opportunity to understand what the buyer is likely to discover.
It also creates an opportunity to correct problems where possible, gather supporting documentation, and establish realistic expectations before negotiations become expensive.
The objective is not to make the business appear perfect. No business is perfect.
The objective is to understand the business well enough to explain its strengths, weaknesses, risks, and opportunities accurately.
Quality of Earnings Can Change the Deal
A transaction can also become vulnerable when the negotiated purchase price is based on financial information that does not withstand deeper examination.
A quality of earnings analysis tests whether reported earnings accurately represent the company's sustainable financial performance. If a seller negotiates a high purchase price based on financial results that later prove to be unsupported, the buyer may seek a price reduction, commonly referred to as a retrade.
This can create significant tension.
For example, a seller may believe the company justifies a particular valuation based on reported EBITDA. The buyer may subsequently conduct a quality of earnings analysis and identify adjustments that materially reduce normalized earnings.
The resulting valuation may be very different from the initial expectation.
This is why financial preparation should occur before a business is marketed rather than after a buyer has already become deeply involved.
Business Owners Need Clear Transaction Goals
Another potential deal breaker is entering a transaction without knowing what actually matters.
Selling a business for the highest possible price sounds like an obvious objective, but the transaction can become much more complicated when other priorities emerge.
A seller may care about cash at closing, continued employment for key employees, an earnout, the treatment of family members working in the business, the timing of the transition, or the buyer's plans for the company.
Without clearly defined priorities, negotiations can turn into positional bargaining over every individual provision.
A better approach is to establish a transaction "North Star" before negotiations begin.
Once the most important objectives are known, other issues can be evaluated according to their importance. Some provisions may be worth fighting for, while others can be exchanged or conceded in order to protect the terms that matter most.
Effective negotiation is not necessarily about winning every point. It is about identifying the points that actually matter.
Employees Can Become a Major Transaction Risk
People are another increasingly important component of M&A transactions.
In a large organization, the departure of a small number of employees may not materially disrupt operations. In a smaller business, however, two or three key employees may represent a significant portion of the company's institutional knowledge, customer relationships, or operational capabilities.
This creates a unique risk.
A buyer is not simply acquiring financial statements. The buyer may also be acquiring relationships, processes, knowledge, reputation, and a workforce that helps generate the company's revenue.
Employee uncertainty can increase during a transaction. Employees may become concerned about their jobs, compensation, leadership, culture, or future responsibilities.
Sellers and buyers therefore need to understand who the key people are and how dependent the business is on them.
There is no contractual solution that can completely eliminate human behavior. Employees can leave, relationships can change, and circumstances can evolve.
The goal is not to eliminate every risk. The goal is to identify and understand the risks before committing to the transaction.
The Owner Must Remain the Decision Maker
M&A transactions often involve attorneys, valuation professionals, accountants, investment bankers, consultants, and other advisors.
These professionals play important roles, but the business owner remains the ultimate decision maker.
A transaction can become unnecessarily complicated when the owner begins deferring every decision to advisors. Professional advice is designed to inform the decision—not replace the person making it.
The strongest advisory relationships provide business owners with enough information to understand the consequences of their choices.
An effective advisor should be willing to identify risks, challenge assumptions, and explain potential consequences rather than simply agreeing with everything the client wants.
The right team does not necessarily make every decision easier. It makes the important decisions clearer.
Build a Steady Drumbeat Toward Closing
Deal momentum matters.
When one party promises to provide a document on Thursday and delivers it on Thursday, or establishes an expectation for the next stage and consistently meets it, confidence increases.
Conversely, missed deadlines, inconsistent communication, incorrect drafts, unexplained delays, and constantly changing expectations can create uncertainty.
That uncertainty creates room for doubt.
A successful transaction benefits from a steady progression in which both sides understand what is happening next, who is responsible, and when the next action should occur.
This does not mean that everything will go according to plan. M&A transactions inevitably encounter obstacles.
The difference is how those obstacles are handled.
Preparation Creates Better Deals
The strongest deal makers are not necessarily the people who negotiate the most aggressively. They are often the people who understand their own business, know their objectives, recognize their risks, and prepare for difficult questions before they are asked.
Preparation allows business owners to identify potential problems before they become surprises.
It also helps buyers evaluate whether the opportunity matches their expectations.
Ultimately, an M&A transaction is more than a valuation exercise. It is a complex process involving financial performance, legal obligations, people, relationships, expectations, and risk.
For business owners considering a sale, acquisition, or other transaction, understanding these factors before negotiations begin can make the difference between spending months pursuing a transaction that ultimately collapses and building a transaction with a realistic path to closing.
Learn More About Business Valuation and M&A
Business owners who want to better understand valuation, transactions, financial preparation, and the factors that influence business deals can explore additional educational resources at ValuationPodcast.com.
The goal is not simply to determine a number. It is to understand what that number means, what supports it, and how valuation fits into the broader transaction strategy.
FAQs
1. Is purchase price the most important factor in an M&A transaction?
No. Purchase price is important, but other factors such as working capital, indemnification provisions, earnouts, quality of earnings, employee retention, due diligence findings, and transaction structure can materially affect the outcome.
2. Why is early disclosure important when selling a business?
Early disclosure gives both parties time to understand and address potential problems. Information revealed late in the transaction can create greater concern because the buyer has already invested significant time and resources and may view the issue as a last-minute surprise.
3. What is a quality of earnings analysis?
A quality of earnings analysis evaluates whether reported financial results accurately represent the company's sustainable earnings. It can identify adjustments that affect EBITDA and, consequently, the valuation or purchase price of the business.
4. How can employees affect the value or risk of an acquisition?
Key employees may possess important customer relationships, operational knowledge, or institutional expertise. In smaller businesses, the loss of only a few critical employees can create significant operational risk for a buyer.
5. What is one of the best ways to improve the chances of closing an M&A deal?
Preparation is one of the most important factors. Understanding transaction goals, conducting appropriate due diligence, preparing accurate financial information, identifying potential problems early, communicating consistently, and assembling the right advisory team can reduce surprises and improve the likelihood of reaching a successful closing.
