Changing Your Mind During M&A: The High Cost of a Change of Heart

Deals can fall apart for many reasons. You might be surprised to learn that one of the most common is the seller. Owners have spent years, and sometimes decades, growing their businesses. This creates a strong emotional attachment, as well as intense feelings about who should run the business, how, and at what sale price. As a result, it’s common for owners to walk away from mergers and acquisitions, even when the process is going well. Walking away is always your prerogative, but comes with a very high cost. Often, extremely high. Here’s what you need to know about walking away—and how to avoid backing out of a deal and losing money. 

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Why Sellers Walk Away 

Sellers may walk away from a sale for many reasons, including: 

• It turns out the sale won’t yield sufficient funds for retirement. 
• They’re disappointed by the value of the sale. 
• They find the process stressful and time-consuming. 
• They don’t feel emotionally prepared to let go of their business. 
• They had a poor understanding of what the sale process would involve and require.
• The stress of the deal exacts a heavy toll. It can feel like death by a thousand cuts. The stress is real—but should be manageable with the right sell-side support. 
• Poor communication with the buy side causes an adversarial relationship with the buyer. 
• Failure to prioritize the deal. Owners may get distracted by daily operations, forgetting that the value of the deal far exceeds any sale they might make. 

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The Costs of Backing Out of M&A 

Backing out of a sale, especially midway through the process, can be very expensive. You’ll lose money on the costs of preparing for the sale. You’ll also lose goodwill from the buyer that may hurt your reputation should you decide again to sell in the future. You may need to pay fees for backing out, and you’ll still owe your accountant, your lawyer, and other team members money for their services. The sale process can be mentally, emotionally and physically demanding, and often causes the owner to take some focus off of their day-to-day tasks. That is the minimum cost that you pay.

Sadly, my two decades plus of experience have shown me costs can be far higher than the owners have anticipated. Do pay attention when you seem to get clear signals that now is the time to sell. Missing that moment can be catastrophic. It’s not just the owner who loses when this occurs. 

I once had a client die exactly one year after the sale. The wife retired comfortably, and the employees were able to keep their jobs with a newer, better capitalized buyer. If the owner had procrastinated for a year, it might not have ended so well. 

Waiting too long is far more likely to be a mistake than selling too early. Fixing the business after one has “missed the boat” can be a long and slow process, demanding years of work.

That doesn’t mean you should buy into a sunk cost fallacy and participate in a sale that’s bad for you. But it does mean that you need to think carefully before initiating the process of M&A, lest you lose money on a sale you back away from.

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Strategies to Avoid Backing Out 

If you want to avoid the perils of backing out of a deal at the last moment, spend some time working with a knowledgeable investment bank before you dip your toes in the water of M&A. Some other strategies for ensuring you’re ready include the following: 

• Meet with a wealth advisor/retirement planner to determine exactly how much money you need for retirement. 
• Work with a valuation expert well ahead of entering M&A to get a realistic understanding of company value. 
• Talk to your family about your plans for retirement. Having a clear plan for what comes next can stop you from inadvertently undermining the sale process. 
• Talk to your advisory team about the process of selling your business—what to expect, how long it might take, and what their role in the process will be. 
• Avoid short-term thinking. Very often the business will be valued at the highest level the business has ever performed at financially. In a given year, the owners typically take out significantly less than the adjusted EBITDA calculation. This can mean you are taking out many, many times more than you have ever paid yourself before. Let’s say a business has $1 million EBITDA, but the owner has never really taken out more than $600k in distributions, benefits, etc. If the business sells for $5 million, we say the multiple is 5x, but practically speaking, the seller is almost getting 10x what they’ve taken out in their best of years.
• Treat and view the buyer as a customer. Your business thrives because of exceptional service. So too should the sale of your business. 
• Employ a “Whatever it takes” mindset: This most likely is the single most lucrative event in your professional life. And it’s always after a lifetime full of accomplishments, accolades, and, at some point, prosperity. The singular component in all of those successes was effort! This will require no less. You will be able to relax, much sooner than you think. 

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Perhaps most importantly, ensure you’re emotionally ready for a sale. No amount of preparation can make up for an owner who fundamentally just does not want to sell their company. If you’re on the fence, consider giving yourself a little more time until the right path forward emerges. My experience has clearly demonstrated that a deal will never, ever get done, unless the seller is 100% committed to the process of selling.