When CEOs and boards begin to look for an M&A adviser, they often start in one of the big financial centers, like New York or Boston. It’s a natural mistake – and one that’s often expensive and regularly fatal.
One of the dirty secrets of the M&A adviser business is that many M&A transactions fail to complete. It’s impossible to find statistics on this. Every M&A advisory firm keeps their failure rate a closely guarded secret – many probably don’t even calculate failure rates.
For over a couple of decades now, I have been asking every CEO, board member and investor I know to share their M&A successes and failures. My twenty years in YPO also provided lots of perspective on M&A transactions gone well – and otherwise.
About One Third of Planned M&A Transactions Fail (under $100 million)
I used to think that at least half of M&A transactions failed. As I learned more, I realized that the percentage of times a planned exit fails to result in the company being sold is closer to 75%.
Failure Increases with Distant M&A Advisers
After hearing about the success and failure of around a hundred transactions, I realized there was a pattern. The M&A transaction failure rate increases as the distance from the company to the M&A adviser grows.
The reason is that the relationship between an M&A adviser and a company, CEO, board, their accountants and their lawyers is intimate and intense. It takes even the smartest M&A adviser a long time to really understand the value in a company, its strategic value and to determine who the best potential buyers are. Much of this work has to be done at the company.
The middle part of an M&A adviser’s job can be done remotely – that’s the prospecting, qualifying and sales funnel building. But in the latter stages of the M&A process, during the auction, negotiation and closing the M&A adviser will be working close to full time to help the CEO and board close the transaction. Most of this work has also to be done in the same city as the company. This is in part because the selling company’s lawyers and accountants are usually in the same city as the company.
Another reality of M&A transactions is that inevitably, ‘stuff happens’. In some of the transactions I’ve been involved with, the deal looked dead several times. These ‘near death experiences’ require immediate action to rectify. It could be to reconsider the strategy, work through an unexpected change in the agreement and/or to work through the business – and psychological – implications of whatever has changed. This type of work is almost always unexpected, but requires face to face action on short notice. That’s often not possible if the M&A adviser has to get on a plane. Failing to bridge even one of these potentially fatal changes usually means the transaction is doomed.
The really good M&A advisers know this and will plan to spend half of their time in the same city as the company during the first third of the process and most of their time in the same city during the last third.
There are other M&A advisers who think they can do most of that work remotely - with only weekly visits to the company. Those are the ones that CEOs and boards have to be very careful of. Even in today’s hyper connected world, you cannot do a really good job as an M&A adviser without a great deal of face time.
From the data I have gathered, I believe the failure rate doubles with distant M&A advisers. In other words, a hypothetical company using a remote M&A adviser might have a failure rate of 50%, but with a local adviser the failure rate might only be 25%. For another company, the failure rates might only be 40% and 20% respectively.
Distance Matters Less When Transactions are over $100 million
From what I have been able to learn, this effect is reduced when transactions are over $100 million. When an M&A advisory firm is working on a transaction over $100 million, the fees involved are usually a few million. There are also often two or three senior individuals involved with deals over $100 million.
When the fees are in the multi-million dollar range, the M&A advisers can afford to fly to the company almost every week and spend most of their time in hotels for many months. It’s also easier on their lives if they can split this between two or three senior people.
But this just doesn’t happen when the fees are below a million dollars. For sub-million dollar fees, there is almost always really only one senior person on each transaction. The economics, and human costs, just can’t justify more people, or the travel required, on these smaller deals.
Reputation is also More Heavily Weighted Locally
There is another dirty secret of the M&A adviser relationship that comes into play here. Professional M&A advisers know that every deal doesn’t end up closing. They build their business models, and manage their sales funnels and calendars, based on their knowledge that somewhere around a third of the deals they sign up to do will probably fail. These M&A advisers will still do OK on the deals that fail because their direct costs will be covered by the work fee.
Part of optimizing their business is knowing when to stop working with a company because the probabilities of success are too low. This is usually 6 to 9 months after they sign on. At that point, if the transaction looks like it’s not going to close pretty soon, many M&A advisers will start to reduce the amount of time they spend on the company. Instead they will devote their time to other companies with new work fees and where they feel the probabilities of success are higher.
This is Especially Likely When the First LOI Doesn’t Close
In every M&A transaction, the company has to select a single prospective buyer when it’s time to accept an offer and sign a binding LOI (letter of intent). At that point, they have to contact the other interested parties on the short list and tell them they cannot continue the process with them.
From the time the LOI is signed to closing is often around three months. If the deal falls apart after a month or two, the other prospective buyers have usually moved on to other opportunities and it’s usually very difficult to get them back to the table.
When this happens, the M&A adviser has to go back and rebuild the sales funnel. This is when I have seen many M&A advisers throw in the towel – especially when they are busy. (If it was purely a matter of economic self interest, they shouldn’t – they have already invested a lot of time with the company.)
The challenge is that they will usually have already contacted most of the best prospects. If they have to go back to the same buyers, the perception will be that they did not succeed the first time. This makes it much more difficult to build momentum on the second pass. It’s also psychologically much more difficult for the M&A advisor. So they usually move onto a ‘fresh’ deal and blame the failure on the company, valuation expectations or a ‘difficult’ CEO or board.
It’s Much Easier to Give Up on a Remote Company
Part of the dirty secret is that it is much easier for the M&A adviser to give up on a company when they are further from the company’s location. When M&A transactions fail, quite a few people will hear about it. But those people are usually geographically close to the company. The negative impact to the M&A adviser’s reputation will be similarly localized.
If the M&A adviser is geographically close to the company, they will be much more likely to stick it out to protect their reputation.
This is another factor that is much less important for transactions over $100 million. With these larger opportunities, local effectively translates to most of the country.
For Under $100 million You Really Need a Local M&A Adviser
Many CEOs and boards engage remote M&A advisers because they think that somebody from New York or Boston must be better than someone who lives within driving distance. In my experience, the real factors are mostly psychological – it’s like that old adage about a consultant just being a regular guy a long way from home.
The difference in a simple consulting job might not be significant, but when it’s your company being sold, and it’s under $100 million in value, you really need an M&A adviser that is close to home.