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Spotting signs of trouble early is critical for CFOs to prevent a deal from derailing.
Not every CFO will experience M&A firsthand during their career. But those who do typically find that their existing skillset makes them a crucial asset during the transaction process.
CFOs’ ability to understand financial data on a deeper level than their colleagues gives them a unique vantage point. As their executive team’s main source of objective truth, CFOs can keep internal discussions grounded in reality by carefully evaluating the strengths and weaknesses of potential deals.
M&A deals promise strategic business growth and value creation, but they rarely come easily. Over my career as an investment banker, I’ve seen enough deals fall apart that I’ve developed an intuition about which ones seem solid — and which ones seem less likely to go the distance.
CFOs who learn to recognize the typical warning signs of troubled deals can help address issues before they threaten the success of a potential transaction. Here are three potential symptoms of trouble that CFOs should be aware of during the M&A process.
1. A Change From Established Norms
CFOs and other deal team members should always keep a keen eye for any changes that might indicate doubt from the other side. One of these changes is an increased presence from stakeholders, such as a board of directors, who have previously kept their distance from the deal-making process.
The question, though, is whether the other party is signaling a loss of faith in the deal or something else. Yes, perhaps something better has come along. Alternatively, senior management might be reconsidering their original assumptions about the deal or even contemplating a change to their deal team.
It could also simply be a negotiation tactic. Determining the proper response might require the collective intellect of the CFO and other experienced members of the deal team. Together, take a mile-high look at the core facts of the deal and put yourself in the other party’s place. Decide whether there’s a sensible reason for them to back out, and if so, make a plan for addressing that situation should it arise. However, sometimes there’s smoke but no fire. When that happens, the best response may be to do nothing.
2. Slow or Incomplete Responses
During due diligence, any delays or difficulties in obtaining timely and accurate information from the other party should raise a red flag.
My firm experienced one particularly glaring example of this behavior while doing due diligence for a sell-side client that had easily reached an initial agreement with a buyer. We had asked our client to send their tax returns for us to review, and the radio silence that followed our request didn’t initially raise any suspicions on our end. But after making several repeated attempts to get the necessary filings, we learned the real reason for the delay — the returns didn’t exist.
During a period of financial distress, this business simply hadn’t been paying its federal taxes despite continuing to collect tax money from customers. In the end, we did close this deal — after renegotiations — as the buyer saw benefits to the purchase that offset the apparent complications.
Keep in mind, every deal is different, and specific questions may take a while to answer for perfectly plausible reasons. But, generally speaking, if the counterparty fails to provide essential financial data or suddenly becomes evasive in addressing key questions, it may indicate underlying issues.
3. Signs of Inexperience or Disorganization
To work with people on the other side who are experts in the deal-making process is refreshing. Well-run meetings, where there’s a clear goal of reaching a consensus on creating and dividing value, are often the key to successful deals.
Conversely, when key meeting roles are handled by inexperienced individuals, the process becomes slow and arduous. It might raise questions about the other party’s commitment and capability to drive the deal forward. CFOs who have been through M&A before should pay close attention to whether meetings are well-organized, obstacles are addressed promptly, and decision-making processes are efficient and effective. If they’re not, consider the reasons why.
Along the same lines, as you gain insight into how the other party conducts business, you might notice signs that they’re not as organized as you assumed. That becomes a problem if the counterparty supplies inaccurate metrics, which can result from a lack of attention to bookkeeping or even financial distress. A sharp-eyed CFO will carefully evaluate the reliability of the other party’s financial information and address any concerns to ensure a solid foundation for the deal. If one side’s metrics are egregiously wrong, fixing that damage and continuing with a deal can be very hard.
The more times you go through M&A as a CFO, the better you get at spotting warning signs that can impact the success of transactions. While CFOs should stay alert for any potential complications, they should also be doing their part to establish effective channels of communication with the counterparty and ensure transparency throughout the deal process.
Maintaining the momentum of a transaction requires attention from several parties, so make sure you’re not the weak link. Successful collaboration with other stakeholders is critical for overcoming hurdles and unlocking the full value and potential of the respective businesses.
Frank Williamson is the founder of Oaklyn Consulting, an investment banking firm for small- and medium-sized companies under private ownership.