When Should You Walk Away from a Deal?

It was late. Time was running out and negotiations weren’t going well. Larry was leading up the buy-side deal team, and it was his third trip to the headquarters of his acquisition target to hammer out the final terms and conditions of the deal.

After three days of going back and forth, it seemed that Wayne, owner of the target company, was picking away at the purchase price from every possible angle. Both men were tired and becoming increasingly frustrated with the negotiation process. After some consideration, Larry, having run out of patience, stood up and abruptly ended the meeting and led his deal team out the door.

This is an old and familiar story. I have seen it many times.

In business, buyers and sellers must be able to know when or when not to walk away from a deal. It is key — whether that means deciding against an acquisition that on paper would create significant synergies when the price is becoming unreasonably high, or walking away to avoid culture misalignment or a toxic workplace, or saying “no thanks” after due diligence reveals major problems. For the most part, you can go with your gut instincts. But there are other signs to look for that aren’t as obvious.

Below are six recommendations that can help you make the right choice.

1. Prepare long before you start the negotiation process. Knowledge is power. The more knowledge you have, the more leverage you have when negotiating. Research your acquisition target and the industry carefully; learn who the major players are and examine the major trends that might affect your current business strategy — with or without an acquisition. If trends are changing significantly, then an acquisition could be less expensive in the long run than attempting to adapt to those changes without an acquisition.
2. Establish deal breakers with your deal team before you begin negotiations. Identifying the potential deal breakers early can save everyone time, effort, and money — not to mention the stress of a high-stakes negotiation that winds up breaking down. For example, not having a firm walk-away price might lead to giving away too many concessions during the negotiation process. Be sure to cost out each concession before granting it so that the concessions do not exceed your walk-away number.
3. Establish a rigorous due-diligence process before you enter into negotiations. This should go beyond verifying the financials, operations, customer records, sales and marketing forecasts, disaster recovery, cyber security, and other items. All too often, due-diligence becomes an exercise in verifying the financial statements and a few other items, rather than conducting a fair analysis of the company’s strategic value and the logic supporting the strategy. For example, does this acquisition fit my growth profile and strategic business plans? Can the acquisition deliver results on schedule to deliver the value I need? Deal-making is glamorous; due diligence is not. That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed. The fact is the momentum of the transaction is hard to resist once senior management has the target in its sights. The backward-looking science of due-diligence is vital. But it is a meaningless exercise without the forward-looking art of strategic due-diligence.
4. Develop a binding detailed letter of intent (LOI) subject to a satisfactory due-diligence review, vs. a term sheet (TS), which often is more like a skeleton to be filled in later. The LOI is more detailed and focuses almost exclusively on major business issues which may pose difficulty down the line. (Legal issues, business terms and conditions, representations and warranties can be addressed in the Definitive Purchase and Sale Agreement that follows the LOI.)
5. Devote significant time to determining how much time and effort will be necessary to realize the synergies expected from the acquisition. Ask yourself, is this a cultural fit for my company? Are we in alignment with common goals? Does this acquisition fit our criteria? What am I really buying?
6. Be constantly aware of inconsistencies during the negotiation the process. Inconsistencies can be the root of future problems and could be a sign of trouble to come.

Deal-making is as much art as science. If you decide to walk, you’ve said “no.” And “no” is a very powerful word.

But it doesn’t necessarily mean the deal is over. By walking away from a potential deal, you’ll learn just how much the other party wants to work with you. I’ve walked enough times that I’ve learned to appreciate the power of “no.” If the target is seriously interested in working with you, pulling out will force them to try to get you back. Or they’ll be relieved and let you walk. Either way, you’ll get resolution.