50% of M&A deals fail because most approaches to exit involve hiring an M&A banker and marketing the business for sale. Instead, companies should prepare for an exit earlier but move slower, says Victor Basta, CEO and Founder of DAI Magister
In 2024, the M&A market has returned to a challenging normal, falling from the soaring heights of the 2021-22 period. Exits exceeding $100 million have now dropped to 2018-19 levels, which despite being higher than the decade before, still represent a challenging market for companies seeking to maximise their value. Current market conditions, such as high interest rates and a vast swathe of public companies going private, mean that achieving a successful exit requires thoughtful and sustained planning.
In light of this, DAI Magister proposes breaking down the M&A process into two stages, where ‘Stage 1’ is focused on marketing the company and ‘Stage 2’ on executing the sale. This approach provides buyers (especially strategics) with enough time to appreciate the full value of the company and come to the table ready to transact. In short, the objective is that a company ends up being bought, rather than sold.
Basta says: “Success in an M&A exit is down to two factors: certainty and price. The conventional wisdom is to hire an M&A banker, prepare a selling ‘book’ and market the business for sale. However, roughly half such efforts fail. Even where they succeed, the outcome is either a deal at a lower price or one that closes amidst uncertainty. DAI Magister’s experience shows that this approach is just as likely to result in a lower price and less certainty as it is to achieve a quality outcome.”
According to DAI Magister, ‘Stage 1’ involves structured, sustained exit planning over a 6-18 month period to lay the groundwork before a company engages in a traditional formal M&A process (‘Stage 2’). Key to this succeeding is that Stage 1 is largely invisible to the general market; a company is not reaching out to dozens of buyers with a for-sale process and materials, requiring a response within a defined time-frame.
Basta continues: “The simple objective of this stage is to achieve a higher price with greater certainty by quietly cultivating buyers in gradual steps, developing and communicating positioning, and proactively addressing potential deal roadblocks well before any strategic buyer is asked to bid. This stage is what pushes the company closer to being bought rather than being sold.”
After investing time and resources in building conviction and alignment with these potential buyers, a company enters a structured M&A sale process with a strong tailwind of momentum and engagement from buyers who are genuinely interested in an acquisition. This pre-qualification and cultivation of buyers helps to maintain competitive tension throughout the process. The company negotiates with counterparties who have a clear strategic rationale, fully understand the opportunity and have a strong desire to complete a deal. Real competitive tension develops, shifting the burden of maintaining momentum to buyers motivated to move quickly and decisively to secure the asset.
Basta concludes: “In some cases, an intensive second stage in isolation is the right answer. For example, instances where there is a defined group of buyers already well known to the target, or where the sale is catalysed by a serious approach from a qualified party. That said, it is too often the case that the second stage is simply triggered by default. An example of this would be when VCs want to exit, they hire a banker to sell the company on their behalf.”