When to Walk Away from an M&A Deal

Mergers and acquisitions offer exceptional value, as well as a chance for owners to retire or move onto their next venture. They’re also a lot of work, and it’s easy to get bogged down in seemingly endless details, due diligence requests, and negotiations. Don’t let the sunk cost fallacy—which dictates that if you’ve already invested significant time and money in something, it’s better to continue down the same path—convince you to pursue a bad deal. Sometimes the best strategy is to accept your losses and walk away. So how do you know when to do so? Here are some indications that you should consider walking away.

Prior to Signing a Purchase Agreement

Prior to signing the purchase agreement, if you walk away from a potential sale, the only thing you stand to lose is some time and a potential buyer. For this reason, you should walk away if there are any major red flags, including:

• a clear mismatch in strategy
• a buyer you don’t trust
• a nagging sense in your gut that this is not the right fit
• a chance for a more valuable deal with another buyer
• a buyer who is dragging their feet, or who is likely to have funding issues

After Signing a Purchase Agreement

After you sign the purchase agreement, walking away becomes more expensive and potentially riskier. It’s still worthwhile to walk away if you believe the deal is doomed, but you should not do so on a whim, or because of personal or emotional conflicts with the buyer. Instead, consult with your M&A advisory team or investment bank if you have concerns. Then consider walking away if:

• The buyer requests a significant material change in deal terms that disadvantages you.
• Due diligence uncovers serious problems that you need to fix.
• Serious issues with the buyer, such as a history of broken deals or serious funding issues, become apparent.
• You have a clear and obvious opportunity to sell for more to someone else, and the difference in funds is enough to make up for any money you’ll lose by walking away.
• There is significant evidence that the buyer does not intend to proceed with the deal.

Recovering From Walking Away

Walking away from a deal may be the best choice when the deal is no longer in your interest. But it can still be costly, and if the deal is heavily publicized it could harm your reputation for future deals. So it’s critical to do a post-mortem with your team after walking away. Some questions to ask before proceeding to your next deal include:

• Were there any red flags I should have picked up on earlier?
• Would better preparation have prevented this from happening?
• Did we use the right M&A team to help navigate the deal?
• Do we need to develop a communication plan to handle any reputation damage this has caused?
• Do we want to immediately sell the business, or wait a while?