Why Private M&A Deals Die, and What Lawyers Can Do About It

In this entry to the CLS Blue Sky Blog, author Rachel Landy (Yeshiva University) discusses the factors that cause mergers and acquisitions (M&A) involving private companies to collapse during due diligence. Drawing on interviews with practicing lawyers and corporate development professionals, Landy examines “deal killers,” or issues that pose material risks to completing a transaction, and considers how lawyers can identify and address these concerns early in the process.

Landy classifies deal killers into three broad categories: issues likely to affect any buyer, issues whose significance depends on the transaction’s objectives, and buyer-specific concerns. The first category includes serious legal noncompliance, such as employee misclassification or environmental violations, where potential penalties may be difficult to quantify or insure against. The second includes issues such as contingent revenue, intellectual property restrictions, and employee retention, depending on what the buyer hopes to gain from the acquisition.

The third category encompasses problems that conflict with a particular buyer’s existing assets or operations. For example, a target’s licensing agreement could inadvertently grant third parties rights over the buyer’s own intellectual property after the acquisition. Landy also highlights other factors affecting deal completion, including the level of detail in the term sheet and potential regulatory approvals. Her interviews suggest that personnel-related concerns are especially significant when a company’s value depends on employees’ expertise, relationships, or tacit knowledge.

Landy argues that responsibility for addressing deal killers shifts depending on who is best positioned to understand and resolve the issue. Sellers should proactively address broadly applicable risks, while buyers should promptly communicate concerns specific to their needs. Lawyers can improve transaction efficiency by encouraging comprehensive term sheets, negotiating key employee agreements earlier, and prioritizing due diligence requests. Their role, however, extends beyond preserving transactions: effective legal counsel can also help parties recognize when ending a deal is the most efficient outcome…

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