Every founder whose startup has been acquired, or who has been through the M&A process, has a story to tell. More often though, it's founders who've met the most success who tell their story the loudest. Tough exit stories aren't talked about as much.
So unless you know a founder who's been through the acquisition process, you probably haven't heard about the sometimes painful challenges that come with M&A. That means you may not be aware of red flags to watch for, which can leave you vulnerable to tire kickers and bad-faith buyers.
In this guide, we'll share insights from M&A experts on how deals can go sour, and what to watch out for so you can make sure your M&A deal is a story you want to share.
The Dangers of M&A No One Tells You About
M&A Failure Statistics
40%
of M&A deals fall through
Even with serious buyers
60-90
days of exclusivity
During LOI period
Even with serious buyers, up to 40% of M&A deals fall through. But if you can't see and screen out unserious buyers, or those negotiating in bad faith, that failure rate only climbs.
The Danger of Failed Deals
"The last thing that you want to do is sign the LOI (Letter of Intent), go into the exclusivity period, which is going to be anywhere between 60 to 90 days, and then realize that they were not serious, they were not really committed to getting a deal done."
Why Deal Failure Is Dangerous
"When a deal fails, you're gonna have to go back to the well, to all these people that maybe offered you an LOI or that were swimming around you. Often they're gonna think that because the deal failed something is wrong with the business. So that's going to be very dangerous."
Because M&A experts have seen firsthand how deals can fall apart, they know the red-flag behaviors to avoid when filtering out acquisition partners.
5 M&A Red Flags to Watch Out For
During M&A, buyers can throw around big numbers, potentially life-changing numbers. It's easy to get fixated on the possibilities those figures represent and lose sight of your goals.
But those big numbers don't mean anything if they're followed by a parade of red flags.
"It's important to not only look at the valuation but also look at how serious and committed the buyer is towards driving the deal to the finish line."
Red Flag #1: No Culture Fit
The most important factor to look for in a buyer is culture fit. While it may seem strange to call it a barrier to an M&A, the truth is, bad culture fit can ruin your exit strategy even after you've been acquired.
Why Culture Matters in M&A
"People don't really look at [culture] much. But, you've got to really remember that when you are finally working on the integration, you're going to have maybe 60% to 70% of the deal paid to you upfront, but the remainder is going to be subject to vesting."
The Vesting Reality:
60-70%
Paid upfront
30-40%
Subject to vesting
Often, the vesting period can extend up to 2 years. During that time, you're going to have to work in that company to ensure you get the full price you agreed on.
So, you want to ensure you'll be happy there, and that your employees will be happy there. Along with enjoying the work during your vesting term, finding that perfect culture-fit buyer also comes with a bonus: networking.
Warning
If you end up being bought by a company that is a bad culture fit, you may end up leaving early and losing the rest of your purchase price.
Red Flag #2: Deal Fatigue
When momentum stalls out, good deals can fall apart. Sometimes, a slow process can hint at a buyer who isn't serious. If they don't show energy in driving the process forward, it can be a bad sign.
"You have to look at the speed, whether it is the speed of the integration and how that's going to look so that you have an idea of what you're signing up for."
More often though, a slow deal, especially in negotiation, comes from the seller's side. Founders can get too involved with negotiating details that don't matter. This makes it too easy for the buyer to get distracted, and then suddenly the excitement and commitment to the purchase starts to fade.
The Emotional Attachment Trap
"I see this a lot with founders too where they come super emotionally attached to the business and then they start negotiating stuff that makes no sense. There's bigger fish to fry and they're stuck on really small stuff."
For founders trying to sell their first startup, this can be tricky. You can get emotionally attached. You might feel this is your only good idea, or you just invested too much in your startup.
Pro Tip
"I find that being completely unattached—and I know this is difficult—being completely unattached to the outcome is going to allow you to always have leverage and to also get the best possible terms."
Red Flag #3: Lack of Integrity
For most founders, integrity is vital, but it's a value that can easily get lost or overlooked in the middle of negotiations. Especially when you're so close to an exit! In truth, M&A is when integrity matters most.
"I think that integrity is absolutely everything. It's ultimately follow-through on your promises."
Lack of integrity will typically pop up after an LOI has been signed, like in the following scenario:
The Post-LOI Integrity Test:
Critical Warning
"This is going to be a really big red flag that I think founders should be really careful about." While it may seem heartbreaking to say no and head back to the well, it's more dangerous to try to negotiate with a buyer who has already demonstrated their lack of integrity.
Red Flag #4: Relying Too Much on the Buyer's Stock
Every M&A deal mixes cash and stock, which is normal. But some buyers will push the ratio heavily towards stock, trying to lure in founders with the potential to make even more money when the vesting period is over.
The buyer's stock can be tempting, but it also makes your M&A deal much riskier.
Expert Advice
"I find that the more that you can get upfront, the better. I've seen this a lot where people just do a stock deal and then all of a sudden it's just paper."
This is easy to forget when dealing with big, well-established companies. But even then, stock deals are inherently risky.
Case Study: The WeWork Disaster
One example that almost everyone in the startup community will remember is WeWork. Before their disastrous IPO, they went on an acquisition spree, buying up smaller companies in stock-heavy deals.
The WeWork Acquisition Catastrophe
$47B
Peak valuation
$9B
Post-crash valuation
$0
Bankruptcy value
Stock deals worth $100M-$300M became worthless
Then, when their valuation plummeted from $47B to $9B to eventual bankruptcy, those founders discovered the deals they were so excited about, and the companies they built from the ground up, were both worthless.
The Heartbreaking Reality
"Many of those founders who sold their companies for $100M, $200M, $300M where everyone was excited about the IPO and that stock realizing into something, that ended up turning into zero. Those are really heartbreaking stories where you see founders that put sweat and tears over the course of years selling something they thought could be meaningful and valuable, and it ends up amounting to nothing."
The lesson: Shoot for as much certainty as possible.
Red Flag #5: No Firm Integration Plans
Some founders enter into M&A deals because their situation forces their hand. Often, these M&A deals end up with the company shuttered and its employees scattered across different teams. That's not a dream exit for any founder.
It's even worse when you think you're selling your startup to a company that values your team, only to see everything you worked for torn apart as soon as the sale is complete.
Ask Questions Beforehand
"You should be asking questions on what integration would look like because many companies, they do a transaction and then all of a sudden they just shut it down."
While you can't control the buyer after the purchase, asking questions beforehand can help understand their plans and protect your team.
Just like our rigorous developer vetting process ensures we only work with elite talent, you need to vet your potential acquirers just as thoroughly.
Evaluating Your Buyers Is as Essential as Evaluating Your Offers
A successful exit is a tricky path to engineer. As a founder, you're not only looking at big, potentially life-changing numbers, but you're also navigating the emotions of selling a company you've poured years of your life into (not to mention the fact that you're probably also facing some kind of external pressure to sell).
Despite all of this, you must prioritize vetting. So you can find the best buyer for your company. And that means taking the time to talk to them.
"You want to ask questions to really understand how excited they are about what you are doing, about what you're building so that you're able to filter through the people that are serious versus the people that are just curious."
Whether you're building your startup toward an exit or scaling with our vetted development talent, the principle is the same: quality over speed, substance over surface-level promises.
Frequently Asked Questions
What percentage of M&A deals fall through?
Up to 40% of M&A deals fall through, even with serious buyers. This failure rate increases significantly when dealing with tire kickers or bad-faith buyers. After signing an LOI, you enter a 60-90 day exclusivity period. If the deal falls apart during this time, other potential buyers often assume something is wrong with your business, making it harder to resurrect alternative offers.
Why does culture fit matter in M&A deals?
Culture fit is crucial because typically only 60-70% of the purchase price is paid upfront, with the remainder subject to vesting over up to 2 years. During this vesting period, you must work at the acquiring company to receive the full agreed price. If the culture is a poor fit, you may leave early and lose 30-40% of your purchase price. Additionally, good culture fit provides valuable networking opportunities and ensures your team will be happy during the transition.
What happened to founders who took WeWork stock deals?
Before WeWork's disastrous IPO, they acquired multiple companies in stock-heavy deals worth $100M-$300M. When WeWork's valuation plummeted from $47B to $9B and eventually into bankruptcy, those stock deals became worthless. Founders who had built companies over years and sold for what seemed like life-changing amounts ended up with nothing. This demonstrates why experts recommend getting as much cash upfront as possible rather than relying heavily on buyer stock.
How can I tell if a buyer lacks integrity during M&A?
A major red flag is when a buyer agrees to all terms before signing the LOI, but then demands to renegotiate those same terms during the legal drafting phase. This shows they're not honoring their commitments. Integrity means follow-through on promises. If a buyer demonstrates lack of integrity after LOI signing, it's better to walk away and return to other potential buyers than continue negotiating with someone who has already shown they can't be trusted.
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