Top Reasons Why an Acquisition May Fail

November 15, 2022

Not every dealership M&A transaction works out. There are always challenges to be overcome for both parties, and sometimes there is no middle ground that both buyer and seller will agree to. While it’s not always possible to prevent problems like this or force a deal to conclude, it is still helpful to know the warning signs, so that canceling the negotiations can be smooth and not cause any further problems.

Some reasons why an acquisition may fail

There can be many reasons why an acquisition deal might not succeed. Here are a few:

A buyer whose vision for the business is so different from that of the seller that the seller feels their legacy will be jeopardized: This can happen in a wide variety of scenarios, especially when a large dealer group is trying to acquire a smaller, family-owned store that has earned a respected place in its community. 

  • Will the locally known name be scrubbed from the building, making way for the corporate brand? 
  • Does the acquirer plan to dismiss the current management, replacing them with, e.g., senior staff from other locations? 
  • Has the buyer shown no interest in keeping the owner’s heirs or any of their other relatives employed beyond the closing date, even though the seller desires it? 
  • Is there a plan to demolish or abandon the facility and build a new one from scratch?

A seller facing any of these possibilities can justifiably feel queasy about completing a deal, regardless of the financial terms. It is essential that the buyer’s vision lines up with that of the seller. Most sellers have devoted a large part of their lives to building up their dealerships. They care deeply about what will happen to their stores next. An inability to reach an amicable agreement on this point can utterly destroy the deal.

An inability to compromise financially: Negotiation is a standard part of making a successful deal happen. This is an area where “my way or the highway” tactics will likely lead to a deal’s failure. 

Just as the seller wants to get the highest possible price for the dealership, the buyer is trying to buy it for a lesser amount that is at or below the amount budgeted for this specific acquisition. This can sometimes lead to a stalemate.

While the experts at DCG have been through this process of getting both the buyer and the seller across the finish line hundreds of times, there can be rare occasions when this is just not possible. Perhaps it’s the personalities involved, or both parties are being wildly unrealistic about the pricing issue and can’t be talked into narrowing the gap. If this should come to pass, the deal may run aground. 

Resistance or a breakdown in morale from the most important staff on the seller’s side: From a buyer’s perspective, one of the key elements of the purchase is the seller’s management and senior staff members. These are the people who are largely responsible for the successful day-to-day operation of the dealership. Ideally, they should be a part of the acquisition, so that the new owner can assume control with an experienced management team in place and on board.

This is where problems can crop up. Have you confided in your senior staff that the dealership is going on the market? Have you assured them that their positions are secure? Have you asked them to stay and serve under the new owner? Are you paying them what they are truly worth, and are their other benefits sufficient to give them confidence?

Lack of communication can lead to many negative outcomes. If your senior staff believes that you are selling your store behind their backs, they may feel insecure and leave. If you are not paying them competitively, they may see this time of uncertainty (from their perspective) as a great time to jump ship and look elsewhere. These potential outcomes will be viewed very dimly by a buyer, who will rightly feel that a major part of your dealership’s value has just left the building. A development like this can blow a deal right out of the water.

Roadblocks on the manufacturer’s side: Regardless of how well things go between the buyer and the seller during the negotiation process, there is another player in this game who must be satisfied with the transaction: The vehicle manufacturer. If the factory is not convinced that the deal will be a positive development for its presence in that market, the acquisition may be doomed.

What are the factory’s main concerns when a dealership changes hands? These extend to the many profit centers that make up an entire automotive retailing facility, such as:

  • Does the new owner have a good track record operating stores in a market of this size? (This can be a big problem if the buyer has never before had a dealership in a larger market.)
  • Does the buyer have high CSI scores and satisfied customers who return for future vehicles?
  • Do the buyer’s other dealerships have profitable service and parts departments?
  • Do the buyer’s other dealerships have mostly good sales and service reviews on popular review sites?

Factory approval is an issue that has no gray areas – either you have it or you don’t. Without it, the deal is dead.

Other hurdles may crop up

There can be many other reasons for the failure of an acquisition. Some of these include:

A lack of EV readiness: A buyer preparing for the future of automotive retailing knows that electric vehicles (EVs) are an important element in that future. What has your store done to prepare for it? 

Have you been selling EVs? Do you have any EV chargers installed on the premises? Have you committed to the factory’s EV program? Have you trained your sales and service staff members in the many unique aspects of electrification they will need to know? If the answer is an unambiguous “no” to all of these, the buyer may well cut their offering price significantly or even walk away.

Financial records that are neither clean nor clear: A buyer will demand access to your books, in order to verify your dealership’s sales, profits, payroll, and other relevant financial milestones. If your books need some work, it is best to clean them up before any potential buyers come calling. Any failure to do this is likely to displease a buyer and wreck the deal.

A facility that is not upgraded to the current standards: Most buyers do not want to have to embark on an expensive major renovation right after purchasing your dealership. A move like this takes up valuable time, and will impact the level of sales as well as overall efficiency while construction takes place. A buyer may simply deduct the cost of the upgrades and projected lost sales from their offer, leaving the seller with much less when the transaction is concluded. Or the buyer could simply look elsewhere in the area for a suitably upgraded point.

DCG can help you to navigate these challenges

DCG is proud to bring its expertise in negotiating hundreds of deals to you! With our years of specialized knowledge from all sides of the industry, DCG is a company with an exceptional rate of completed transactions. Our experienced and committed staff includes M&A attorneys, M&A accountants, previous OEM executives, even former dealers. We know what it takes to get both the buyer and the seller to a mutually agreeable conclusion with smiles on their faces.

Contact DCG  to speak directly with an Automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership sale or purchase.