96% of mid-market deals fail to deliver

A lack of pre-deal preparation and post-deal operational weakness has resulted in the majority of deals in the mid-market failing to live up to expectations says latest research.

Poor pre-deal due diligence and post-deal execution have led to the underperformance of the vast majority of mid-market deals, according to research by Grant Thornton.
More than 40 percent of respondents to the survey cited underperforming management as the most common cause contributing to a transaction not delivering on pre-deal expectations. Grant Thornton polled 100 mid-market firms involved in deals of between £5 million and £200 million (€7.4 million to €296 million).
David Axon, a partner with Grant Thornton’s operations and post deal services team said: “It’s not hard to see why management due diligence is growing in popularity. The problem is that it’s impossible to provide guarantees that management can deliver the business plan. Post deal, detailing what can cause a deal to fail operationally is not sufficiently well documented. Without understanding the real operational dynamics of a business, a good management team can fall seriously short of expectations.”
Overestimating anticipated post-deal benefits and poorly planned integration strategies also ranked highly, with 24 percent and 14 percent respectively. In fourth and fifth place were badly executed acquisition strategies, with 12 percent, and underestimating costs associated with post-deal implementation activities, with 8 percent.
Axon said private equity firms have to accept some failure within the portfolio as inevitable, post-deal operational reviews were necessary as “in our experience, pre-deal due diligence will not always pick up all of the issues or even all of the upsides. The statistics bear up to the fact that deals rarely go smoothly, but a greater understanding of the business immediately pre and post any deal, will pay dividends later.”
The report said that as formal auction processes have become a standard process for private equity acquisitions, fast auctions have limited private equity firms’ access to management and business operations during the bidding process. According to the report, one in five private equity acquisitions were made through formal auction processes, but only two percent of respondents believe it to be the best way to buy a business.
The majority, or 26 percent, said that formal auctions mainly benefit vendors, while 24 percent felt the auction process to be too widely run. A further 21 percent said that auctions were more suited to the larger end of the market.