M&A Expert Alejandro Cremades’ 5 red flags to watch for during M&A negotiations

April 22, 2024
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Alejandro Cremades

M&A advisor, investor, founder of Panthera Advisors 
M&A firm, best-selling author

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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 our recent conversation with M&A Advisor Alejandro Cremades, he shared how M&A 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.


Your M&A expert: Alejandro Cremades

Most startup founders will go through the M&A process once, twice, or maybe three times in their lives. But Alejandro Cremades has been through the process dozens of times, as a seller, buyer, and advisor.

An internationally recognized M&A advisor, serial entrepreneur, author, and fundraising consultant, Alejandro literally wrote the book on M&A, called “Selling Your Startup”. He also co-founded Panthera, a firm offering M&A and fundraising advisory to early-stage companies.


The dangers of M&A no one tells you about

Even with serious buyers, up to 40% of M&A deals fall through, according to Alejandro.

But if you can’t see and screen out unserious buyers, or those negotiating in bad faith, that failure rate only climbs.

“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,” Alejandro said.

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“When a deal fails, your problem is that you’re gonna have to go back to the well, to all these people that maybe offered you an LOI or that we’re 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.”

// Alejandro Cremades, M&A advisor

Because Alejandro has seen firsthand how M&A deals can fall apart, he knows the red-flag behaviors to avoid when filtering out acquisition partners.


M&A process: 5 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,” Alejandro said.

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No culture fit

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Deal fatigue

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Lack of integrity

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Relying too much on buyer’s stock

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No firm integration plans


No culture fit

The most important factor to look for in a buyer, from Alejandro’s point of view, 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.

“People don’t really look at [culture] much,” Alejandro said.

“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.”

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.

Grain of wisdom

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.


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, you know, 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,” Alejandro said.

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.

“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,” Alejandro said. “There’s bigger fish to fry and they’re stuck on really small stuff.”

For founders who are 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 startups.

Grain of wisdom

But when it comes to negotiating, Alejandro recommends just letting go.

“I find that being completely unattached – and I know this is difficult – being completely unattached to the outcome is going to allow you to be able to always have leverage and to also get the best possible terms.”


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!

Grain of wisdom

In truth, M&A is when integrity matters most.

“I think that integrity is absolutely everything,” Alejandro said. “You know, 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.

Before signing the LOI, everyone is excited to move forward, and your buyer doesn’t have a problem with the deal’s terms. However, once the LOI comes into effect and your legal teams are drafting up the documents, your buyer suddenly demands to renegotiate terms you thought were already agreed upon.

“This is going to be a really big red flag that I think founders should be really careful about,” Alejandro said.

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.


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.

Grain of wisdom

The buyer’s stock can be tempting, but it also makes your M&A deal much riskier.

“I find that the more that you can get upfront, the better,” Alejandro said. “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.

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.

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.

“Many of those founders who sold their companies for a hundred, 200 million, 300 million where everyone was excited about the IPO and that stock realizing into something, that ended up turning into zero, right?” Alejandro said.

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Those are really heartbreaking stories where you see founders that put sweat and tears over the course of years and of their life selling something that they thought could be meaningful and valuable, and it ends up amounting to nothing.

So again, that goes back to trying to shoot for as much certainty as possible.

// Alejandro Cremades, M&A advisor


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.

Grain of wisdom

While you can’t control the buyer after the purchase, asking questions beforehand can help understand their plans.

“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,” Alejandro said.


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.”