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Navigating Deal Execution Risk

Deal Execution Risk

The allure of the highest bidder can often cloud judgement when it comes to choosing the right buyer to close a deal. However, selecting a buyer isn't just about the numbers on the table; it's about evaluating the risks associated with the transaction's successful conclusion. Deal execution risk, though sometimes overlooked, can make or break a deal, and understanding its nuances is crucial in the M&A process. 


Consider a scenario where multiple buyers have presented enticing offers. On the one hand, there are familiar faces—established suitors with a track record of successful deal closures. These buyers have demonstrated reliability, showing that they deliver without deviations when they commit to an offer. On the other hand, there's a newcomer in the mix offering a higher bid. However, there's a significant level of uncertainty surrounding the deal execution with this party. 


It's easy to be swayed by the promise of greater financial gains, but chasing the highest offer without considering deal execution risk can be perilous. Opting for the highest bidder might seem lucrative initially, but if the deal falls through due to execution complexities, there is no guarantee the other offers on the table will still be there.  


Deal execution risk encompasses various factors, with access to funding playing a pivotal role. Buyers with proven access to capital and a history of successful fundraising instil confidence in sellers as they mitigate the uncertainty associated with financing. Conversely, dealing with buyers lacking direct access to funding introduces many risks. Questions can arise regarding the buyer's ability to secure financing at the proposed price, potentially jeopardising the entire transaction (and the seller only finding this out much further down the line).


Inexperienced buyers or those reliant on external funding sources often face obstacles during the due diligence phase. If a buyer's financing falls through or lenders undervalue the deal, it can lead to renegotiations or, in worst-case scenarios, deal collapse. This underscores the security that comes with dealing directly with parties who possess the financial backing and experience to fulfil their commitments. 


The adage "follow the money" rings true in M&A negotiations. Sellers must ascertain whether the buyer has the means to fulfil their offer, either through their own resources or established financial arrangements. Relying on assurances without concrete evidence of funding accessibility can lead to detrimental outcomes, as promises may not materialise when it's time to seal the deal. 


Given our extensive network of buyers and deep understanding of market dynamics, our proficiency at Deal Leaders allows us to pinpoint potential risks and provide invaluable counsel on securing the most advantageous deal. 


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