How can you determine when to walk away from a merger or acquisition?

Company's financial health and future earning potentials. When it is discovered during the due diligence process that the company is having issues relating to declining revenue and inaccurate financial statements. Secondly, Legal concern or issues. During the process of due diligence if it was discovered that the intended acquired company has potential risk factors such as not complying with regulatory requirements, unethical or legal issues which might include tax labilities.

In recent years the business environment has also experienced variety of external shocks, when assessing the potential of an acquisition - I think these potential external risks should be taken into account as well. Can the acquisition risk the whole operations or important part of it, if external shock would be to happen?

In my experience, the due diligence process is a crucial mechanism to not only validate the information that has been shared by the other party, but to also learn the story behind the data. A financial statement, and its data, are a great starting point. However, if you fail to understand why the numbers are what they are and how the systems driving them work (or don't work), you enter the transaction and integration with your hands tied behind your back. When you bring curiosity about the story and what support it, you discover more opportunities for improvement. These opportunities may represent synergistic savings or needs for further investment, both of which are meaningful data points to finalizing the purchase.

One aspect often overlooked is the “human due diligence”, do the acquisition target have the right skills and culture match in their leadership team? Does the culture of the target match that of the acquirer?

In case of personal or personality clashes, it is important to steer the conversation back to the issues at hand perhaps rewording it so that the emotional barriers do not block the logical and fact based conversation.

The biggest mistakes owners make in exit planning is to narrow their view of the alternatives. There are always more alternatives (inside sale, outside sale or ESOP). The more we are able to encourage sellers to consider all of their alternatives, the more likely it is that they will arrive at the other side of the exit content and with less seller's remorse. Further, it provides them with the ability to communicate to their key stakeholders, whether fellow owners, family members in the family enterprise, or employees, that they followed a process and carefully considered their alternatives rather than grabbing the first (and possibly what they perceives as their only) train in the station.