One in three business failures linked to botched acquisitions
SMEs exploring merger or acquisition (M&A) opportunities have been advised to increase the robustness of their due diligence process as figures from Purbeck Insurance Services reveal an uptick in the number of business failures due to business acquisitions gone wrong. Purbeck has found that 33% of all claims for Personal Guarantee Insurance (PGI) during 2024 were due to a failed merger or acquisition. As the M&A landscape remains buoyant with the provisional values of inward and outward M&As at their highest since 2022, Purbeck Insurance Services is urging caution to small business owners tempted by M&A.
Todd Davison, MD of Purbeck Insurance Services said: “Lower interest rates, GDP growth and increased political stability laid a strong foundation for increased M&A activity at the end of 2024 and this trend is continuing. Reasons for a business sale vary from appealing valuations tempting directors to seek early retirement, to interest from private equity or tech consolidation. Meanwhile with more businesses on the table, SME buyers might be looking to grow their market share or simply view the acquisition as potential for building a stronger future for their firm. No matter the reason as our figures reflect, robust due diligence is vital.”
Yet, with many plates to spin, conducting due diligence checks can be challenging for owners of smaller businesses. To prevent post-acquisition surprises, however, taking a deep dive into the business, they are seeking to acquire is essential.
Todd Davison continues, “Rather like dressing your house ready for sale or touching up the paintwork on a car, it is not uncommon in acquisition for firms to make their business appear more secure than it is.”
While it is incredibly important as a business director to be close to the financials, Purbeck advises that carrying out financial and legal due diligence should include input from trusted professionals such as an accountant or legal adviser. Even if these checks are successful, SME directors should also consider the cultural fit of the company they are considering and investigate systems, processes, and equipment to ensure that operations will run smoothly post-acquisition.
Todd Davison concludes, “The outlook for M&A activity in the UK for the remainder of the year is optimistic, good news for those business directors considering a sale or acquisition. Preparation is always key though. As well as due diligence by buyers, business directors need the reassurance that if their business does fail after a merger or acquisition, then the lender will not seek redress from their personal assets. Personal Guarantee Insurance comes into its own here, not only paying out in the event of a claim, but also providing much needed confidence to small businesses as they secure the finance they need to close the deal in the first place.”