Common Deal Breakers in M&A Transactions

Mergers and acquisitions do not usually fail because of a single dramatic event. More often, deals unravel because legal, commercial or structural problems emerge during the transaction and the parties are unable to bridge the gap.

In South Africa, many of these issues can be identified early, but only if the deal is approached strategically and the risk areas are properly understood from the outset.

For buyers, deal breakers often signal risk that cannot be priced or contained. For sellers, they can reduce valuation, delay closing or cause a transaction to collapse entirely.

Understanding the most common deal breakers can help parties prepare properly and avoid preventable failures.

Why M&A Deals Fall Apart

A transaction may look attractive at headline level, but once due diligence begins and the legal documents are negotiated, the reality often becomes more complicated.

Problems usually arise where there is:

• uncertainty about what is actually being sold

• a mismatch between price and risk

• poor documentation

• governance or compliance concerns

• unrealistic expectations from one or both sides

In many cases, the issue is not that a problem exists, but that it is discovered too late or handled badly.

1. Poor Corporate Records

One of the most common deal breakers is weak or incomplete corporate housekeeping.

This may include:

• missing share certificates

• incomplete share registers

• unsigned resolutions

• outdated company records

• uncertainty about ownership or authority

If the target’s corporate records are unreliable, buyers may question whether the seller can deliver clean title, whether prior actions were validly authorised and whether hidden disputes may surface after closing.

Even where a deal does not fail entirely, these issues can materially slow down the process and increase transaction costs.

2. Unclear Ownership of Shares or Assets

A buyer needs certainty about what it is acquiring.

Deals often run into trouble where there is confusion around:

• who owns the shares

• whether pre-emptive rights apply

• whether options or claims exist over the equity

• whether key assets are actually owned by the target

• whether intellectual property sits in the correct entity

Ownership uncertainty is a major risk because it goes to the heart of the transaction. If the seller cannot clearly establish ownership and transferability, the buyer may walk away.

3. Legal Due Diligence Red Flags

Due diligence is where many deals begin to unravel.

Common legal red flags include:

• unresolved litigation

• regulatory non-compliance

• defective customer or supplier contracts

• missing employment protections

• tax exposure

• weak data protection compliance

• licensing issues

A buyer may tolerate some risk if it is quantifiable and capable of being managed. The problem arises where the exposure is open-ended, difficult to assess or suggests deeper governance failures.

4. Material Compliance Failures

Serious compliance issues can kill a deal very quickly.

This may involve:

• non-compliance with sector regulation

• failures in licensing or approvals

• anti-bribery concerns

• labour law exposure

• BEE-related risks

• tax non-compliance

These issues can affect valuation, insurability and the buyer’s appetite to proceed. In some transactions, they may also create personal risk for directors or management if not properly dealt with.

5. Weak Financial Controls or Suspected Misconduct

Buyers become nervous very quickly where the target appears poorly controlled.

Warning signs include:

• unusual related-party payments

• unexplained cash movements

• inconsistent financial records

• personal expenditure through the business

• signs of misappropriation or fraud

These issues often suggest that the problem is not limited to one transaction or one accounting period. They can indicate broader governance weakness, which is often much harder to price and contain.

6. Disputes Between Shareholders or Directors

Internal disputes are a major threat to deal certainty.

Common examples include:

• deadlock between key stakeholders

• founder disputes

• exclusion from management

• threatened litigation

• disagreements over authority to sell

A buyer does not want to acquire a business only to inherit instability, litigation risk or a challenge to the validity of the deal itself.

Where the business depends heavily on a small number of individuals, unresolved internal conflict can materially undermine the transaction.

7. Key Contracts That Cannot Be Assigned or Are At Risk

Many businesses derive significant value from a small number of customer, supplier, funding or operational contracts.

Deals can be jeopardised where:

• contracts require third-party consent

• change of control triggers termination rights

• contracts are unsigned or expired

• key terms are unclear or commercially unfavourable

A transaction that looks attractive in principle may become unworkable if the target cannot retain its most important contractual relationships after closing.

8. Intellectual Property Problems

In many businesses, especially founder-led or growth-stage businesses, intellectual property is a core asset.

Common deal blockers include:

• IP registered in the wrong name

• key software or content not properly assigned

• contractor-created IP not transferred to the company

• brand ownership uncertainty

• infringement claims or licence defects

If the target does not clearly own the IP that underpins the business, the buyer may view the deal as fundamentally compromised.

9. Employment and Management Risks

Transactions often depend on continuity in leadership and workforce stability.

Problems arise where there is:

• no enforceable restraint or confidentiality protection

• key personnel not properly contracted

• disputes with senior management

• misclassification of workers

• retention risk post-acquisition

If the value of the business is tied to specific founders or executives, a buyer will want confidence that those individuals are either staying or that the business can function without them.

10. Unrealistic Valuation Expectations

Sometimes the biggest deal breaker is not legal at all.

Transactions often stall because the seller’s view of value does not align with the buyer’s assessment of risk, performance or future prospects.

This usually becomes more acute where due diligence reveals issues that the seller did not expect to affect price.

A valuation gap can sometimes be solved through earn-outs, deferred consideration or other structuring tools. In other cases, the expectations are simply too far apart.

11. Overly Aggressive Warranty and Indemnity Negotiations

Even where the parties agree on the commercial deal, the transaction can still break down in the legal documents.

This often happens where there is disagreement over:

• the scope of warranties

• disclosure standards

• indemnities for identified risks

• limitation of liability

• time periods and financial caps

Sellers may feel that the buyer is trying to shift too much risk back onto them. Buyers may feel that the seller is avoiding accountability for serious issues.

When this gap cannot be resolved, the deal may fall apart late in the process.

12. Regulatory Approval Issues

Some transactions require regulatory clearance or sector-specific approvals.

If approval is uncertain, delayed or subject to burdensome conditions, the transaction may become commercially unattractive.

Even where approval is technically possible, the timing risk alone can create problems if the parties cannot wait or if the business is vulnerable during the interim period.

13. Poor Deal Structure

Sometimes the issue is not the target, but the way the transaction is being put together.

Examples include:

• using the wrong acquisition vehicle

• failing to account for tax consequences

• inadequate funding arrangements

• unclear conditions precedent

• no practical plan for post-closing transition

A weak structure can create avoidable risk and make a deal harder to execute, finance or integrate.

The Real Problem: Surprises Late in the Process

Most deal breakers become fatal when they emerge late.

If serious issues are only uncovered after time, cost and momentum have already been invested, parties are more likely to become defensive, distrustful and entrenched.

That is why early legal input is so important. The purpose is not only to document the deal, but to identify the issues that could derail it before they become unmanageable.

How to Reduce the Risk of a Deal Breaking Down

The best way to protect a transaction is to prepare properly from the start.

That usually means:

• stress-testing the structure early

• identifying obvious red flags before exclusivity

• conducting focused due diligence

• addressing corporate housekeeping problems upfront

• aligning price with risk

• negotiating documents realistically

A well-run process does not eliminate risk, but it significantly improves the chances of getting the deal closed.

How We Can Help

At Barter McKellar, we advise buyers, sellers, founders and investors on M&A transactions from early structuring through to closing.

We assist with:

• transaction structuring

• legal due diligence

• share and asset sale agreements

• risk allocation and negotiation

• governance and compliance issues that threaten deal completion

If you are considering an acquisition or sale, it is important to identify potential deal breakers before they derail the transaction.

Contact Barter McKellar to assess risk, strengthen your deal position and improve the prospects of a successful closing.