For of all sad words of tongue or pen, / The saddest are these: "It might have been!"

This couplet from a John Greenleaf Whittier poem could be recited every time an M&A transaction falls through-as M&A transactions sometimes do. As advisers to buyers and sellers in many successful M&As, Paul Reilly and Peter Schaefer of New Direction Partners (NDP) have also witnessed the circumstances that can cause otherwise promising deals to come undone. They know from first-hand experience how poor judgment, misinformation, adverse business developments, and personal antagonisms can drive principals apart despite the mutual advantages of deals that should bring them together.

Reilly and Schaefer say that if a transaction becomes seriously flawed, it can collapse either before the deal is closed or after it takes effect. Most transactions that stumble short of the finish line conform to one of the following scenarios-a catalog of errors that can undermine even the most well-intentioned negotiations. (Post-closing failures will be explored in the next installment of this article.)

Incompatible responses to declining profits. If the seller's business falters during the course of negotiations, says Reilly, the decline in profits probably isn't going to change the seller's expectations. The buyer, on the other hand, has no certain way of knowing how long the slump will go on or how much risk ultimately will be involved. This confidence-swallowing gap between perceptions, he says, "probably is the biggest reason we don't get deals done."

It's up to the seller, Reilly says, to acknowledge and remove risk factors that could stand in the way of a successful closing. Something else for sellers to beware is complacency when the deal appears to be going well. In one case from NDP's files, the seller had obtained a letter of intent from the buyer when a business problem arose-one serious enough to demand immediate attention. But by that point, says Reilly, the seller's management "had checked out" attitudinally and didn't respond to the situation as they should have. As a result, the value of the company declined to a point where the seller no longer was interested, killing a deal that a little more vigilance on the seller's part might have kept alive.

Unrealistic expectations. Call it hubris, call it overreaching, or call it simple greed-it's what sinks transactions whenever one party demands more from the deal than its fundamentals will bear. Schaefer remembers a seller who, having agreed to close for a specified amount, decided at the last moment to hold out for more. The buyer walked away, and soon after, so did two of the seller's top salespeople. These were blows from which the company couldn't recover, and it eventually folded in a testament to what can happen when a refusal to be realistic overcomes common sense.

Conflicting objectives among shareholders and partners. In joint ownership situations, says Schaefer, individual motivations are bound to be different. They could be age-based, for example, with some partners focusing on retirement while others are looking toward the future of the business. Reconciling these positions can make a transaction harder to achieve. "It always adds complexity when there are multiple owners" in a company seeking to be acquired, Schaefer says. Merger attempts can fall apart when the parties fail to acknowledge the impossibility of structuring a deal that will be all things to all shareholders.

Negative influence from within and without. When mergers loom, people get nervous. Non-shareholding members of management worry about losing their jobs. Attorneys, accountants, and other external providers of professional services fret about becoming redundant after the sale. Human nature being what it is, these fears sometimes prompt behaviors calculated to undercut deals in progress.

Reilly says that people acting out of fear may try to "stack the cards" against the deal by over-emphasizing its downsides or by giving dubious advice. NDP saw this kind of mischief at work, says Schaefer, in a negotiation where the seller's attorney urged the client to make an unreasonable demand of the seller: that a non-refundable deposit be presented along with the letter of intent. In this case, Schaefer says, the attorney's desire to preserve a client relationship became a needless obstacle to the closing of the deal.

Inadequate or incompetent dealmaking. Reilly notes that what seems to be an attempt to "torpedo" a negotiation isn't necessarily a subversive act-it could just be the response of someone who isn't particularly sophisticated about M&As. The complexity of these transactions, he points out, can be overwhelming to those who don't specialize in them-a description that fits most would-be buyers and sellers of entrepreneurial businesses.

Reilly notes that one of the aims of due diligence-the investigative analysis in which the buyer assesses the condition and the value of the seller's business-is to expose issues that could turn into deal-breakers if left unaddressed. As such, it's a task best given to professionals who know how to frame the implications for buyer and seller alike. As Reilly says, "Managing expectations up front in the process is key."