The Good News: The Givens of M&A Projects
For professionals who love to plan, the plus side of M&A projects is their predictable structure. Whether you’re acquiring or selling, the steps proceed the same way every time. From the offering memorandum to valuation and due diligence, there’s an established flow.
With most life experiences, repetition helps you manage the process better. The more times you do something, the more you understand how things unfold. Every new experience gets you closer to achieving your desired outcome.
You’d think this lesson would apply to M&A projects, too. The more experience you have, the more accurate your estimates of project timelines would be. However, that’s not always the case.
The Bad News: The Planning Fallacy
Unfortunately, a psychological phenomenon plays havoc with your estimates. Called “the planning fallacy,” it’s the natural tendency for people to underestimate how long a process will take to complete.
And it doesn’t only apply to time. People underestimate the effort needed to get things done. They fail to make room for external factors. You might be waiting on a document from someone who needs information from someone else to complete. The impact isn’t just hard to correct — it snowballs.
Despite impeccable planning skills and best intentions, it’s difficult to control for the range of potential factors that can hinder the progress of a project, such as:
- Poorly prepared clients: People usually focus on the work their side needs to accomplish. However, teams need to anticipate delays from the client side and include prompting and reminders into your plan.
- Surprise data: An M&A project might be on schedule until new documentation comes in showing different performance results. New numbers could cause a chain reaction and you’ll need time to revise.
- Cold feet: When multiple parties are involved in an M&A deal, everyone rides the same wave. But circumstances can change and interested parties can “go cold” mid-deal. A timeline estimate won’t just be off, the process might end prematurely or be postponed indefinitely.
- Shift in market conditions: A change in the market can turn the market cold. For instance, an economic situation that comes on abruptly or a geopolitical turning of tides can slam the brakes on a project and throw timelines into question.
A Timeline Comparison
To learn more about how the planning fallacy impacts timeline estimates in M&A, we decided to find out how often deals run longer than expected and by how long. We analyzed a random sample of 3,500 projects run on Firmex between 2020 and 2023 and quantified the results.
In line with our hypothesis, timeline estimates were repeatedly lower than actual timelines. What surprised us was how far out of the ballpark many initial estimates were.
In 40-50% of cases, projects lasted over twice as long as original estimates.
It’s hard to ascribe such a sizeable proportion of delays to bad planning and overly aggressive timelines alone. The longer the project estimate, the longer it was extended.
Estimate
3 months
6 months
12 months
Months Extended
51% went 4.7 months longer
39% went 8 months longer
44% went 14.5 months longer
No one is immune from the planning fallacy. Regardless of a project team’s skill level and experience, external factors can’t be avoided.
Deal Overages Add Up
With circumstances so variable, relying on transactional data rooms with fixed end dates feels counterintuitive. External factors might be unpredictable, but extension fees aren’t. And they add up fast.
Based on our study, doubling the original estimate would give projects the right cushion on a significant number of projects. But that route is expensive, too, since there’s no guarantee extra time will be needed. The frustration mounts when busy project planners encounter the same estimation challenge repeatedly on different projects, often simultaneously.
Advisors and owners can avoid the problem entirely by choosing a virtual data room (VDR) platform that uses a subscription model, like Firmex. Projects are supported for as long as they need to be — no deadlines or extensions needed. If external factors impact scheduling, the flat fee stays the same.
Let Projects Determine Their Own Timelines
Every M&A project is unique. Each has its own flow. It’s impossible to anticipate or control every extenuating circumstance. But you can be aware of the planning fallacy and make choices that account for unpredictability.
Find out what a Firmex VDR subscription can do for you and get started.
