Is it true that 70 to 90 percent of acquisitions fail?
The figure is repeated constantly and the trail behind it runs cold almost immediately. Its best-known appearance is the opening of “The Big Idea: The New M&A Playbook,” by Clayton M. Christensen, Richard Alton, Curtis Rising and Andrew Waldeck, in the March 2011 Harvard Business Review: “Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. A lot of researchers have tried to explain those abysmal statistics, usually by analyzing the attributes of deals that worked and those that didn’t.” Read the whole article and no study is named, no author is credited, no dataset is identified and no footnote is supplied for that range. It is an assertion about a literature rather than a finding from one, offered as the premise for a theory the authors then propose.
Work that does measure something reports a more complicated picture. Steven N. Kaplan and Michael S. Weisbach, in “The Success of Acquisitions: Evidence from Divestitures,” Journal of Finance 47(1):107-138 (1992), studied large acquisitions completed between 1971 and 1982 and found that by the end of 1989 acquirers had divested almost 44 percent of the target companies. The part usually left out is what they concluded about those divestitures: using the accounting gain or loss the acquirer recognized, press reports and the sale price, they classified only 34 percent to 50 percent of the classified divestitures as unsuccessful. A divestiture rate is not a failure rate, and reading one as the other is how a number near 44 becomes a number near 90.
Two limits belong in the same breath. That study looked at large acquisitions by public acquirers four decades ago, which is not the population a person buying a fifteen-employee company belongs to. And the range attributed to “study after study” cannot be checked, because the studies are not named.
What does the evidence say about outcomes for small acquisitions specifically?
There is one long-running series that measures a population close to the owner-operator case, and it counts outcomes rather than estimating them. The Stanford Graduate School of Business 2024 Search Fund Study (Case E-870, 28 June 2024), conducted by Peter Kelly, Lecturer in Management, and Sara Heston, Assistant Director of the Search Fund Project, reports on 681 core search funds formed in the United States and Canada since 1984, and states that it “includes data from every known core search fund in the United States and Canada.” The study defines the path it measures as one undertaken “by one or two individuals who form an investment vehicle with a small group of investors to search for, acquire, and lead a privately held company for the medium to long term, typically five to ten years,” which makes its outcomes a reasonable, if imperfect, window onto first-time acquisitions of small companies.
The status counts as of 31 December 2023 are these. Of 681 funds raised, 524 had concluded their search and 328 of those had made an acquisition. Of the 328 acquisitions, 166 were still operating, 122 had exited with a positive return, and 40 had exited with a negative return. The companies bought were real operating businesses rather than startups: a median purchase price of $14.4 million, a median EBITDA margin of 27 percent and 34 employees at the median. The study is sponsored by a university, is biennial, and reports its exclusions, which is more provenance than most numbers in this field carry.
Why is payroll the first thing that breaks after closing?
The first payroll run after closing is where an acquisition first touches every employee at once, and the rules for it are federal and specific. IRS Revenue Procedure 2004-53 explains “both the standard procedure and an alternate procedure” for preparing and filing Forms W-2, 941 and W-4 in acquisitions, and it applies when a successor “acquires substantially all the property (1) used in a trade or business of another employer (predecessor), or (2) used in a separate unit of a trade or business of a predecessor,” and then employs people who worked in that business immediately before. Under the standard procedure, the revenue procedure states, “the predecessor performs all the reporting duties for the wages and other compensation it pays,” and the successor does the same for what it pays. Employees consequently receive two Forms W-2 for the year of the sale.
Two details in that procedure are where the first hundred days actually go wrong. If the predecessor ceases to pay any wages reportable on Form 941, for example because it goes out of business at closing, it “must file the Form 941 for the quarter of the acquisition as a final Form 941,” and then must furnish Forms W-2 to its former employees on an expedited basis, on or before the date the final Form 941 is due, generally one month after the end of the quarter. A seller who has emotionally left the business still has a statutory filing to make, and a buyer who did not agree in writing which procedure applies discovers it in the same week the first payroll is due. The revenue procedure also describes Schedule D (Form 941), the schedule for explaining discrepancies between Forms W-2 and Forms 941 “caused by acquisitions, statutory mergers, or consolidations,” which exists because those discrepancies are routine.
None of the above is tax advice and none of it decides anything for a particular transaction; which procedure fits, and who files what, is a question for the parties’ own accountants and counsel before closing rather than after. The point for planning is only that the cutover has a due date that nobody in the deal controls. The wider systems and reporting problem, of getting numbers you trust in a form you can act on, is covered at Systems, finance and reporting.
How much of the business lives only in the seller’s head?
Enough that the length of the seller’s transition is one of the few pre-closing decisions that predictably shows up in the first hundred days. The Stanford Graduate School of Business 2024 Search Fund Study reports that, post transaction, sellers “increased their length of engagement to six months in this study from four months in the prior study,” that “over 90% of searchers report a positive relationship with sellers post-transaction,” and that “12% intend to keep the seller engaged indefinitely.” The study does not say whether six months is a mean or a median. Six months is what was reported by buyers who deliberately chose this path, went in expecting an operating role, and largely got on with the person they bought from. Against twenty or thirty years of accumulated relationships, pricing habits and undocumented exceptions, it is short.
Where the purchase is financed with a Small Business Administration guarantee, the ceiling is set by regulation rather than by preference. SBA SOP 50 10 8, effective 1 June 2025 and applicable to loans receiving an SBA loan number through 30 September 2026, provides that except in a partial change of ownership or where the purchaser is an ESOP, an equivalent trust or a cooperative, “the seller may not remain as an officer, director, stockholder, or employee of the business,” and that where a short transitional period is needed the business “may contract with the seller as a consultant for a period not to exceed 12 months including any extensions.” The same procedure provides that “Seller earnouts are prohibited; however, buyer rebates based on business performance are allowed.” SBA has since issued SOP 50 10 8.1, effective for loans receiving an SBA loan number on or after 1 October 2026, so which version governs depends on the loan. A buyer who planned a three-year handover, or intended to tie part of the price to the seller staying, has a plan the financing does not permit, and the discovery tends to arrive late.
The practical consequence is that knowledge transfer is a scheduled activity with a deadline, not an atmosphere. What the transition period is actually for, and what the opening weeks should and should not attempt, is covered at The first hundred days, and the retention side of the same problem at Culture and retention.
Which consents get assumed to transfer and then do not?
The lease and the operating licenses, because both belong to third parties who did not negotiate the deal and are not bound by its timetable. On the lease, the governing text is the lease itself, read under the law of its state. California, to take one state that has legislated the point, provides in Civil Code section 1995.250 that a transfer restriction “may require the landlord’s consent for transfer subject to any express standard or condition for giving or withholding consent,” and in section 1995.260 that where the lease requires consent but “provides no standard for giving or withholding consent,” an implied standard applies that consent “may not be unreasonably withheld,” with the burden of proof on the tenant. Many commercial leases supply an express standard precisely so that the default does not apply. Which rule governs a particular lease is a question for the parties’ counsel, and the answer varies by state.
Licenses are the harder case, because a license is frequently personal to its holder and does not sit inside the assets being sold. The California Department of Alcoholic Beverage Control states plainly in its ABC-211-A instructions that “the average waiting period for a license is 55-65 days and by law the license cannot transfer for at least 30 days,” with protested applications running to 95 days or longer and further delay where documents, fees, liens or premises construction are unresolved. Alcohol is only the most conspicuous example: contractor registrations, health permits, motor carrier authority, childcare and home health licensure and professional licenses each run a regime of their own, in which the relevant question is not when the deal closes but when a complete application was filed.
What should a buyer take from all of this before closing rather than after?
That most of what breaks early is documentary, and documents can be read in advance. The seller’s available transition, the applicable payroll reporting procedure and who files the final returns, the lease’s consent standard and remaining term, and every license the business holds along with the issuing authority’s stated processing time, are all knowable before a closing date is set. None of them require a forecast. They require someone to go and look, and the reason they so often go unexamined is that they are boring next to price.
It is also worth holding the failure statistics loosely in both directions. The 70 to 90 percent range has no traceable study behind it. The counted evidence that does exist, from Kaplan and Weisbach in 1992 and from Stanford’s 2024 search fund study, describes different populations at different times and neither predicts any particular acquisition. An owner who treats the first hundred days as a period for verifying dull things has better odds of a quiet quarter than one who treats it as a period for demonstrating decisiveness, and that claim is a judgment of the Institute rather than a finding of any study named here.
This Institute publishes no valuation of any company, no recommendation to buy, sell or finance anything, and no legal, tax or accounting advice; the questions raised above belong with the reader’s own counsel, tax adviser and accountant. The integration stage sits at Integration and Value Creation, the diligence that should have surfaced most of it at Valuation and Due Diligence, and the roles on a deal team, with the questions to put to each, at the Deal Team Directory.