Successful M&A deals don’t just happen by accident. Each M&A transaction has its own complexities and numerous factors must converge to result in a mutually beneficial outcome for both the buyer and seller. Sellers who are willing to critically analyze a deal objectively and possess the gravitas to have tough conversations with buyers stand the best chance of obtaining an optimal outcome for themselves and avoiding some common seller “deal traps” outlined below.
1. Mistakenly presuming they have a deal. Many sellers, after getting a high-level, non-binding commitment from a buyer at the right valuation or purchase price may think that the core deal has been settled and all that’s needed is a “standard” purchase agreement. But what many people (who don’t do M&A every day) don’t realize is the cardinal rule that while price matters, deal structure often matters even more. Many sellers have limited understanding or appreciation of how structure ultimately can significantly affect the price they actually realize in a sale. In the final analysis, the Seller’s realization is all that really matters.
The starting point for an optimal M&A deal structure is a robust letter of intent (LOI) that does more than lay out the purchase price and boilerplate provisions. (Read more about LOIs here). The more general or formulaic the LOI, the more sellers will have to negotiate when it’s time to document the deal (which is anything but standard) at a heightened cost over a prolonged period, and by then, a seller may be too far along to pull back from the deal or negotiate better terms. As a general deal rule of thumb – buyers benefit from “less” up front and pulling sellers into the process (buyers almost always have more leverage than sellers after the LOI is signed); sellers most typically benefit from “more” up front and should negotiate hard at the LOI stage.
Saavy sellers also need to understand that the process for closing the sale of their business is fundamentally different than selling or buying the typical business product or service. Hard conversations are often part of the process – either you have them at the beginning, or you have them when you’re in the middle or even the end of the deal (at which point those conversations will only be harder and the stakes even higher). Unlike with other various other deals, such as schmoozing a new customer, handshakes and cocktails (and an LOI) are just the very beginning, and not even close to the end, for M&A deals.
2. Failing to perform due diligence on the buyer. Too many sellers, particularly in smaller deals, assume potential buyers have the necessary funds and capability to make the purchase and close the transaction when they don’t. When this happens, sellers have sunk time and money into the process with nothing to show for it. Accordingly, every seller needs to take appropriate steps early in the process to ensure the prospective buyer has the actual capital, resources and experience to close the deal. For many deals, the buyer will also need the acumen and resources to capably integrate the buyer’s and seller’s businesses post-closing. (Learn more on this topic here).
Buyers should be willing and able to provide financial statements, meaningful commitment letters from lenders, credit pre-approvals, references, and a track record of successful investments or purchases in the seller’s industry and market. If a buyer balks at this, continually delays providing this information, or provides sparse, vague, or otherwise inadequate information, it’s a big red flag.
3. Not mentally preparing for the process. There are a few things sellers need to accept before starting the M&A process:
- The transaction will take longer than expected.
- It’s common for sellers to experience deal fatigue.
- There will be costs (tangible and intangible).
- There will be sometimes be periods characterized by adversarial communications.
M&A deals are marathons, not sprints. This is true no matter how “straightforward” the deal is, or how quickly the buyer claims it and its lawyers can close. The psychological element of these transactions is too often neglected by both sellers and buyers, and in particular, sellers can become inundated in the deal process to the point of conceding on important terms just to get over the finish line. Understanding the nature of the M&A deal process at the start is the best way for both sides to avoid being overtaken by its highs and lows, and can help sellers stay firm on the critical deal terms that matter most to them. A seller should be ready to be thrust out of its comfort zone if it wants the best deal it can get.
4. Not being willing to walk away from the deal. Every seller needs to have the willingness to walk away from the negotiating table. Demonstrating that you, as the seller, are not afraid to walk away conveys that you have leverage and can help motivate the buyer to move past negotiating roadblocks and close the deal. In virtually every successful M&A transaction we’ve worked on, at some point during the deal the seller flexed some muscle to get something important and was willing to walk if it didn’t get it (and not unsurprisingly, in almost every instance by demonstrating that willingness to walk it got the deal over the hump to where the seller felt good enough to move forward and close). Sellers shouldn’t be afraid to ask and legitimate buyers don’t just pick up their chips and go home based on reasonable seller asks or negotiations. It’s a typical part of the process and negotiations.
5. Commoditizing the advisors and legal counsel. A seasoned deal professional that you work with during your M&A deal will provide value beyond merely executing a closing, and each type of professional serves a specific purpose. The worth of having advisors, including attorneys, with proven experience in M&A can’t be overstated. Not hiring advisors that are M&A specialists is kind of like seeing a general practitioner to perform your heart surgery.
It’s not surprising that the financial outlay for this level of expertise may not be insignificant. Cost savings in the short-term can seem attractive, and cost is important – to a degree. But in reality, what seem like big fees are often dwarfed by the value of finding more money in the deal, enhancing terms and seeing things that people who don’t do M&A every day won’t see and capture for you. Put simply, a great M&A advisor is no commodity. The overall value you should realize from their services and counsel will outweigh any relatively immaterial cost-cutting measures in the end.
We Can Be Your M&A Deal Partners
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we have represented buyers and sellers in hundreds of M&A transactions. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.
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