6 Ways Sellers Unwittingly Kill M&A Deals
For many business owners, the sale of their company is a once-in-a-lifetime undertaking. A common scenario involves negotiation between a first-time seller who has spent years devoted to building a company and a seasoned buyer with many acquisitions under their belt (especially private equity and public company buyers).
The merger and acquisition (M&A) process has a steep learning curve and, as with any complex undertaking, prior experience and a strong understanding of the process are invaluable. We’ve written in the past about potential land mines awaiting unsuspecting sellers, and the following are some additional common mistakes we routinely see from first-time sellers.
This article is the second of a 2-part series. Read part 1 of the series: “3 Ways Buyers Can Kill A Perfectly Good M&A Deal.”
- Sellers Who Preclude A Competitive Process
All too often, sellers believe they already know their buyer and push to close a transaction with that buyer. In fact, frequently the sale process has been instigated by an inquiry or even a tentative offer from that very buyer. However, it can’t be overemphasized: a key to closing a successful transaction – one including optimal price structure, terms, and time to close – is to foster competition among multiple potential buyers. A little professional rivalry keeps buyers motivated, focused, and on track. It encourages buyers to put forward their strongest offer with a winning combination of price and deal terms. It swings the negotiating pendulum the seller’s way since buyers believe the seller may be selected from multiple offers and only one can win. And ultimately, should the process with one buyer stall, the seller will have one or more viable backups. - Sellers Who Aren’t Prepared For Due Diligence
Once buyer and seller have signed a letter of intent, due diligence will begin in earnest. The seller will be asked to populate a data room with current financial statements, financial projections and underlying assumptions, strategic plans, market analyses, operating documents, customer and vendor contracts, employee details, employee manuals, management incentive programs, real estate contracts, regulatory and compliance reports, and on and on. A potential buyer will turn the business inside out during the due diligence phase, meaning that a seller needs to be prepared to help the buyer come to terms with the skeletons in the closet. Every business has weaknesses or flaws, major or minor, which the seller should discuss early on with its deal professionals. These potential issues need to be presented to the buyer and should never be late-game surprises that damage the relationship built between buyer and seller. - Sellers Who Can’t Articulate An Industry Overview
Potential buyers will be extremely interested in the seller’s competitive differentiation, the structure of the competitive landscape, and industry trends, as well as critical technological and regulatory impacts. Sellers who can’t hold their own during intense questioning and lengthy discussions in this area risk losing the confidence of buyers. Buyers will be planning to take the business to the next level by bringing new capital, talent, and other resources to bear, and will rely on a seller’s insights into the industry as the buyer begins to formulate its road map. To set their own expectations, sellers need to educate themselves on comparable transactions and valuations in their industries. Sellers should expect any offers for their business to be in line with those comps, barring any persuasive reasons that their valuation should be an outlier. - Sellers Who Neglect Their Business During The Deal Process
Buyers are interested in acquiring a company that is a healthy performer – very likely factors that originally brought them to the negotiating table. An M&A transaction typically takes several months to a year to close, and is an exhilarating, exhausting and extremely challenging time for most selling business owners. Sellers who get overly caught up in trying to oversee the transaction process, or do not have a solid management team in place to keep the business firing on all cylinders during the deal process, may cause the business to lose some of its sheen in the buyer’s eyes. If the company under performs for a quarter or two, the purchase price may be reduced, and the seller’s negotiating position will be weakened. Sellers must allow their real professionals to keep the transaction process moving ahead while walking a tightrope between running the business and responding timely to proposals, due diligence requests, and other deal negotiation matters. - Sellers Who Lack A Sense Of Urgency
Conversely, the common refrain among deal professionals, “time kills all deals,” reflects the damage incurred when closing the transaction does not take center stage for the seller, buyer, and their deal teams. Transactions have momentum and allowing them to ebb can be damaging and even fatal to closing. A buyer may assume that a seller who misses deadlines is unmotivated, incapable, or disorganized. Do those qualities reflect the business behind the scenes, they wonder? If delays become so extreme that the buyer focuses their attention elsewhere, all may be lost. Sellers should make every effort to avoid revising deal timelines. - Sellers Who Fail To Engage Experienced Deal Professionals
And finally … you’ve heard repeatedly from us and others that the foundation of a successful transaction is hiring experienced deal professionals. Selling your business is an event where what you don’t know can really hurt you. A team of M&A advisors who have repeatedly been there and done that will guide the seller through the complexities of the process, keep the deal on track, negotiate the countless deal points, and know when to push and when to give a little. That experience acquired over many transactions and many years can make all the difference to a seller hoping to avoid deal-killing mistakes.
Contact Us.
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. 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.
