Aug 08, 2023

The M&A Deal: A Marathon, Not A Sprint

A Marathon, Not A Sprint


Selling your company might appear on the surface to be a swift sprint toward success. However, an M&A deal is more like a marathon or a hard-fought boxing match.

To successfully complete M&A deals, selling business owners must thoroughly understand the complexity involved. This includes understanding operations, sales, cash flow, revenue recognition, balance sheets, income statements, accounting policies, and the roles of financial and legal advisors. Prepare for the M&A endurance race.

The Misconception: A Quick Sprint to the Finish Line

Starting a new venture can be thrilling, and the same goes for selling a business when you’re the target company. Just as marathoners feel excitement at the starting line, the prospect of an M&A deal can get pulses racing. Don’t be fooled. The journey is complicated and requires a close look at, for example, sales, revenue and other financial records, a business plan, and details like adjusted EBITDA, working capital, cash flow, net income and your associated income statement, analysis of expenses, taxes, earnings quality, and a quality of earnings report. Buyers will also focus on a seller’s command of their sales and business operations.

The Reality: Why It’s Harder Than You Think

  1. M&A Due Diligence: This phase is critical for a potential buyer and the seller, including for example, sales, operations and financial due diligence, analyzing due diligence reports, and responding to extensive M&A checklists and informational requests to help assure the business is a viable long-term investment for the buyer.
  2. Uncharted Territory: Many sellers are beginners in the M&A field, confronted with the task of managing accounting models, intellectual property, a virtual data room, and much more that will test the limits of the target company’s ability. It is also important that sellers not lose focus on their sales and other business operations during the deal process as dips in performance or profits before closing can negatively impact the ultimate purchase price.
  3. The Complexity of the Deal: Even straightforward M&A business sales can present red flags or unexpected challenges. Tactical changes may become necessary throughout the deal in order to aching the primary purpose – an optimal deal outcome which maximizes the seller’s profits and other deal objectives.
  4. Timing: Longer Than Expected: Complexity equals time. M&A deals require meticulous attention, drawing out the timeline.
  5. Skillset Mismatch: Success in business doesn’t directly translate into M&A expertise. It’s a whole new ballgame.
  6. Sophisticated Buyers: Seasoned buyers and their investors normally have the advantage. Their experience can outmatch novice M&A sellers, emphasizing the need for expert financial, accounting, and legal advisors to help selling business owners navigate each phase of the transaction.
  7. Quality of Earnings: The Heartbeat of the Deal
  • What it Means: Quality of earnings (Q of E) refers to the sustainability and authenticity of revenue, net income and cash flows, i.e., the earnings quality. In most M&A deals, the buyer’s outside team of accountants will prepare a quality of earnings report as a financial reporting tool to be used as part of the buyer’s and its investors financial analysis of the target company’s earnings to provide the buyer with a complete picture as it evaluates symmetry with its typical investment decisions. A seller’s financial performance over the trailing twelve month period is a particularly important income measurement. Potential buyers will also be wary of too many related party transactions and add back expenses.
  • The Q of E Process: Having a clean quality of earnings report builds trust with potential buyers. The process of doing the work to prepare the quality of earnings report is similar to an audit of your financial statements conducted by the buyer. Among other things, for example, the earnings report will evaluate the seller’s revenue and expenses, income statement (and/or profit and loss statement) and associated net income, working capital, free cash flow, balance sheet, fixed assets, accounts receivable, accounts payable, other current assets and current liabilities, and the detail supporting this financial information. A seller’s financials will normally be adjusted to examine what they would look like under generally accepted accounting principles (GAAP). The buyer will be interested in whether the accounting shows declining net income or whether there has been any earnings manipulation. Sellers are often required to provide detailed reports to assist the buyer’s advisors with their examination of the target company’s expenses, taxes, financial statements, financial accounting practices, and previously reported earnings. Sellers may also be asked to model financial projections for future periods or including sensitivity analyses to take into account other variable factors.
  • Impact on Valuation: Consistent revenue and strong net income and associated quality of earnings report enhances the valuation (and any prior earnings presented) of your company as it means your company will likely have sustainable earnings quality for a specific period after the closing.

Impact on Valuation


The Risk of Deal Fatigue:

  1. The Long Game: The lengthy process can lead to deal fatigue. The momentum wanes, mistakes occur, and the final M&A transaction outcome may not be as good.
  2. Psychological Readiness: A seller must mentally prepare for the long haul and steel themselves for what will seem like a need to respond to endless tedious and exhausting discussions, deal negotiations, and exchange of documentation.
  3. Building the Right Team: Assemble a skilled team of M&A advisors, including financial and legal advisors who are M&A specialists, to help you successfully manage the deal and assist you in your analysis.

Avoiding Common Pitfalls: Lessons from the Trenches

  1. Over-optimistic Expectations: Realism is key in the business plan presented to prospective buyers for analysis of a potential transaction.
  2. Lack of Preparation: The due diligence process requires meticulous preparation, including assessing and reworking financial statements.
  3. Poor Communication with the Team: M&A communications are very important, and therefore consistent discussions and coordination with your deal advisors are crucial throughout the deal cycle.
  4. The Importance of Resilience: The Marathoner’s Mindset
  • Expect Deal Setbacks: An M&A deal always presents unexpected challenges. Resilience is your ally for the long term in M&A transactions.
  • Learn from Mistakes: Every phase of the M&A cycle provides insights, and there will likely be deal mistakes. A few mistakes can be overcome, as long as you are a quick study, learn from them, and change deal tactics as needed.
  • Embrace the Journey: Enjoy the deal stages. Each step brings you closer to your goal of closing the M&A transaction.

Avoiding Common Pitfalls


Final Thoughts: The Finish Line is Worth the Effort

Selling your business to the right buyer isn’t a sprint or leisurely jog. It’s a demanding marathon requiring planning, persistence, and determination. Embrace the marathon and make the most of this vital chapter in your entrepreneurial journey.

Understanding M&A deals, and the dynamics between sellers and buyers, is valuable when you plan for the long term. With the right mindset, preparation, and team of M&A advisors, you can not only reach but exceed well beyond the distant finish line.

Considering Selling Your Company?

At Linden Law Partners, we specialize in orchestrating all aspects of M&A transactions. Our experience, unique insights, and personalized attention make us an ideal partner in this exciting but challenging adventure. Contact us today to discuss how we can help.

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