Congrats. After a long, tedious search, you’ve finally snared an acquirer that checks all the boxes. Time to cash in?
Not so fast. In 35 years of advising mid-market sellers, I’ve seen deals crater for these five reasons:
Didn’t commit the resources needed to prepare for and complete the sale;
Overvalued the business;
Mismanaged employees through the M&A transaction process;
Built an ineffective M&A project team (or no team at all);
Allowed more than one person to carry on unsupervised contact with buyers.
Read on to learn how to avoid the top five ways business owners kill M&A deals:
#5) On Your Mark
Pre-Marketing Prep
Call them pre-deal projects. They come in two flavors:
The Gremlin Hunt. Rummage through the attic of your business for anything that could materially ding value or create mistrust. Then either fix it, or if you can’t, come clean with reasons why it’s not a deal-killer. Example: While conducting due diligence, a buyer -– much larger than the seller -– stumbles across a long-dormant legal threat against the seller. Did the seller deliberately hide it? Might it spring back to life after the new, richer owner buys the company?
The Curb Appeal Checklist. Look for opportunities to tidy up the business. Update corporate and tax records, reconcile inventory, secure and document IP protections, etc. Even freshen run-down bathrooms. Seriously. First impressions rule.
Embrace the Marathoner’s Mindset
The months-long M&A process demands commitment from both sellers and buyers, but much more from sellers:
Buyers ask sellers many more questions than sellers ask of buyers. And sellers typically have fewer resources than buyers with which to answer those questions.
At the same time, sellers must keep running their business, ideally better than ever.
The result? For many entrepreneurs, selling a company is the most demanding time of their careers. If you can’t muster the resources to anticipate and survive a thorough going-over by people looking for problems, wait till you can. Every glamorous closing hides unsung hours of grinding effort.
Why is this deliberate commitment so important? First, because delays dampen buyer enthusiasm. If you don’t keep them busy, they may run off chasing the next shiny penny. Delay kills deals.
Second, lethargic, incomplete responses to a buyer’s due diligence questions give off the vibe that you don’t care. Or worse, may be hiding something.
Fortunately, experienced M&A advisors can lighten the seller’s load. For instance, before you go to market, your advisor should have completed a thorough “internal due diligence” exercise. That way, multiple buyers can quickly verify key facts about the company’s performance without distracting you with repetitious Q&A.
#4) Be Reasonable
Yes, your company is special. And it’s got lots of promise, even if that’s not clear from past performance. Regardless, it’s still on you to justify what buyers may see as an aggressive purchase price. You need something more convincing than “that’s what I want,” though I actually hear that a lot. If you can’t back up your ask with facts, either lower your expectations or keep your head down till you can.
Because of the importance of setting a reasonable valuation, that’s nearly the first thing we do when taking on a new sellside client. Both of us need to get comfortable with that value before spending months working together to ready the company for a sale that’s unlikely to close.
Figuring What’s “Fair”
But how, you say, do you determine what your business is worth? Mostly two ways: 1) Estimating the company’s future cash flow; and 2) Seeing what acquirers paid for companies like yours.
There’s one big exception to these calculations — when a “strategic” or operating company believes that your business fits its needs. Unlike “financial” buyers, they can make or save money by folding your business into their already existing infrastructure. Some even benefit by shutting down the companies they buy to eliminate competition.
Therefore, strategics might pay more for a target that its stand-alone cash flow and prior similar transactions justify. Finding a strategic that’s willing to do this is another thing effective M&A advisors can do.
Takeaway: know what your company is worth before entertaining buyers (but have them put their number on the table first). Making arbitrary demands can convince suiters that trying to bridge the gap between their position and yours isn’t worth the hassle.
#3) Maintain Morale
The Perils of Loose Lips
Rumors about a company’s potential sale make every “stakeholder” nervous – employees, suppliers, clients, lenders. Most such rumors are wrong. But countering them demands time you don’t have and can force you to make compromising denials.
The best way to deal with watercooler whispers is to stop them before they start by going deep undercover till the deal is done. Not that you’re skulking around. Rather, you’re tight-fisted about who knows what because you yourself aren’t sure about the outcome. Only share details with those on a “need to know” basis and under strict, written confidentiality.
After you’ve closed the deal, gather all employees together to break the news. It’s usually good. For instance, the buyer brings new resources that benefit those who stay on, like more career paths and greater responsibilities.
Retain Key Employees
Should key employees make for the exits — before or during the six months after close — your sale price and its cash component can suffer. Big defections before closing can even crater deals.
Your sales rainmakers are typically highly mobile, not critical to joining in the M&A process, and already well-paid. So, unless they sniff out that something’s afoot, you may be able to avoid having to devise special compensation plans to reward their loyalty.
#2) Build an Effective M&A Team
However, certain other individuals are indeed integral to closing the deal. You can’t handle all M&A tasks on your own: you need specialists.
They are your M&A team members. For those who are on your management team, you’ve already got their confidentiality agreements in hand, right? Now you need to make sure they’re motivated to stick around and work overtime – golden handcuffs or golden parachutes. All such plans are designed to discourage them from fleeing to less uncertain and demanding workplaces.
What Do Team Members Do and Who Are They?
They anticipate and produce due diligence responses, help choose which buyers show the most promise, and provide feedback on negotiation terms with leading suitors.
Insider team members are typically the owner and/or CEO and CFO. Outsiders are a transaction attorney, M&A advisor who acts as team leader, and sometimes an accountant.
Member Qualifications
For CFOs/Accountants
The CFO/Accountant must know how to slice and dice both financial and operating data every which way (e.g., sorting customers by revenue, year, location, industry, margin, etc.). And do so quickly.
These days, companies that can’t produce that kind of data attract low or even no offers. Critical as well are complete financial statements going backwards and projected three years into the future.
As owner or CEO, you should find a tax planner and/or wealth advisor to understand how any proposed deal might affect selling your tax liabilities. That advice is relevant early on, before accepting an acquirer’s letter of intent outlining deal terms.
BTW, a sure-fire way to kill a deal is to demand — absent the discovery of relevant new facts — material changes in purchase terms after you execute the LOI, i.e., re-trading. The power of re-trades to blow up deals rises dramatically the nearer you get to closing.
For M&A Attorneys
That brings us to deal team attorneys. They must be well-experienced in closing M&A deals. They’re very different from lawyers who handle day-to-day corporate affairs or the owner’s personal business.
We’ve seen well-meaning but newbie M&A lawyers threaten deals because they don’t understand that negotiations are a game of give-and-take. The goal is to trade something of lesser value for something of more value (to you, that is).
They may insist on small unilateral gains that cripple deals with a thousand duck bites, or provoke a buyer to demand something of more value to you in return. As the cliché goes, the M&A lawyer’s operation may be a success, but the patient — your deal — died.
Local, mid-sized law firms are often the best source of capable M&A attorneys for mid-market deals because:
They’re less pricey than their larger brethren;
They’re less likely to be distracted by larger, more lucrative clients. (I once had a seller’s M&A counsel from a large firm turn over three times before close.);
Mid-sized firms typically have on hand enough specialists in areas like intellectual property and employment law to quickly and relatively inexpensively address those issues should they arise.
What About the M&A Advisor?
Fun fact: professional M&A advisors (e.g., competent investment bankers, M&A practitioners, etc.) on average increase the sale price of their clients’ companies by nearly 25%. Here are some ways they do that:
Based on experience with similar transactions, they suggest ways to position your company for optimal buyer appeal.
Owners can’t personally test buyer interest without letting others know the company is up for sale. An advisor can present your company anonymously until the time comes to reveal its identity, but only to qualified buyers under NDA.
Sellers have two options when approaching the market:
Entertain a series of buyers one after the other over time. The problem with this is that it doesn’t tell you if you’ve passed up the best offer or if it’s yet to come. That, plus people burn out with repeated fire drills over deals that die.
Or use an M&A advisor to create an auction-like environment where all buyers bid on a set schedule under competitive pressure.
The owner/operator’s time is almost always better spent minding the business while the advisor takes buyer calls and blocks them from wheedling special favors or inside info about the M&A process.
It’s not a good look when company owners grub around for concessions from buyers or get into hardball negotiations with them. The two usually have to live happily together for some time after the close. Instead, sellers need to be the good cop while advisors can afford to be bad cops. While negotiations between advisor and buyer may get chippy, the bad cop advisor is gone after the close.
Sellers need one person who knows the position of each interested party and how it changes over time. That allows them to work the room for the best offers.
Other reasons:
Clear the market. Most sellside campaigns require contact with hundreds of prospective buyers, both strategic and financial.
Bring the same level of experience and sophistication to the deal as the buyer.
Alert the seller to buyer offers that deviate from SOP (standard operating procedure).
Help them prioritize their objectives and determine what trade-offs may be necessary to achieve them.
Know how to rank buyer offers based on multiple seller criteria.
Last, a surprise to some, most buyers welcome competent sellside advisors for their ability to move deals along in a transparent, business-like manner.
#1) Who’s on First?
There’s a place for trusted employees and board members, but except for M&A team members, it’s not in the room with prospective buyers. You need a single point of contact with the buyer for several reasons:
Allowing multiple seller parties to interact with a buyer invites dissension within your ranks. That gives the buyer an opening to divide and conquer. It invites the “camel’s nose under the tent.”
Different people representing the seller confuse who’s in charge and what terms are acceptable.
Your single point of contact should be the same person who manages the entire M&A process, i.e., your M&A advisor. Advisors don’t assume this central role because they’re control freaks.
It’s because they need to herd multiple buyers forward like cats to create a competitive bidding environment (or at least to create the perception of the same).
They can’t do that without knowing everything about each buyer’s purchasing rationale, priorities, and degree of interest. If they don’t know these things, they (or somebody else on the seller’s side) might give away something to a buyer for little or nothing in return.
Or they could divulge confidential details about the seller or the deal process. These and other untoward things happen when discussions between buyer and seller occur on multiple, separate fronts.
Quick war story: I once had a sellside client who secretly met with a buyer despite agreeing in writing not to do so. Whatever was said then didn’t go down well. The next day, the buyer (the only one around) called to say he was out.
Finally, It’s Not All Sellers’ Fault
That’s it — the top five ways business owners kill M&A deals.
But wait! Buyers blow up deals too, especially strategic buyers. They even have the unique opportunity to go wrong again after closing the deal. See what Dealroom and Investopedia say about that kind of unhappy ending.