For more than six months I worked closely with a client on the acquisition of a mid-market business. Like most deals, it was a roller coaster ride with gut-wrenching twists and turns throughout the process. Although the initially agreed upon purchase price did not change from the LOI, the details of the deal were altered many times before closing the transaction.
(Read more in So You Received a Letter of Intent, Now What?)
These obstacles in the deal process took a toll on all involved; the aging vendor, the ambitious buyer, the lawyers and the bankers providing financing for the transaction. Even I was exhausted at the end of it all. I have seen these ups and downs many times before, so even when others thought the deal was dead, I knew it wasn't — it had issues, but not insurmountable ones. That didn't stop me from thinking that there has to be a better way to smoothly navigate all the potential landmines that come with selling a business.
After reflecting on how the transaction finally played out, I came to the conclusion that there is no way to map out all of the steps needed to close an M&A deal. Every deal has its own unique challenges that need to be addressed. Plus, emotions and personalities play a huge role, and they aren't something you can predict or plan for at all. That said, I have noticed three consistent principles that are always present when a deal closes successfully.
#1 Build Trust
In this deal I helped broker. Both sides wanted to negotiate a hard but fair deal and, ultimately, each party trusted the other. I believe this trust was built on the fact that we never tried to grind down the purchase price after it was agreed to in the LOI. We preformed a sufficient amount of due diligence prior to our offer and my client and I were comfortable with the enterprise value that was offered for the business. The structure of the deal changed slightly to mitigate risk areas found during the diligence process, but, overall, the price of the deal did not.
There are many instances of buyers using a bait-and-switch tactic where a high offer is made to gain exclusivity, only to be reduced when issues are uncovered in due diligence. My guess is that the success rate of such deals is low. These tactics damage trust. Lack of trust also significantly increases time to close, not to mention cost, thanks to the added documentation required in the purchase and sale agreement so that no issue is left to interpretation.
I encouraged my client to build a relationship directly with the seller. Many times throughout the course of the sales process, the buyer and seller met for a beer without any advisors by their side. Their families even gathered for a dinner to see if this was the right fit. Now I know this won't be the right approach for every deal, but liking the person on the other side of the negotiating table is an important part of getting the deal done.
At the end of the day, my simple advice for all my clients is: If you don't trust the other side, don't do the deal.
Good communication is another key to closing a deal, so it's important to identify the potential "deal killing" issues and tackle them head on. Every deal has two or three areas that are hot-button issues for the vendor and the purchaser. If you want to close the deal, find out what these issues are early in the process.
My strategy around discovering these deal breakers is simple: Ask. Also, be sure to divulge the issues that could stop a deal from your client's perspective to the other party in the transaction. When the deal-killing issues came up, I assembled all the decision-makers in a room to figure out a solution. From my experience, deals tend to go sideways when it's only advisors (lawyers, investment bankers, business brokers, etc.) talking to advisors. In these cases, communication can become a game of telephone, and wires can quickly get crossed.
In my opinion, the role of the M&A professional is to provide advice and guidance on negotiating the transaction. When an impasse arises, the advisor should mind his or her own deal-making experience to determine what is fair or unfair and then communicate that to their clients. Of course, whether or not to accept the advisor's advice is ultimately the responsibility of the individuals writing and receiving the check.
#3 Negotiating Risk Transfer
Negotiation should not be about winning, but about getting a result that you want (i.e. selling or buying a business for a reasonable price) while taking on a tolerable amount of risk. Deals that close successfully have buyers and sellers who recognize that both sides of the transaction must accept a certain amount of risk.
Buyers must be willing to accept standard business risk. Clients could leave, a competitor could eat your lunch and employees could walk out the door. That's the joy of being a business owner. If you are looking for a perfect business without these risks, feel free to keep looking. I highly doubt you'll find it.
Sellers, on the other hand, need to realize that just because they're exiting the business does not absolve them from all risks and liabilities associated with that business going forward. They are being paid a large sum of money for handing off a business that can generate a certain level of future cash flow. As business owners, they must recognize that mechanisms like vendor financing, earnouts and reps and warranties are reasonable requests from a buyer to mitigate the risk of future cash flows being different than what was represented.
A Word to Advisors
The odds of successfully closing M&A deals are daunting, to say the least. I have found that focusing on these three core tenets helps improve those odds. That said, it's often a roller coaster ride for everyone involved, even at the best of times. If you know that going in — and if M&A professionals educate their clients about what to expect — it might go just a little bit more smoothly.