Critical M&A Questions All Owners Need to Ask: Part 2

Part 2: Seller’s Valid Concerns and Common Misconceptions in an M&A Transaction

In the initial blog in our series covering Critical M&A Questions All Owners Need to Ask, we looked at the most important question every owner needs to ask themselves – What Matters Most to Me? There are many factors beyond price that matter to you, and the way you run a sale process should be designed to achieve your most important objectives. This can be more difficult than it sounds.

Unless one has gone through an M&A transaction before, it is almost impossible to understand the complexities of properly structuring, negotiating, and facilitating a successful business sale. No two M&A transactions are the same, but many of the valid concerns you have are shared by all owners who have been through a sale process. Businesses get sold every day, and everyone finds a way to deal with all of these concerns. There are tried-and-true approaches to getting through circumstances that may seem problematic or impossible – you just need to avoid common misconceptions and tailor a strategic approach with your advisory team.

Some misconceptions can prevent you from executing the most important transaction of your life in a manner that will accomplish your goals. You have worked way too hard and long in building a successful business to transition away from that role without setting yourself up to achieve the best possible outcome for your needs, your people, and your legacy.

Below are just some of the thoughts, questions, concerns, and rationales we hear owners wrestling with every day that can lead to mistakes, leave significant value on the table, or even prevent your company from being saleable at all. Make sure you understand the misconceptions to avoid mistakes that can prevent you from achieving your optimal outcome:

  • Why do I need an advisor? There are many reasons to hire an experienced M&A advisor, but the most important ones are:
    • To level the playing field with buyers by accessing an advisor’s breadth of experience accumulated throughout many closed transactions.
    • To create a competitive process that generates more and stronger bids.
    • To have a third-party basis to support a high valuation.
    • To navigate through the long and challenging due diligence process, and to move it along as quickly as possible.
    • To maximize the likelihood that your transaction closes successfully and on favorable terms for the seller.

Your advisor can create a competitive process that results in a range of qualified bids, and often the highest ones will be double the lowest. Different buyers will come with very different value propositions and investment rationales. A good M&A advisor will identify these and be able to articulate the value proposition to each, so you can narrow focus on only the most attractive proposals. Always remember that no buyer wants to pay any more than they have to – they will use any tactics possible to pay as little as they can. Your experienced M&A advisor will run a process that forces seriously interested buyers to put the best foot forward.

Another way to think about this:  People who make a living buying and selling companies – successful private equity investors – know exactly how to achieve the best results. They “buy low and sell high.” The simplest way they do this is to identify sellers not represented by advisors when acquiring a company, enabling them to pay less money and negotiate buyer-favorable terms. When they sell a company that they own, they do the opposite – hire an investment banker to run a competitive process so they are sure to get a higher price and seller-favorable terms.

  • Advisors are way too expensive. Hiring good advisory help may seem expensive up front, but it can be nowhere near as costly as not having experienced negotiators on the back end. Good M&A advice and transaction execution pays for itself many times over. Selling a company is like nothing else most owners have experienced before, whereas sophisticated buyers have gone through the process numerous times. You need to match their expertise and create competitive leverage to force them to put their best foot forward, arrive at fair terms, and move on your timetable.
  • I know who the buyer is going to be, or I already have an “offer”. Owners are surprised to find that buyers who have been knocking on their doors or chasing them for years are almost never the ones who offer the best price and terms. The oldest trick in the M&A book is proactively showing lots of “interest” or floating an unsolicited offer. Beware – this is a tactic! Buyers will work very hard in the absence of a strong competitive process to convince you that their offer is fair, or even worse, to get you to let them access all your information and afterward provide reasons why the terms in their initial offer need to be changed or structured in a less favorable way. No offer is worth anything to you unless the buyer has received enough information – the good, the bad and even the ugly – for you to be confident that the offer incorporates all those issues to close on the agreed upon terms. An advisor will put you one step ahead of buyers – if a buyer really is interested in paying a fair price for your company, the competitive process will make them do so.
  • I know what my business is worth. Too many owners have not taken the time to understand how their company will be valued by buyers, and often set their goals based on what they want or feel they need rather than on realistic market information. Valuations should not be mysterious – the factors assessed by buyers are always the same: repeatable cash flow and risks to that cash flow. To be clear, this is not necessarily the cash flow you generate – it is the cash flow the buyer believes your company can reliably and repeatedly generate for them going forward. This is why savings and synergies cause some buyers to value the same business at completely different levels than others. No buyer wants to pay a seller any more than they have to – but an investment banker can help you understand how different buyers will calculate their assumptions and push each of them to bid as aggressively as possible.
  • My company is prepared, I can get my business sold quickly. Every owner thinks their “numbers are clean” or they “have no issues.” Even though that may be true in your day-to-day ongoing operations, selling a business to a third party that will be geared to suspect significant issues and risks until proven otherwise by detailed diligence, is an exercise like nothing an owner has previously experienced. Buyers will have armies of consultants scrubbing over everything – accounting, taxes, environmental and regulatory concerns, human resources, benefits, insurance, intellectual property, etc. If you don’t have your ducks in a row and haven’t anticipated as many of these data requests as possible, you are asking for months of time in culminating and analyzing all the information a buyer and their financing sources require. And nothing ever gets better as time goes by – an old adage in the M&A business is, “Time kills deals”. Don’t let it kill yours, no one ever gets a deal done and wishes they had done less preparation.
  • I don’t want anyone to know my business is for sale, I will do this without outside involvement. This is a critical point – you will not be able to sell your company by yourself. Confidentiality is of course a primary concern of every owner, and rightfully so. But you will need the help and buy-in of key people in your organization. On one hand, there is way more detailed information to compile and present than one person can process. But even more importantly, before a buyer will cut a check, they need to meet the key people in your organization who will help them grow the business after you have left the company. Buyers will also likely expect to speak to key customers or suppliers prior to closing the transaction. While potentially scary, the answers to many of these challenges becomes more obvious if you put the shoe on the other foot and ask yourself, “If I was writing a big check to buy a company, would I want to know that information?” The answer is, “of course!” Anything a buyer expects or needs to know that they can’t readily access without pushback will increase the likelihood of a successful deal. Any sticking points that increase potential risk from their vantage will result in one of two things: a significantly reduced price and disadvantageous structure/terms, or the chance of them walking away entirely. There is a right way and timetable to handle these things with the highest level of sensitivity and confidentiality – your advisor plays a key role in managing the process.
  • I won’t approach competitors; they will poach my employees and customers! On the surface, all owners fear this. But the reality is that serious potential buyers, who have made acquisitions before and hope to do so in the future, take their non-disclosure and confidentiality obligations seriously. Information like this is typically restricted only to top executives or within a specific M&A department until there may be a need to include others – after you have decided that party’s offer is the one you wish to pursue. It may be prudent to avoid contacting parties who are inexperienced in M&A transactions, as well as those you suspect may not have the resources to complete a transaction of the size you anticipate. However, failing to include logical and sophisticated buyers who are active in your sector or industry and may gain particular savings and synergies from your business, will potentially prevent you from seeing the highest offers. Not considering all qualified and active buyers will likely leave significant value on the table. The offer you decide to pursue is always up to you, so you should try to attract all offers from all likely suitors, so you can select the path that best fits your objectives.
  • My company is different. The most common resistance to all of the points above is, “But my company/industry is different!” While every company brings a unique set of factors and every owner will have specific goals for an M&A transaction, almost all of the concerns above are common across all owners considering a sale, regardless of industry or competitive landscape. How you feel about competitors, existing “offers”, fears about word leaking out, or concerns about cost and timing—every potential business sale benefits from extensive preparation and due diligence, followed by a deliberate competitive sale process managed by an experienced investment banker. Doing the work and spending time and money up front almost always amounts to significantly higher offers, more favorable terms, and more net proceeds in your pocket on the back end.

As a business owner with years and sometimes even generations of sweat equity in your company, your concerns and expectations for a potential sale are valid. It shouldn’t cost you anything to voice your concerns to potential advisors and get clear, experience-based answers that leave you feeling more confident. Good advisors will provide this advice without cost as part of the process to get to know you and convince you they are the right people for you to work with. The relationship with your team through an M&A transaction should be built on trust, open communication, and collaborative strategic thinking specifically designed around your most important objectives. A successful M&A outcome should not be a mystery. Take advantage of the lessons those before you have learned, and avoid the mistakes that most commonly prevent sellers from achieving the outcome they desire.

Be on the lookout for future parts in this series over the coming weeks:

  • Part 3: Questions you should always ask Investment Bankers
  • Part 4: Questions you should always ask Law Firms
  • Part 5: Questions you should always ask CPAs/Accounting Firms
  • Part 6: Questions you should always ask Wealth Advisors

To download a PDF of this blog click here.

Previously published parts in this series: Part 1: What Matters Most to Me?