Mergers & Aquisitions

What can make a Transaction Unsuccessful?

Just like anything else in life, hard work, experience and persistence will help you achieve success. While we have all of these things in spades, there are things to watch out for that can cause disruptions to an M&A process. While there are many, here are 5 examples:

Financial Statement Issues

• The first thing that a buyer reviews when gaining an interest in a business are the company’s historical financials and forward-looking projections. The historical financials provide a plethora of information on a company, including trending, profitability, growth, debt reliance, and so much more. When the financials are a mess and things like Cost of Goods Sold are not properly measured, or balance sheets are not kept up to date … transactions can be delayed, renegotiated and potentially killed. It is important that prior to going to market, all financial statements are market ready – and we assure this with all clients we take on to reduce the risk of this popping up.
• Believe it or not, the personality of a seller has a tremendous impact on both the valuation of the business as well as the likelihood of a closing. While probably not all that surprising since most business owners are A-type personalities, some business owners get nervous through the process, which causes stress reactions and abnormal conduct. Sometimes this can be extremely off-putting to a buyer, especially if there is a level of disrespect or animosity by a buyer, whether intended or not. We have seen this impact both valuation and the salability of a company in many different ways, so we work with our clients to reduce stress and ensure that if we see personality issues through the process, we openly discuss them so the owner understands there is an issue. 9 times out of 10 this fixes the problem … but then of course there are hard cases out there, and for those that we can’t through to … that is a sure fire way to kill a deal.
• Over-lawyering. Have you ever heard the phrase, “Attorneys kill deals”? It can be true if an attorney with no background in M&A is allowed into a deal, and allowed to an unfettered approach to redlining every page they see in deal documents. Some of this we can help manage, but really it is on a business owner to ensure he/she is using only attorneys that have deal making experience, solid reviews, and understand the particular business that is being sold. Our brokers help here to by constantly providing input on what is “market” or “normal” and what is not. While an attorney is there to protect the business owner in the transaction, the more hours that are billed, the better off they are … so we recommend never working with an attorney on an hourly basis – only on an agreed upon flat fee. This helps reduce over-lawyering as there is no benefit to the attorney in spending more time than is necessary to protect the client.
• Issues pop up in Due Diligence. Our firm tries to mitigate and create narratives around issues that might be present in a company (skeletons in the closet). But if those issues aren’t brought to the attention of the broker so that they can be managed with buyers before the disclosure of documents in due diligence, it can cause issues that may lead to a buyer walking away. Being up front and transparent about issues material to a company’s ongoing operations is important. For instance, if a demand letter was sent from an attorney and the issue hasn’t been resolved, this should be discussed up front so that the buyer can get comfortable with it before spending money in diligence. This up front discussion and honesty also builds trust with a buyer, something important in order for a deal to close.
• A transaction is all about negotiation and transparency. Sometimes a buyer agrees to an enterprise value in a company and lenders/investors that they are speaking with disagree with the valuation. So while the buyer can raise a certain level of capital, perhaps they will be short. If a seller sticks his head in the sand and refuses to budge on the original offer, then the deal will likely break. And these kinds of things do happen, so when they do, it is important to work with the broker who has experience with capital raise issues and to remain flexible. A deal can be worked out that get you to the same place you were going to be in before … it might just take a little more time. Being inflexible will also spook those investors that have agreed on some level of financing, especially if the owner is remaining with the business and/or retaining equity.

What is the Timeline for my Deal to Close?

1. Preparation and Planning

   This stage of the process and the length of time it takes is really up to you. We work very quickly to get you to market, but if your financials need to be amended or you’re in the middle of high season, it might take more time than usual. In general, from the day we meet you until we go live at market should not take more than 2 weeks. During this time, we create all of the marketing collateral, create an initial data room with the information we have gathered from you, and we prepare the teasers for the various marketplaces.

2. Buyer/Seller Calls

   You can expect this stage of the process to take from 2-4 weeks, depending on how aggressive we went to market. And if we’re overly aggressive, this may take longer. During this stage of the M&A process, you will be interacting with highly vetted buyers (usually over a video call), gathering initial data the buyers need to generate their own opinion of valuation, and receiving offers. Generally, our guidance is to focus on one offer at a time and use the other offers as leverage to ensure you get the best deal structure that you’re happy with in an LOI.

3. Letter of Intent / Offers

   The offer stage is generally 1-2 weeks, depending on how many offers were received. We’ve had over 20 offers on some transactions, others just 1 or 2. Once we have decided on the buyer we like best, we negotiate the very best deal possible. And if there’s agreement, we sign the offer and begin the due diligence stage. The team will negotiate business points in the offer that will make the process of purchase agreement negotiation must easier once we get to the legal stage.

4. Due Diligence (Financial & Operational)

   This stage can take from 2-4 weeks for some buyers to 4-8 weeks for others. The difference lies in the deal size and whether a capital raise is necessary. During this stage, the financials of the company are scrutinized by both ownership and their lending/equity partners. The buyer will also dive in deeper to gain a better understanding of the operations of the company. But during this stage, if capital has to be raised, then there can be a wide disparity of time between signing the LOI and getting a bank term sheet or financial commitment.
   For smaller deals that are going through a bank process (under $5M), generally the lending side takes 30-45 days to underwrite the deal, provide a 3^rd party valuation and issue a commitment letter. Small deals that don’t require financing may get through this stage in as soon as 2 weeks.
   For larger deals that require financing, either via a private equity group that acts as a sponsor to the deal, or a family office that uses a lending partner, each buyer will have their own timeline and can share past experiences raising capital – this will be taken into account initially when we determine which buyer is the best fit for your business, and most likely to close.
   For larger deals where funds are on the buyer’s balance sheet, this process can take 30-45 days since they don’t require a 3^rd party approval for financing. Larger deals also typically require a Quality of Earnings Report, which takes 2-3 weeks and is necessary for proving the financials of the company, and a requirement by lenders/investors of the buyer.

5. Legal Due Diligence & Purchase Documents

   Generally, attorneys are not hired by the parties until the deal has passed financial muster, no issues popped up in due diligence, and if capital is being raised, that a commitment has been issued. At this point, it makes sense to invest in attorneys to help with the legal aspects of due diligence and to negotiate and draft the deal documents. This process generally takes up to 30 days depending on the level of “redlining” and negotiation the parties undertake in the process. The larger the deal, the more likely that this part of the process runs at least 30 days.

6.  Closing

   One due diligence is satisfied and all deal documents are agreed upon, it is time to close. Closings generally occur at the time of signing, but there are times when we sign and then close a few days or weeks later. However, most deals close on the day documents are signed. You will receive the funds delivered into your account and can pop champaign knowing that you’ve achieved the ultimate goal in business ownership – building wealth through the buying and selling process.