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TOP 5 WAYS BUSINESS OWNERS KILL M&A DEALS

By Ryan Kuhn. A Harvard MBA, Ryan founded M&A advisor Kuhn Capital 35 years ago. Since then, the firm has sourced, prepared clients for, and closed hundreds of high-IP mid-market M&A transactions together worth more than $3 billion. This article was first published 5/8/23, revised 2/19/24.

Congrats. You’ve finally snared a buyer that checks all the boxes. Time to cash in? Not so fast. Many a seller has cratered the deal of a lifetime for one or more of these five reasons.

  • Didn’t commit the resources needed to prepare for and complete a sale;
  • Overvalued the business;
  • Mismanaged employees through the M&A transaction process;
  • Created an ineffective Mergers & Acquisitions project team (or no team at all);
  • Allowed more than one person to have unsupervised contact with buyers.

To avoid these top 5 ways business owners kill M&A deals, read on.

#5) Prepare Yourself

Pre-Marketing Prep

Call it pre-deal planning. I’ve published two articles on what you can do to fix deal-killing problems and strengthen your company’s value before going to market in search of an M&A transaction. One of them is about projects you can complete in less than six months: How to Increase Your Company’s Value: A Curb Appeal Checklist.

The other covers projects that take longer but deliver more: How to Increase Your Company’s Value: A Renovation Checklist.

Both articles uncover seemingly insignificant but potentially deadly traps. As one example, the buyer – a much wealthier business than the seller – finds during due diligence a long dormant legal threat against the seller. Was it deliberately hidden? Could it spring back to life after the new owner acquires its equity?

Embrace the Marathoner’s Mindset

The months-long M&A process demands commitment from both sellers and buyers but much more from sellers:

  • Buyers get to ask a lot more questions of sellers than vice versa.
  • Sellers typically have fewer resources with which to answer those questions.
  • At the same time, those who are selling a company must keep running their business as before or even better.
  • The result? For many entrepreneurs, the process of selling a company is the most demanding of their careers. Successful deals just demand time and effort. For ways to tell if you’re ready for that, see my When Is the Right Time to Sell Your Business?

Why is this commitment so important? Potential buyers lose momentum when you nonchalantly drift through agreed-upon deadlines. Lethargic, incomplete responses and lack of focus give off the vibe that you don’t care or worse, may have something to hide. A slow pace and ambiguity sow doubts that curb buyer enthusiasm.

Fortunately, experienced M&A advisors can lighten the seller’s load. For instance, before you go to market your advisor should have completed thorough “internal due diligence.” That way multiple buyers can quickly verify key claims 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 we actually hear that a lot. If you can’t back up your ask with facts, either lower it or focus on growing the business. Valuation numbers

Because of the importance of setting reasonable expectations, nearly the first thing we do with a prospective client is value the business. They need to get comfortable with that value range before we both spend months readying 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 businesses 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 willing to do this is another thing effective M&A advisors do. For a deeper dive into how valuations work, see my How to Value a Going Business and How to Value a Start-up.

Takeaway: know what your company is worth before entertaining buyers (but have them to 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 brain damage

#3) Maintain Morale

The Perils of Loose Lips

Rumors about a sales process underway makes everybody nervous – employees, suppliers, clients, lenders. Most of them are wild and wrong. But countering them demands time you don’t have and can force you into compromising denials.

Best wat to deal with water cooler whispers is to stop it before it starts by going deep undercover till the deal is done. Not that you’re skulking around, hatching conspiracies. Rather, you’re tight fisted about who knows what because you yourself aren’t sure about the final outcome.

After you’ve closed the deal, gather all employees together to break what’s usually good news. For instance, the buyer brings to the table new and bigger resources benefitting 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 whatever part of that is cash, can suffer. Big defections can even crater your deal altogether.

Your sales rainmakers are typically highly mobile but also not usually critical to carrying the M&A process forward. So unless some 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 integral to deal closing success. It’s not possible for you to handle all Mergers & Acquisitions project tasks on your own: you need specialists.

They are your M&A team members. For those who are management team employees, you’ve already got their confidentiality agreements in hand. Now you need to make sure they’re motivated to stick around and work overtime – golden handcuffs, goldengolden parachute parachutes, etc. All such plans are designed to discourage them from fleeing to less uncertain and demanding workplaces.

What Do Team Members Do?

Anticipate and produce due diligence responses, later choose which buyers show the most promise, then negotiate terms with the leading suitor.

Who’s on the Team?

Insiders and outsiders. Insiders are typically you as owner and/or CEO, and your CFO. Outsiders are a transaction attorney, M&A advisor who acts as team leader, and often a CPA.

Member Qualifications

For CFOs/CPAs

The CFO/CPA 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. Obviously critical as well are complete financial statements going back and forward three years.

As owner or CEO, you also need somebody to understand how the proposed deal might affect seller shareholders’ tax liabilities. That advice becomes relevant early on, before drafting the LOI. (See this article for the definition of LOI and other key lingo related to M&A and fund-raising).

BTW, a sure-fire way to kill a deal dead is for a team member to demand substantive changes in terms after you execute the LOI – aka, re-trading. The power of re-trades to blow up deals rises dramatically the nearer you approach the close.

For M&A Attorneys

That brings us to deal team attorneys. They must be well-experienced in closing M&A deals specifically. They’re very different from lawyers that handle day-to-day corporate affairs or the owner’s personal business.

We’ve seen well-meaning but newbie M&A lawyers who don’t understand that deal negotiations are a game of give-and-take. The goal is to trade something of lesser value for something of more value. They may insist on small unilateral gains that kill deals with a thousand duck bites, or provoke a buyer to demand something of more value in return. As the cliché goes, the M&A lawyer’s operation may be a success but their patient — your deal — died.

Local, mid-sized law firms are often the best source of capable M&A attorneys for mid-market deals:

  • They’re less pricey than their larger brethren;
  • They’re less likely to be distracted by larger, more lucrative clients. (We once had the seller’s deal counsel from a large firm turn over three times);
  • 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’s some ways they do that:

  • Based on experience, they can suggest ways to position your company for optimal buyer appeal.
  • Owners can’t personally test buyer interest without letting others know the company is considering a sale. An advisor can present your company anonymously until the time comes to reveal its identity 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 approach is it doesn’t tell them if they’ve passed up the best offer or it’s yet to come. Plus they get weary with deal fire drills.
    • Use an M&A advisor to create an auction-like environment where all buyers bid on a set schedule under competitive pressure.auction
  • 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 close. Rather, sellers need to be the good cop while advisors can afford to be bad cops. While  negotiations between advisor and buyer can get a bit chippy, the bad cop’s gone after 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 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 deviations from deal 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.

For more about the advisor’s role in sellside transactions, see my popular post What Do Investment Bankers Do to Sell a Company?

And learn what the differences are between investment bankers and brokers by reading Which to Use – Investment Banker or Business Broker?

#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’s the “camel’s nose under the tent.”
  • Multiple representatives when selling a company create confusion about who’s in charge.
  • Your single point of contact should be the same person who manages the entire M&A process. That’s your M&A advisor. Advisors don’t assume this central role because they’re control freaks.Team leader 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 same).They can’t do that without knowing everything about each buyer’s purchasing rationale, priorities and degree of interest. If they don’t, 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 deal process. These and other untoward things happen when discussions between buyer and seller occur on multiple, separate fronts.

Quick war story: we had a sellside client who secretly met with a buyer for dinner despite agreeing beforehand not to do so. Whatever was said that evening didn’t go down well. Next day, the buyer (the only one around) called to say he was out.

Finally, It’s Not All Sellers’ Fault

Well, that’s it — the top 5 ways business owners kill M&A deals. But wait! Buyers blow up deals too, we think more than sellers. See why in my sister article How Buyer Kill M&A Deals. (And unlike sellers, buyers also have the unique opportunity to go wrong again after the deal closes. We’ll talk how post-close train wrecks happen in an upcoming article. Meanwhile, see what Dealroom and Investopedia say about that kind of unhappy ending.)

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Ryan Kuhn

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02/19/24

“Ryan Kuhn is the founder of Kuhn Capital (bio). This article is not the product of AI. AI is a product of this article.