Avoiding Common Pitfalls of the Deal

Watch for areas that can impede your business sale and note which steps can help you achieve your objectives.

“Practice makes perfect” is a common saying we’ve all heard since youth. Whether tying our shoes, hitting the baseball, learning algebra or guiding M&A transactions, the saying is applicable. When selling a business, this “practice” can help an investment banker provide superior deal presentation, identify anticipated deal issues and increase overall interest in an opportunity, all of which creates a more efficient and effective process to drive a higher value.

After being involved in hundreds of transactions, albeit no two exactly alike, I’ve observed many business owners (and even some advisors) without the appropriate “practice” stumble on common pitfalls. Oftentimes this leads to undesirable situations or, worse, failed deals.

Missteps that can impede your business transaction

While there can be many mistakes made during an M&A transaction, the most common I’ve witnessed over my career include the following:

Focusing on the wrong number

While I always share with clients that there are hundreds of terms to negotiate and value is only one of them, albeit an important one, it typically becomes the sole focus of discussions, preparation and negotiations. If this is the case, it’s critical to narrow in on a net proceeds value versus the gross value of a transaction. The net proceeds number appropriately accounts for value based on capital and transaction structuring, purchase price allocation and tax structuring, and other balance sheet considerations such as working capital and retained assets/liabilities.

Limiting the sale process

The process through which a business is sold can impact the number of potential buyers, duration of any sale process and the overall value. Generally, having more options during the process means greater negotiating leverage and more favorable terms. That said, I see sellers regularly deciding to respond to a general solicitation or talk to only one party. While there are exceptions where this can produce exceptional results, it generally limits value and extends the process as you may work one-after-another with separate buyers until a deal is completed.

Pursuing off-the-mark buyers

Buyers come in many forms as they could be corporate, strategic private equity, financial private equity, family offices or individuals. Certain businesses are more appropriate for certain buyers; for example, financial private equity rarely considers businesses with material customer concentration. Additionally, since submitting a proposal for a business (such as an Indication of Interest or Letter of Intent) is as easy as putting some words on paper, knowing the credibility of buyers and quality of any proposal is critical to completing a transaction and prevents you from wasting time or experiencing a disruption during a sale process. Similarly, there is a growing number of fundless sponsor groups looking for acquisitions, and these groups and their transaction histories should be cautiously vetted because, with no funds of their own, they lack the same control and decision-making abilities as private equity groups with raised and dedicated capital.

Focusing on the small things

When going through a transaction and negotiating hundreds of terms, it’s easy to get competitive and caught up in the game of winning each and every negotiation. This amounts to a long and strenuous process. Rather, identify your overall transaction objectives and prioritize individual terms that are important to you, which could include your post-transaction employment obligations, whether the company stays independent or is consolidated, cash amount at closing, indemnification or escrow terms, among many others.

I’ll always remember a transaction from years ago that demonstrated this exact point. While all terms of the transaction were agreed to between the parties, one term—the non-compete duration—was not and both parties were digging in their heels…the buyer wanted five years and the seller wanted three years.

The deal was falling apart and I reminded the seller that this point of contention:

1. Could end a deal for which we successfully negotiated nearly every other term, and
2. This term was meaningless to them, because they had absolutely and unequivocally no interest in re-entering the market and they had limited reason to need future negotiating leverage as the purchase price was paid in all cash.

In this example, the sellers agreed to the five years, the transaction closed and the sellers have never looked back.

Using the wrong advisor

Many deals fail when there aren’t experienced advisors on both sides of the transaction. There’s a unique set of skills and knowledge required to effectively negotiate and navigate through a transaction, and, unfortunately, many advisors underestimate these requirements and attempt to advise clients through their transactions. The end result is oftentimes a disservice to their clients.

In fact, in my years transacting companies, if an inexperienced investment banker, financial advisor or other general advisor was representing the other side, while there are always exceptions, the transaction was oftentimes going to have a lower probability of closing. Likewise, we see equal challenges when attorneys without notable M&A experience are involved in transactions. And, considering transactions are difficult enough, the further challenge of not having the right advisor can make it nearly impossible.

Steps to a successful business sale

So, when considering a sale of your business and path through which you hope to achieve your objectives, make sure to avoid these common pitfalls. Instead, focus on:

• Net proceeds based on a structure that is most tax-efficient for you
• A process that maximizes your options and negotiating leverage while minimizing confidentiality risk
• Buyers that match your objectives
• The critical and priority negotiable terms
• Choosing a trusted investment banker with specific M&A experience relative to your transaction and enough “practice” to make your transaction perfect

For more information or to better understand your options related to selling your business, please contact Corey Vanderpoel, managing director and owner, at cv@taureaugroup.com or any member of the Taureau Group team at 414-465-5555.