Going through a transaction alone is fraught with costly pitfalls and risks.
In today’s hot mergers and acquisitions (“M&A”) market, business owners are being approached directly with offers to sell their business. With a buyer in-hand, many owners charge ahead on their own without seeking the advice of experts. A common misconception is that M&A advisors simply exist to bring a buyer to the table. However, there are myriad pitfalls and unexpected costly hurdles during the selling process that could derail a successful exit without the counsel of an experienced advisor by your side.
To the surprise of many business owners, the M&A transaction process is lengthy and often takes anywhere from 6 to 12 months to successfully complete a sale. The process is also far more complex than expected where the old adage of “you don’t know what you don’t know” often causes many sellers to stumble. Unforeseen mistakes and mishaps during the process can quickly eat into the profits an owner expects to reap from their sale. This is why having an M&A advisor who has navigated the process many times already can pay for itself many times over thanks to cost and time savings on mistakes avoided. Here are the top ten reasons why it is highly recommended not to navigate the complex process of a merger or acquisition without professional advice.
- Private Markets Mean No Transparency
The market for privately-held, middle-market businesses is muddy. There is no centralized marketplace or stock exchange for mid-sized companies which means that any merger or acquisition is done “off-market”. The problem with that is a lack of market transparency for both the buyer and the seller when navigating a transaction. Very little public information is available to help you accurately determine the value of a business. Data that large companies use during the M&A process such as looking at comparable transactions concerning other companies in your industry does not exist. Purchase prices are rarely disclosed.
Also, the lack of access that business owners have to a pool of qualified buyers is significant, making it difficult for an owner to get the highest possible price for their company. Selling your business isn’t like real estate – you can’t throw a sign in the yard and let people know it is for sale. An M&A advisor has access to vast amounts of market data and a large competitive pool of buyers. This is how you maximize your exit price.
- Law of Supply and Demand
Owners who engage with an investor or acquirer that has contacted them directly are potentially leaving significant money on the table when selling. Market competition is what increases the value of an asset. When a buyer knows they are the only one at the table, they are going to try to pay the absolute least amount they can– and without access to data, business owners often fall into the trap of accepting that amount.
However, when there are several buyers at the table all competing for your attention, they know they must sharpen their pencil to win out in the end. It’s the age-old law of supply and demand – when demand is high and supply is low, prices go up.
Also, remember that there is more to a deal than just the price. It’s about finding the right buyer. What if the only buyer at the table is someone you don’t particularly like? This may not seem important, but M&A is like a marriage: you want it to last for the long-term even after you may leave. Your employees will thank you as well. Having more than one potential buyer in the process allows you to ensure it is the right fit.
An M&A advisor brings multiple buyers to the table, and they will help you vet the options to ensure you find the right partner at the highest possible price and at the best terms.
- Proactive vs Reactive
We all dream of a world where someone knocks on the front door of our personal home and offers us a huge bag of cash on the spot to buy the house. But, how often does that really happen? And if it did, what plans do you have to move? Where will you go? What will you do with that money? You’re reacting to a potentially too-good-to-be-true opportunity, but you’ve put no thought into what you do once you sell and must move out. This lack of preparedness will likely cause you to lose money in transition and wind up with a quality of life that is below your needs and expectations.
This is no different with your business. With investors and acquirers calling on businesses every day with exit opportunities, it is just like someone knocking on your door with that bag of cash. But the same logic applies – you have put no thought into what you need from a transaction, so how do you know this is the right one?
An M&A advisor has seen every possible outcome before. They work with you to determine what you want and need from a transaction. They evaluate what you need personally, both economically and in quality of life, and compare that to what the market can provide.
Also importantly an M&A advisor works with you to determine the growth potential and opportunities for the business. Investors and acquirers pay for future potential, so understanding where the business can go is paramount to maximizing price. When an acquirer calls on you, they are evaluating where you fit into their criteria. When you approach the market proactively, you are telling the market how you fit and why you are valuable – it changes the dialogue completely. You are in the driver’s seat and inviting acquirers to participate in the process, rather than reacting to their individual needs. This is how you drive up the overall price and get better terms – you are in the driver’s seat because you know what you want and need and why the business supports the exit outcome you desire.
- It’s an Emotional Process
Selling your life’s work is a very emotional process. You have spent many years building the business to where it is today, and an M&A transaction is a significant life change. There is a lot of emotion to manage with a change like this, and owners who try and negotiate for themselves are blinded by emotion far too often. As the owner of the business, you rarely can take an objective look at the business and its value to others in the market. You also become far more fatigued of the transaction process when all of the pressure is solely on your shoulders to get it done. The sheer volume of the meetings, administration, due diligence and legal issues fall to the feet of the owner when they are trying to do it themselves. It becomes too much and the deal falls apart.
An M&A advisor is your fierce advocate who brings the objectivity and support needed to successfully get a deal closed. They will negotiate on your behalf drawing on their vast experience to get the best deal possible. They also will support the functional closing of the transaction, relieving the pressure on the owner to do it all. This allows the owner to be more objective and drastically increases the certainty of closing.
- They have seen it all
As we have noted, there is far more to an M&A transaction than just the price. Many business owners are laser-focused on the sale price, but that is just the WHAT. The HOW is equally, if not more, important. How the deal will be closed, how the money gets paid out to you, how the business is run post-close, how liable you are for claims post-close, and so much more. The pitfalls during negotiation can be endless.
M&A advisors have seen many, many deals, and they can provide guidance on best practices and areas of negotiation to ensure the terms of the deal are in alignment with the price. There are very few owners who are well-versed in M&A terms and complexities, so going it alone means you are likely to make missteps along the way that could cost a lot just by virtue of inexperience. If you wouldn’t represent yourself in court, don’t do it at the M&A table either.
It takes an average of 1,000 hours to successfully close an M&A transaction. Can you walk away from your business for 1,000 hours?
As previously stated, the M&A process takes many months to complete, filled with countless hours of meetings, conference calls, and data gathering. Owners who try and do it alone find themselves overwhelmed by the amount of effort it takes to do it well. The day-to-day business often suffers due to this distraction, which negatively impacts the value of the business. There is no worse time to have the business perform poorly than in the months leading up to a sale.
There is also an art to managing the timeline of the process and the information that is shared throughout to ensure the valuation is preserved. Inadvertently saying something incorrectly or providing the wrong information can create a perception that there is an issue with the business, which means the buyer will decrease the value due to this perceived risk.
An M&A advisor will manage the entire process and take a significant burden off the owner by facilitating all the key activities of the transaction. This allows the owner to stay focused on running the business, and it mitigates risk of devaluation in diligence. This is where M&A advisors provide value beyond “just finding a buyer.“ Yes, the marketing of the business to buyers is an important component, but it is only about 50% of the overall effort. It’s one thing to find a buyer, it’s another to get the deal closed. M&A advisors provide leadership and support throughout all the key areas of a transaction from marketing, to negotiating, to due diligence, and contracting/closing.
Business owners are often well-networked within their industry, knowing many of the competitors and vendors in the sector. They, however, do not have a wide network of buyers ready to make acquisitions. So, if you did want to create a competitive process to sell your company on your own, who would you call?
M&A advisors have deep networks of many types of buyers that they can bring to the table for your business. These are pre-qualified buyers who are the most likely to deliver the outcome you need and want. M&A advisors invest significant time in cultivating these relationships and tracking their investment criteria, so they know exactly who is interested in what types of investments and which ones are good partners for a seller.
- Credibility and Information Imbalance
When a business owner who lacks the experience of an M&A professional sits down across the negotiating table from investors and acquirers who have vast knowledge and experience in executing deals, it creates an immediate disadvantage for the seller. It’s like a game of poker: you sit down at the table to play, you may have some base knowledge and experience with the game, but you are playing against someone who has won the world series of poker. You’re mismatched and will likely be outplayed simply due to lack of experience, and it will cost you.
To exacerbate the imbalance, lower-middle-market companies often do not have sophisticated financial and operational reporting, which makes it difficult for buyers to fully understand the business and assign value. This lack of transparency creates a credibility issue, as buyers cannot fully validate results without this information.
Hiring an M&A advisor clears up the ambiguity and levels the playing field. Sellers have an advocate negotiating on their behalf who is as experienced in deal-making, and they will package your information and ensure transparency to mitigate any credibility issues. Better negotiating and stronger information will drastically improve the overall valuation, as well as certainty of the deal closing.
- Due Diligence
The due diligence process is traditionally broken up into four key areas: quality-of-earnings (“QofE”), legal, Insurance/Risk, and Human Resources. Volumes of detailed information is required for buyers to evaluate to ensure that the asset they are purchasing is as they believe it to be. This process requires a tremendous amount of time and attention to detail, and it is nearly impossible for a business owner to facilitate it on their own. There is also an art in how information is presented, in addition to the science of the data being accurate and complete.
Remember that while you may be trying to go it alone during the sale process, your buyer is often utilizing top-tier firms to perform due diligence. This is another area of information and experience imbalance, so it is critical to have an advisor to help manage this process.
M&A advisors will facilitate the entire due diligence process and know how to deal with the diligence vendors. They will organize the data, provide the information, and answer questions that arise along the way. Issues found during due diligence are the number one reason deals are re-traded. You may receive a $20 million dollar offer, but if due diligence uncovers an issue in your financials, the buyer will ask to reduce the price down from $20 million to accommodate for the change that was discovered. Nobody likes to see their deal re-traded, so having someone manage the diligence process will mitigate the risk of re-trading.
Time kills all deals. M&A transactions that are solely managed by the owner take significantly longer to close than those managed through an advisor. That extra time introduces additional risk – a risk of re-trade or a risk that the deal will not close. It is important to manage the timing and cadence throughout the entire process.
When trying to lock in an offer, it is nearly impossible to manage the timing when there is only one buyer at the table. The buyer knows they can take their time, and they may even slow the process if they find other deals that take priority. When there are multiple buyers at the table, they all must adhere to a defined timeline to ensure they are competitive. The overall valuation is significantly impacted by the time it takes to generate an offer, and an M&A advisor is adept at managing this properly.
In due diligence, it is critical to manage the timeline as it is the last hurdle to jump to get the deal closed. When owners manage due diligence themselves, it traditionally takes them twice as long to complete as they aren’t prepared, and everything has to go through them, all while still running the day-to-day business. It’s not physically possible to handle due diligence and run the daily operations – there just aren’t enough hours in the days. This delay introduces the potential of the deal not closing because information wasn’t produced or wasn’t accurate. An M&A advisor will manage the data, provide responses quickly, and ensure that there are no issues preventing a close.
While these are the ten most common areas that we see sellers run into issues with when trying to navigate a merger or acquisition on their own, there are additional intricacies and nuances of any deal making process that are far too numerous to count. Transitioning your life’s work is not something you want to try and take on by yourself. It is long, complex, and emotionally taxing. Having an experienced team behind you ensures that you maximize value and achieve the outcome you desire. Think of it this way: you COULD do your own dental work, but you really should NOT. It is worth every penny to have an expert advise you and partner with you to ensure that you achieve everything you want out of a transaction.
Written by Dena Jalbert.
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