Deceptive Simplicity
A prevalent misconception among business owners is the belief that there is an "easy" path to the sale of their company. This notion is reinforced every time the owner receives unsolicited interest in acquiring the company from either its competitors, strategic industry players, or private equity firms – a regular occurrence for successful business owners. As an investment bank specializing in sell-side M&A representation for the lower middle market, Eight Quarter Advisors (EQA) sees this dynamic play out frequently. Owners believe an acquisition by a buyer that first initiated the relationship, especially a buyer that appears to be knowledgeable of their industry and potentially a good strategic fit, will simplify the transaction process. A few common themes that dispel this myth:
Perceived Knowledge and Strategic Alignment: When a buyer has knowledge of the industry and the owner’s business, an owner can develop a false confidence that a transaction will be a relatively smooth and pain free exercise. They might think that there won’t be a need for much due diligence and little will be asked of the owner, both before and after closing. Creating this perception is the buyer’s goal and why they contacted the owner in the first place.
Existing Relationships: A relationship developed between the company owner and a buyer, potentially from years of buyer outreach and communication, can foster a sense of trust and ease. Buyers will try to get an owner to believe that the buyer is operating in the best interest of both parties and the term “win-win” will be a common refrain.
Attractive Initial Offers: Buyers will be quick to present offers that seem enticing, reasonable, and straight forward to the owner. These offers will be light on detail and structure and will be submitted based on very limited information. The buyer’s intent is to make an owner believe that he should proceed down the sale process without any professional representation and without executing a structured M&A process to explore the entire market of potential buyers.
Intentional Deal Fatigue: After initial agreement from the owner as to the terms of the proposed deal, buyers will move very slowly through the diligence process, continuing to make small information requests piece by piece so as not to overwhelm the owner. This might seem to be a good thing, but the buyer will leverage this drawn-out, months-long timeline and extended due diligence effort to get the owner ever more mentally and emotionally invested in getting the deal done. Eventually, the owner will get to a point that it becomes difficult to even consider backing out because of how much time and effort has already been spent in the deal process. This “deal fatigue” was the buyer’s goal all along and it’s when the real negotiations begin, wearing down the owner to transform the terms of the initial offer into the least beneficial deal that the owner will begrudgingly accept. At this point, the owner has limited options. He can walk away from the deal that he has worked on for months, becoming emotionally and psychologically invested in, or he can agree to the now much degraded terms offered by the buyer.
The Complex Nature of M&A Transactions
In this complex interplay, the M&A advisor's role is critical. As a mediator, the advisor ensures that the process remains disciplined and time-bound, factors which are paramount in keeping buyer interest at a maximum. Furthermore, by creating an environment where bidders believe that their participation is one of several interested parties, even when that might not actually be the case, the advisor subtly but effectively enhances the competitive atmosphere.
Broadening the Horizon: The Importance of Exploring the Market
Selecting a buyer prematurely, without engaging an experienced deal advisor, and without exploring the broader market of potential buyers, will substantially reduce an owner’s options and leverage in a sale of their business. Presenting the opportunity to acquire the business to a healthy spectrum of qualified buyers allows the owner to engage with numerous buyers with different strengths, visions, and strategies, and then leverage a competitive process between those buyers to maximize the transaction outcome. What might be a sticking point with one buyer could be a non-issue, or even a point of leverage, with another buyer. This organized transaction methodology ensures the owner is engaging with the parties that best align with their goals and provides the high ground from which they can negotiate the most favorable deal terms before making a buyer selection.
Leveraging the Auction Process
A competitive auction process, inclusive of all the best potential buyers, is the ONLY way to ensure an owner maximizes the outcome for themselves, their employees, and the business. The auction process creates a dynamic where buyers are driven by enthusiasm for the value the acquisition will add to their organization in conjunction with the fear of possibly losing the opportunity to one of their competitors. This is the dynamic necessary to compel buyers to offer the very highest and best terms they are capable of, and it is the exact opposite of the dynamic that exists when a buyer knows they are the only one in deal negotiations with the owner.
Preparation is Key
Deals are fraught with risk – some you can’t control, but most you can. A professionally run M&A process substantially mitigates risk before going to market with extensive preparation through detailed analysis of the business, creation of comprehensive and compelling marketing materials, an exhaustive exploration of the buyer market, and preemptive legal and accounting due diligence. This ensures buyers make informed offers and won’t be able to leverage the due diligence process to justify renegotiating the terms of the deal in their favor.
Conclusion
While the allure of a straightforward, single-buyer transaction is understandable, it's crucial to recognize the complexities and potential pitfalls of this approach. The M&A process, by its nature, demands careful navigation, where broader market exposure and a competitive auction can make a significant positive impact on the ultimate outcome for a business owner. It's imperative for owners to look beyond the initial ease and simplicity of an unsolicited offer and focus instead on the profound benefits of a well-executed sale process.