There is no question that the M&A marketplace has seen some impressive activity over the past few years. Theoretically, this should create a positive environment for all people looking to execute an M&A transaction, so why do some deals fall apart? In spite of these favorable conditions, there are groups that can’t seem to get a deal done. In many cases, it is due to people who care more about “winning” rather than consummating a transaction. Within this article, we examine how to engage in industry standard business practices that can improve the likelihood of transaction success while still getting the most for both buyer and seller.
When a stock market investor divests 100 shares of stock each worth $10, he or she would go forward with a sale for $1,000 without question because that is what the market has deemed fair and acceptable. There are constant sources of information readily available to validate transaction norms and fair market value. This dynamic can change when it concerns private, entrepreneurial-based M&A transactions. There is certainly more of an emotional charge to consider when a person is selling their own business rather than share of Microsoft. However, the fact doesn’t change that a very established market still ultimately dictates the pricing and terms deemed most accurate given the quality of the assets and the current industry climate. Yet, regardless of this reality, some buyers and sellers fail to position themselves to execute a transaction because they feel the need to win at someone else’s expense.
We truly appreciate the spirit of entrepreneurship and understand the competitive nature inherent to business owners, so we are not suggesting that a party shouldn’t seek to obtain the best deal possible. That is what we are engaged by our clients to do. However, we believe it is important to realize and accept the fact that the majority of successful transactions happen in market-bandwidth terms, and the marketplace is well-informed.
First and foremost, it is crucial to understand market valuation parameters. The most frequent source of transaction failure is due to a lack of realistic understanding regarding transaction value versus transaction multiples. Some of this is the sincere result of misinformation in the market that sellers and buyers are relying upon. Every day we encounter parties that are hearing about transaction values that are just plain wrong. This provides the basis of a faulty valuation perception that is hard to overcome. However, in some cases, parties deliberately want to incorrectly apply unrelated attributes or circumstances to their own situation, whether that is comparing different brands, geographies, growth potential or otherwise. We have had more than one industry participant try to justify why their franchise business should trade at the same valuation multiple as their publicly traded franchisor.
Then there are those clients that just want an “off-market” transaction. While these deals do happen occasionally, they are by no means the norm. If this is the only kind of transaction you are interested in participating in, it is imperative that you communicate this early and openly; the market will take you more seriously if you concede the position that you are only interested in an opportunistic valuation. However, it is also necessary to recognize that even opportunistic valuations must be based in legitimate market realities. Parties that want to buy at a 4.0x multiple, but sell at 8.0x need to realize that although this situation is entirely appealing, it is also completely impractical. Not only will chasing after such outlandish valuations never result in transactional success, it will also do you a reputational disservice. Again, the marketplace is well-informed and it does not overlook or accept nonsensical valuations.
The second greatest source of failure is due to the lack of understanding of fairly accepted, commercial purchase agreement terms and standards. Successful buyers and sellers engage knowledgeable M&A advisors and attorneys to help them through this part of the process. Others attempt to “go it alone” or engage a familiar attorney used for general business activities versus one that specializes in transaction work. Failing to use credible advisors in an M&A process will not only cost you time, it will almost certainly cost you treasure and potentially the deal itself. These advisors use a relatively standardized set of documents to provide consistency and reduce the recurring need to over-negotiate each transaction from the ground up, while simultaneously helping to eliminate some unnecessary brain damage and stress. At this stage in any transaction, deal fatigue can set in and degrade the likelihood of closure. One method we have experienced success with is when participants opt to bypass the LOI stage and go straight into APA negotiations. By investing a little money up front, firms can utilize market-based agreements that serve as a solid jumping off point for deal discussions and specific transaction tailoring.
Another area worthy of discussion is certainty and speed of closure versus collecting every last dollar off the bargaining table. Transactions involve many types of trade-offs. We ask many of our clients to put together a list of objectives and rank them by priority before launching a process, often reminding them and ourselves to revisit that list during the challenging days and weeks in the transaction marathon. You may seek to maximize price which inherently decreases the interested audience and increases your counter-party risk once you go under exclusivity. Alternately, you may opt to solve for certainty of closure or retention of key personnel, in which case buyer selection and prior transaction track record must be weighed with great importance. It is critical to keep your specific priorities top of mind. Achieving what is most meaningful to you is the correct measure of success.
Finally, it is important to keep in mind how you are being perceived by others. Trust us when we say the last thing that you want to do is give yourself a reputation as being difficult to work with. Not only can this make people reluctant to work with you, it can also severely impact your chances of being considered as a viable buyer or seller. Parties who develop a bad reputation will ultimately miss out on opportunities because fair dealers will choose to avoid them altogether, opting to work with people who share the desire to do business in a productive manner.
Overall, a "good for the goose, good for the gander" approach helps buyers, sellers, advisors, and everyone else involved in the process because it is both more efficient and cuts down the time spent negotiating deal terms. While it is true that this approach might not automatically resonate with a long-time owner who is selling their life’s work to retire, it is important to remain as objective as possible. Remember that unnecessary negotiation affects goodwill between parties, creating a challenging climate in which to resolve the truly important issues. Taking impractical positions makes it more difficult for your advisors and attorneys to do their jobs successfully, especially if they are put into a position where they have to support unrealistic terms. Doing so can also cause a loss of credibility in the eyes of the other party, not to mention the increase in the amount of legal costs that will be incurred by both sides. How you engage in a transaction and how your approach evolves over its course will directly shape your potential for success. Following industry norms and well-defined best practices may seem overly conventional to some, but we have demonstrated that an approach of fair dealing actually results in better execution as well as happier clients.