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What are the potential deal breakers?
Here are four key M&A deal breakers, and what business owners can do to help prevent them when they choose to exit their company.
1) Accurate, Honest Documentation – First and foremost, it is essential to get your numbers in order. The level of documentation buyers expects when they acquire a company is unfathomable to anyone who hasn’t been through the process before, and it needs to be accurate and honest.
Innocent mistakes can be forgiven – deliberately misrepresenting your figures is more likely to cause an irredeemable breakdown in trust. While the temptation to alter or overstate numbers to hide any flaws and push up the company’s value can be strong, in our experience honesty is the best policy. With the thoroughness most professional buyers apply to due diligence, the odds of sneaking in erroneous information are slim.
Presenting the company as it is to buyers, with explanations prepared for areas that could be considered concerning, is far more likely to build trust and keep negotiations going. The need to have accurate documentation is also a very good reason to hire an Mergers & Acquisition (M&A) Advisor to assist you.
2) Seller’s Remorse – Selling a business can be an emotional experience, as it represents the end of a chapter in an owner’s life. Not handling that emotion has been the cause of many deals not closing, as sellers realize that they aren’t quite as ready to make the next step as they first thought. While everybody has a right to change their mind, this could cost the business owner substantial time and money in negotiations and give a bad reputation when they are ready to sell. These questions should be answered long before the business owner starts the sale process:
– Why do they want to sell?
– Have they discussed the reasons with their family?
– Do they have plans for life after business?
– Are they ready to see their company in the hands of someone else?
3) Poor Deal Structure – Often, the deal structure and schedule for acquiring a company isn’t as straightforward cash deal. With M&A deal structures like earn-out agreements and others now commonplace, there is potential for negotiations to fail if one side wants an immediate cash payment while the other supports a more gradual, contingent payment structure.
We recommend as simple a deal structure as possible. Cash is king in the M&A industry, and this helps to ensure that both sides of the agreement understand its terms and can move onto their respective next steps. However, with so many approaches to structuring mergers and acquisitions today, it is unwise to be completely rigid in your approach to negotiations. If you can keep it simple, that’s greatly preferred, but both buyers and sellers should stay flexible in options, while strong enough to push the approach they prefer.
4) No Professional Advice – Finally, a major reason why M&A negotiations break down is a lack of professional advice. Most business owners will only exit a company once in their life, and therefore will be unfamiliar with how the M&A journey works. While they may be shrewd negotiators in their own industry, this often represents a very different environment.
There’s no hard-and-fast answer to avoiding this potential deal breaker, but it’s recommended to have an experienced advisor to assist in getting the business ready for a sale, and at the negotiation table. Most of these circumstances can be avoided with the right team and expertise surrounding you, so make sure you contact Management Advisors like B2B CFO to help you navigate the most challenging aspects of the overall exit process.
This article was inspired by Dr. John Binkley’s August 15, 2018 article, “How to Prevent Critical M&A Deal Breakers.”