M&A Lies

By Maurie Cashman

Last week we began a discussion about the M&A lies that buyers and sellers tell themselves. Let’s finish off that discussion this week.

 

M&A Lie: The Numbers Don’t Lie

Sophisticated buyers and sellers slant numbers in their favor. It is your job to sleuth this out. This is usually fairly simple as long as you have qualified accounting help to work through the initial financial information, formulate an offer contingent on the numbers proving out and reviewing tax returns during due diligence to confirm initial analysis..

It is important to remember the other aspects of due diligence and that the numbers may not tell the entire story. A change in one assumption can have massive impacts. You should focus significant effort on customers and demand, cultural fit between organizations, key employees, synergies, the overall business and industry environment and products and services offered and how they fit with yours.

Once this is complete, double check critical assumptions – the ones that could destroy the acquisition – but don’t get caught up in minutia. Be careful of synergies, as these can be either overstated to justify a deal or understated and kill it. Be careful of rationalizing the deal the deeper you get. But also be careful of your own fears and biases – if you rely solely on numbers and models you will never do a deal.

 

M&A Lie: Our Customers and Employees Will Love It

Customers are critical and can walk away (and do). Never assume that key customers and suppliers will remain with a new owner. This is a critical assumption that often turns out to be a big surprise right before closing. This is why buyers are usually concerned about concentration in these areas.

Employees sense immediate threat – particularly the key employees. It is critical to develop a compelling vision and communication plan. Have this plan in place before and after the transition to keep employees reasonably comfortable and confident in the transaction.

Understand the business before you break it. There are a few key components to this. If possible, keep your pricing consistent immediately after the sale. This will inspire confidence in customers and minimize chaos of integrating the business. Communicate at appropriate time with good information to customers, suppliers and employees and LISTEN. Keep your customers at the center of everything you do. Finally, minimize operational changes if possible

 

M&A Lie: Price is Everything

If you want to send a signal, ask the seller if it is a distressed sale. The second thing you can ask is for some sort of price multiple. You are likely to be out of the game before you ever entered it. Businesses are not static and should not be evaluated as if they are.

Take time to build good relationships with decision makers to understand what each party needs so that you can structure the deal accordingly. Buyers and sellers usually don’t see eye to eye on everything. Having built good relationships will help keep the deal moving and bridge gaps. Have creative problem solvers on your team and don’t assume the other party does.

Sometimes paying a premium for a business is warranted by the parties’ strategies. These strategies are certainly not solely about price. A good way to do a final check is to ask yourself: What if a competitor ends up with the deal?

 

M&A Lie: We Don’t Worry About Taxes or Financing

Taxes will absolutely matter to the seller – don’t assume they understand the impact tax will have on them in a sale. They will also matter to your accounting and finance staff. When evaluating a transaction only after-tax dollars should be considered by both parties.

Financing and leverage can have a massive impact on your entire organization. Not being able to finance a deal at closing will stop your acquisition process. Financing can drive solutions via deal structure if identified early in the process. Don’t forget about your current loan covenants or you may hate yourself the day you go to ask for the loan.

M&A Lie: The Buyer Hasn’t Done His Own Due Diligence

If the buyer has good representation he will have thoroughly discussed his business and understands very clearly where his advantages are. Don’t assume you can get everything as a buyer. This is one thing I learned from a mentor who pulled me aside one day and told me that I would be even more effective if I let the other guy win some points. Good advice. Be prepared to give the buyer credit for the business he has built.

You can also assume that the buyer is going to do some due diligence on you. Don’t expect the buyer to open his books to you if you aren’t willing to open yours to him at the same time. The key thing a buyer wants to know about a potential suitor is “Do they have the capacity to close on the deal.”

M&A Lie: Due Diligence Isn’t Important – We Can Fix Anything

This may be the king of the lies because it tends to encompass all of the others. There are good deals out there. When you find the one you want, document where the benefits of the deal come from. Assign responsibility to an individual or team for achieving those benefits and involve them in the deal-making process to get buy-in. Do not allow them to rationalize away benefit loss post-close.

All businesses have warts – I usually figure that if the deal hasn’t gone in the ditch five times before closing, it’s probably not done. Don’t get discouraged or walk away when this happens – get creative and solve the problem. Transactions carry risk and reward. Don’t get so paranoid that you can’t do a deal. Transactions are not easy but they can be very valuable to those who develop their capabilities.

 

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