M&A Process from Negotiation to Valuation
The negotiation process for M&A, in my view, is not fast. We would need to discuss a lot of issues; you would need to resolve underlying issues.
Evaluation is usually the top issue. The second issue is the time it takes time to close the deal. Then the due diligence period, that’s usually the third issue. So these deals take some time for proper structure. In my experience, it’s worth it.
Each party should have good counsel to shepherd the deal in the most efficient way possible. There are so many different financing strategies for an acquirer to consider. First of all, do you get bank financing or non-bank financing for the deal? You can go to a traditional bank and try to sign up through an SBA program. Or you can pursue another traditional financing program. Or, you can leverage the deal on your own balance sheet and there are consequences to that as well. Although, self-financed deals, in my experience, are faster. So the big issue is whether you get bank financing or you’re self-financing. There are different terms and conditions for each financing. That’s an important consideration in your evaluation. It affects the expediency in which you want to close the deal.
Due Diligence Matters Most
Due diligence is the most critical aspect of acquiring or selling your business. Each party, the acquirer and the seller, has different perspectives on due diligence. The acquirer generally wants as much time as possible to kick the tires, to check out what they’re buying. The seller wants to get done fast and doesn’t want due diligence to slow the deal. Some of the classic examples that I’ve seen over the years are lack of record keeping by the selling party. There could be a lack of financing lined up by the acquiring party. Those are the two big mistakes that I see.
The record keeping mistake is critical for the seller. This is because it slows down the deal. It shakes the buyer’s confidence about what they’re buying. It may also impact evaluation. Good record keeping is critical. This means any corporate documents and financial records. This is also any proprietary or intellectual property that the selling entity has.
On the purchasing side, it means having your financing lined up. Having documents ready to go that is critical. If you get through the one-yard line and you’re unable to deliver, the whole deal is going to go sideways. So, for example, I’ve seen an acquiring entity fall short. This was in their ability to acquire another company. They had to pay a breakup fee associated with failing to consummate that transaction. And that breakup fee was a significant amount of money. So there are some cardinal sins that you want to avoid in M&A. Those are generally the big ones.