Every deal, regardless of whether it closes or not, is a roller coaster ride. Throughout the journey, it may constantly feel like the deal is on the verge of failing. This is normal. Although the purchase price is often never changed drastically (once the LOI has been sent and due diligence commences), the details of the deal are altered constantly before the deal is finally closed.
There is no way to map out the steps needed to close an M&A deal. Every deal has its own unique obstacles, some predictable and others not so. Emotions and personalities play a fundamental role. You can pick your employees or your co-founder, but you don’t generally get to pick your buyer (or seller). However, over years of deal making experience, we have seen that there are common themes in successful deals and we outline some of these below.
Obstacles take a toll on all involved: the buyer, seller, lawyers, and the bankers. Every change generally requires sign off from both sides and, therefore, their legal teams. However, these ups and downs are common, so even when you are thinking the deal is dead, keep your faith alive. Some deals fail largely because one party throws in the towel, and not necessarily because they needed to.
Yes, of course, we would say this . But the reality is that most successful deals have a competent team of advisors. Shop around and ask people you know that have completed successful M&A for a recommendation. You need to know your strengths and weaknesses. Although you may enjoy the subject matter, the due diligence process is where deals are won or lost.
We have mentioned this before, but trust and communication are a key component of every successful deal. Pride and stubbornness can be the straw that breaks the camel’s back. Although both sides want to negotiate and, more importantly, arrive a deal that is fair, it is human nature to want a deal that is slightly better for yourself . Knowing this before you start will make the negotiations seem less personal. One way to build trust is to try and refrain from negotiating too hard on the actual purchase price. Once the deal is underway, and an LOI has been signed, if you think your company has been slightly undervalued, try to negotiate better terms instead of price. The actual deal price is only one part of the total reward/cost but is the one value which causes conflict. Giving them a “win” and clawing back the difference inside the term sheet is an easy way to start building trust.
Buyers often use what is called a “bait-and-switch” tactic. This involves them leading with a high offer to gain exclusivity, only to be reduced when “issues” arise during due diligence. This is where a lot of companies start to distrust each other. Lack of trust also significantly increases the time to close, and therefore cost, so think about the bigger picture. Another way to build trust is to form a relationship directly with the other party, in a personal environment away from the lawyers and accountants. Have a coffee, beer, or just a chat.
Good communication is another key to closing a deal and linked to having mutual trust. Without trust, communication can be challenging. If you start to identify potential “deal killing” disagreements, tackle them head-on and discuss them. If you are meeting the buyer/seller for coffee, as mentioned above, bring these up here. People may keep quiet in a room full of advisors. Most deals have two or three areas of debate. With a strong communication channel, you can often resolve these issues and move towards closing the deal. If you can’t identify any issues yourself, you may have negotiated too hard and the counterparty is not so happy.
One strategy is to look at the deal from the other person’s perspective. If you think you are getting “the deal of the century”, the other party probably thinks the same and might be keeping quiet in the early days of the deal. Deals can often go sideways when only advisors are talking to advisors. In these cases, communication can become a game of email, and wires can quickly get crossed.
The role of the advisor is to aid their client, and in this case, you both have your own advisors. Of course, whether or not to accept the advisor’s advice is ultimately the responsibility of the individuals, but this is why direct communication can help. With that said, be sure to let your sell-side adviser know the outcomes of these one-on-one meetings. It is very important for them to be kept up-to-date on every part of the deal. Sharks are plentiful in the business world, you might be getting manipulated. Any good sell-side advisor will tell you whether a compromise is “fair”.
Negotiation is not solely about winning, but it is about getting a result that is tolerable for both parties. Most deals that close include buyers and sellers who recognize that both sides of the transaction must somewhat agree to terms and each accepts a certain amount of risk and compromise.
Buyers are generally willing to accept standard business risk, and occasionally sellers just want to walk away after the transaction. These terms can be negotiated but generally the better terms you get, the lower the price you receive. This is because, well, that is fair. As a business owner you must recognize that mechanisms like vendor financing, earnouts and reps & warranties are reasonable requests. These are simply the buyer trying to mitigate the risk of future cash flow, not a personal dig at you.
In M&A, the success rate of closing a deal is daunting, to say the least. The five principles above will increase your odds substantially. However, quality M&A professionals can educate you on these expectations and help mitigate any disagreements. Sometimes they might tell you that you are being unreasonable in negotiations. If this is the case, listen. If you have hired a good sell-side advisor, they know why deals fall over and they want the deal to close as much as you do, if not more.