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The Demystification of M&A – Part 3 TAKES TWO TO TANGO

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Our last article focused on the numerous motivations from a buyer’s perspective; we learned that sellers are wise to discern each potential buyer’s motivation as they enter into negotiations and prepare for due diligence.

Now it’s time to look at the seller’s side of an M&A transaction. Every deal requires a willing seller and a willing buyer (yes, occasionally we see unwilling sellers, but we’ll leave distressed and bankrupt sellers out to the equation for now). Seasoned buyers understand that timing is critical and the only way to buy a strong, well-run business on the buyer’s timing – other than luck – is to overpay. Everybody has a price.

Of course, serial buyers don’t call a disciplined process of continuously nurturing a healthy deal pipeline “luck”. And they shouldn’t. If your goal is to buy a stable business at a fair price, you often have to cast a lot of lines into the water, check on them regularly to ensure the bait still is good, and wait for a nibble. If you want to acquire several businesses, add a corporate development executive to your team whose job is to ensure every strategically-viable acquisition target is called upon regularly. As they say, make your own luck.

[Buyers also can wait for investment bankers and business brokers to send them unsolicited acquisition opportunities, but why wait? A proactive search process tends to yield better results than playing the waiting game and then competing with your peers after everyone gets the offering memorandum.]

The Nibble. When a seller shows some interest, a critical next step is to determine why the business is available. While it may seem counterintuitive, often a seller’s reason for exiting isn’t just to “monetize” the business. Let’s explore some scenarios:

1. Frailty. I can count on four hands how many deals I’ve been involved in that were heavily influenced by a health issue. Despite being a data-driven, analytical type, I have not tracked the different maladies. That said, owners suffering heart attacks (or near misses) likely have been the primary motivator, followed by a spouse’s serious sickness. Why is this notable? Beyond knowing that the seller may have a sense of urgency, there may be ways to sweeten a deal that makes it more attractive than others. In this situation, consider offering an employment position that allows the seller to maintain health insurance while reducing some of the stressors that may have led to the health issue.

2. Fear. In industries experiencing consolidation or obsolescence, sellers tend to be less rational. When a buyer suspects that a deal may be driven by fear, that should be a giant warning sign prompting detailed due diligence. Is the suspected “fear” something that would negatively impact the buyer? Perhaps the fear isn’t so obvious to a buyer. Could it be that the seller knows that eminent domain will be gobbling up a big chuck of the site, or a major lawsuit is looming, or a major customer is likely to go away because it is being sold to a company that won’t work with the seller, or the seller expects a key employee to be moving away. Think of a major risk in your business and then examine the seller’s propensity to suffer from the same situation. The scenarios are almost endless.

3. Fatigue. Health reasons and fear, particularly when combined, can result in significant fatigue for a business owner. When you sit down for an exploratory conversation with a potential seller over coffee and all that you hear is that he’s tired or that she’s not sleeping well, try to quickly discern between the fatiguing influences that would affect you as a buyer versus those that may be unique to the seller. If the seller is tired because, for example, he/she can’t find quality employees and is having to work double time, be sure to have a proven plan in place to eliminate this challenge (or acknowledge it and wisely walk away).

4. (In)frequent. Occasionally, a bored business owner becomes a rational seller. This is particularly common in owners who have started and sold multiple businesses. These “serial entrepreneurs” live for the start & build, but don’t get too emotionally attached to a business. Their objectivity in a deal tends to yield balanced outcomes. Conversely, another occasional motivator is situations with multiple partners having conflicting interests. Buyers should tread lightly in these situations in the event acrimony amongst the sellers leads one to make choices and take actions that potentially damages the blue sky that is appealing to the buyer.

5. Financial. Most success doesn’t occur by happenstance. Rather, business owners who have a clear vision, set goals and then direct their resources and energy towards achieving them, often have “that number”. That’s right – as soon as their business reaches a certain value, they’re a seller. They can be in the 30’s or their 60’s. Even the most experience buyers can’t recognize these sellers until they self identify, which often sounds like: “I need X”. Like the bored or serial entrepreneur, they tend to be more objective – hit their number and the rest of the deal will likely go smoothly.

6. Finally. More than any other reason, the desire to depart is driven by a date. Whether it’s the owner’s 50th, 60th or 65th birthday, often the calendar is the final arbiter. The seller has had a successful career, built a healthy business and now it’s time to rebalance the retirement portfolio’s assets from a risky business to cash. Why should buyers care? Often sellers in this category don’t have a significant sense of urgency, or so they want you to believe. If you’ve been around the deal block a couple of times, you know to not count that big chicken before it’s hatched. Savvy sellers will continue to invest in their businesses during negotiations and due diligence to not only create a sense of nonchalance about the deal, but also to be ready in the event it potential breaks down. They’re good at “playing chicken” about “counting their chickens” (sorry – I couldn’t resist!).

What’s the message here? It may not be just dollars driving a deal. Savvy buyers dig deep to understand their deal counterpart’s motivations and will structure deal terms to match their goals or allay their fears. Meanwhile, successful sellers are careful to project objectivity and artfully use perception to improve their outcomes. A key to successfully negotiating and structuring a deal is to know what drives the other side.

Comments / questions / criticisms? Are you contemplating a deal that might fit into one of these categories and you want to ensure you’re making a sound decision? Feel free to e-mail me: john.walcher@veritasadvisorsinc.com – I’m happy to explore the circumstances with you. Our next article will explore the anatomy of a deal. Until then, happy dealing!