As the market for mergers and acquisitions is as hot as it has always been, many medium-sized business owners are considering selling their most valuable asset, a company they have spent years building from scratch. However, there are a few mistakes that I often see made by owners selling their companies.
# 1: Failure to prepare in advance for the diligence process
It is crucial that you involve your advisors in your process at least six months before you go to market. You will want your advisers to do two main things: prepare their own “revenue quality” report and conduct a background check. The Income Quality Report (“QOE”) is an analysis of your financial performance that you may consider to be a proper financial audit. It is basically an analysis of whether your income is “real” or somehow inflated. This does not mean that QOE is there to catch fraud, but rather to analyze whether you have made all the right decisions in preparing your financial data and it is worth the price you are trying to get. Due diligence is the same concept, but for non-financial matters. A good legal team can spot and highlight problems in advance and help you either solve the problem so that it is not a problem until the buyer comes to the table, or create a clear and unambiguous answer as to why the alleged problem is not.
# 2: You don’t get advisors with extensive experience in mergers and acquisitions
Financial and legal advisers with extensive experience in mergers and acquisitions are crucial to a successful transaction. M&A is his specialty and has its own rhythm, terms, concepts and even jargon. You are selling the most important asset you have, while trying to maximize the price and minimize your post-transaction exposure. Do your advisors know the space for mergers and acquisitions? If you ask them, for example, “what are the premiums for RWI nowadays?”, Or “can we go for a walk?”, Or “do we give them strong or weak materiality?” – do they know how to answer? These concepts (and dozens of others) are highly specific to the merger and acquisition process. Good advisors are not cheap, but bad ones are much, much more expensive in the long run.
# 3: Accept the first offer that comes
Over the years, I have watched hundreds of companies swap hands and there are many variations in prices. A company that one buyer thinks is worth $ 60 million can be valued at $ 75 million by another. And this second company may be willing to pay $ 85 million just to complete the deal. If you just choose the first offer you get without testing the market, you miss a lot of value.
# 4: Signing an LOI without being reviewed by a merger and acquisition attorney
Once the price is taken into account, the buyer will send a letter of intent (“LOI”). The buyer wants basically two things in the LOI – a price that is “subject to further diligence” and exclusivity. The price – and the possible adjustment of this price – we discussed above. However, exclusivity is crucial to understanding the process. Although the LOI is not binding in general, there will be some binding conditions, one of which is usually exclusivity. Before the buyer starts spending a lot of time and money, he will usually ask the seller for a commitment that you are not working with other potential buyers. Therefore, the buyer will ask the seller to agree to work exclusively with the buyer for a certain period of time (30 to 90 days). If that’s all there is to the LOI, the seller has missed out on his best chance to negotiate a bargain. Once you sign an exclusivity, you are out of the market – your buyer has concluded. There are many possible suitors – get them to give you the best deal you can get. If you sign an LOI without taking it to an experienced merger and acquisition lawyer to negotiate specific terms in the LOI, you won’t know what you’re missing out on until it’s too late.
# 5: Be impatient
Deals take time – it’s just an inevitable fact of life. Each transaction goes through four stages. Reaching LOI, everyone loves each other – stage one. Then the reality of diligence and how hard it is set, and this is the second stage. The third stage is when you despair that the deal will never be made and you just want to give up. But then your experienced merger and acquisition advisors help you complete the deal, which takes you to the fourth stage – a huge check. Do not panic, be impatient and do not give in to every request of the buyer. If the deal is good, it will take time. Just be patient and let it happen.
© 2022 Davis | Kuelthau, sc All rights reservedNational Review of Law, Volume XII, Number 172