I’d like to discuss two big mistakes that I often see in M&A transactions. While many experts discuss what to do before and during a transaction, I’m discussing what not to do.
One mistake is keeping a transaction a secret from your key people. The other mistake is not making adequate disclosure during the marketing process.
Keeping it Secret
You may be told that you should not tell anyone you are considering a sale until the deal is done. I strongly disagree with that advice for two reasons.
First, when it is discovered by employees, it may create a huge integrity issue. I’ve seen a deal get derailed when two key people discovered that a process was underway, and they blackmailed the owner to pay them a sizable “stay bonus” because they were essential to the business. Thereafter, this $20 million deal was always in jeopardy because both the owner and the key people didn’t trust the other.
Second, a buyer usually is glad to hear that employees know about a sale. That is one less thing for them to worry about – i.e. how employees will react to a sale. A buyer has a lot of unknowns in a transaction, and they conduct extensive due diligence to learn about the risk of the deal. On the first day of owning the company, they are at risk of having bad things happen to customers and employees, who are usually inextricably linked.
When you have more risk assumed by a buyer, the offset is always in the price or the structure. If you lower the risk, you increase the price or you improve the structure. If I’m a buyer, I’d love to know that all or most of the employees of a target company know that the owner is selling the business. That means that the owner has shown forethought and treated them fairly, and I want my future employees to come to me feeling happy about the transaction. If they feel betrayed, they may never regain trust in an employer.
Adequate Disclosure
Regarding the level of disclosure provided in the marketing phase, I find it highly beneficial to know your strengths and weaknesses, and share them. Every business has weaknesses, and I view those as opportunities for buyers to create value after the transaction. If your business has no weaknesses, the buyer can’t make it better and may not pay as high a multiple since you’ve perfected the model. Additionally, if your information memorandum is nothing but “fluff,” the buyer then views the company as having hidden issues that must be found in due diligence. These issues will be discovered in most cases, and then you’ve got the integrity issue to confront, and a possible re-pricing of the deal. The latter can be material, and the former can be very uncomfortable as the buyer then feels compelled to conduct further due diligence or possibly abandon the process. I like to tell the story of a client who was honest to a fault, and would openly state that they weren’t very good at a few things, including marketing. The buyers loved his honesty, which was disarming, and it helped him achieve a better valuation.
Transactions have gotten harder to close, they take longer, and the risks of failure are not immaterial. Proceed with integrity and improve your odds.
