By Steven Levitt and Annie Tronoski, Park Sutton Advisors, LLC
Mergers and acquisitions can be exciting for buyers and sellers alike, but discussions are complex and need to be handled thoughtfully and carefully.
There are a series of mistakes that occur frequently in the industry and place sellers at a significant disadvantage in the M&A process. The courtship between buyers and sellers can take months (or years) but sellers must follow timelines and decide their priorities. The process of selling one’s firm involves nuances.
Here are the five biggest mistakes sellers make:
- Sellers Take Too Much Time
Sellers often believe they have abundant time to make a decision when they are being courted by buyers. However, sellers should focus on maintaining deal momentum at all times. Unfortunately, not all sellers do so, and the results can be negative.
In 2008, two Park Sutton seller clients took their sale processes slowly, taking a long time to make basic decisions and turn around deal documents. They did not pay attention to worsening market conditions and ultimately, both transactions collapsed during the fourth quarter of 2008. If the sellers had been more prompt and nimble, it is quite likely both of these transactions would have closed.
Time is one of the most important factors of any deal. Those selling their practices need to realize when the buyer asks for information, the seller must be forthcoming and quick to respond. That means sellers need to be prepared to turn over due diligence items such as historical financial statements, material contracts, and tax documents by stated deadlines.
While the past few months of 2020 have again been turbulent, deals can be hard to close in any market environment. A critical producer could exit the business or face an unexpected health issue (or worse). A large client could elect to move their relationship (and assets) to another firm. A buyer of a particular acquisition candidate could face an unexpected financial hardship and be unable to consummate a transaction. Momentum is critical to getting a seller’s deal closed, period.
- Sellers Underestimate Deal Complexities
When owners prepare to sell their business, it is natural to want to oversee the entire process themselves. Owners built their business and operate it efficiently on a daily basis. They are entrepreneurs and are often convinced that selling their practice will not be that much different.
But managing deals can be arduous, especially when experienced acquirers that have completed multiple acquisitions are sitting across the negotiating table. The sale transaction is very different than running the daily business, and first-time sellers will be at a disadvantage when the buyer has conducted multiple deals.
Even handling simple aspects of the process can quickly derail an otherwise viable deal. For instance, when a seller makes a certain request to a buyer, it might inadvertently appear greedy as a buyer contemplates the potential working relationship. Advice from an investment banker can turn that same request into a professional part of process.
An investment banker and M&A advisor with multiple active assignments/deal flow allows for a client to benefit from the current, real-time data that is being collected from other active clients. This is where an investment banker’s experience becomes invaluable and the cost of an expert pays for itself – deal list matters in both volume, comparability and timeliness. When owners overlook these deal complexities and nuances, they are at much greater risk to achieve lower valuations and/or sub-optimal terms due to lack of experience and lack of access to current deal flow.
For owners who decide to hire an expert to help, here are several questions you should be sure to ask beforehand:
• How many comparable deals have you closed in the last year? Overall?
• How do you charge?
• Are you capable of running complex models and able to anticipate how buyers will analyze the opportunity?
• Do you know how to expertly market the business? Do you have relationships/experience with likely buyers?
• Do you know how to engage and manage all parties in the sales process and follow standard protocols?
• What kinds of deal terms have you achieved for clients?
• Can you negotiate offers and review and opine on definitive documentation?
- Sellers Prioritize their Requests Poorly to Buyers
Certainly, the most important request sellers want from buyers is a hefty price-tag for their firm. Most seek top dollar for their firm.
But sellers must realize the need to prioritize. For example, if a seller demands top dollar for the business, then the buyer will likely expect lower employee compensation and/or potentially seek to reduce staff.
Sellers need to closely evaluate what they want before discussions begin. They need to prioritize what they are willing to concede or not. Too often, sellers demand items that are not even a priority to them and become fixated on small details that cost them in the long run. These are hard discussions and preparation is essential in creating an effective transaction.
- Sellers Do Not Hire an M&A Attorney
It is important to hire an attorney who is an expert in mergers and acquisitions. Certainly, sellers trust their personal attorneys, but those attorneys often lack the experience to properly advise on an M&A transaction and actually see it through to closing. In fact, sellers often end up spending more time and money when they hire those without direct experience such as their own personal attorneys.
One Park Sutton seller hired his own divorce attorney to oversee his M&A deal. This decision cost him more financially and also slowed the transaction because the attorney had to spend more time learning due to his unfamiliarity with negotiation protocol and market asks. In fact, the client himself was ultimately searching for deal templates over the Internet because their attorney was so ill-prepared for the tasks involved. The result: the client actually paid higher all-in legal fees as his personal attorney “learned on his dime.” Put simply, it takes more time for an inexperienced attorney to complete the same tasks that an M&A attorney has overseen hundreds of times.
- Sellers Court Only One Buyer
Talking with just one buyer creates no incentive for that buyer to make a top offer if they know there are no other suitors in the mix.
When an owner has just one buyer making an offer that means there isn’t any competition, which ultimately leads to less favorable deal terms.
It is exciting to owners that a buyer might be offering more than the owners thought their firm was actually worth. But remember, buyers are more motivated when there is competition.
Owners need to be willing to consider more offers because there could even be better strategic options available of which they are initially simply not aware.
Steven Levitt and Annie Tronoski lead Park Sutton Advisors, LLC, a boutique investment bank specializing in mergers and acquisitions within wealth management and the broader financial services industries.