Whether you’re interested in investing in a new business venture or selling your own, understanding the basics of the mergers and acquisitions (M&A) process will be crucial to your success. We’ve represented clients on both sides of M&A deals many times over and helped clients successfully close, start to finish. We have also seen many deals unravel on both sides for various reasons, often from preventable circumstances. To avoid the possibility that your deal might fail, there are five common scenarios to be aware of:
The Seller Isn’t Prepared
In most cases, the seller is the party that initiates an M&A deal. However, a seller may get worried about what they’ll do after they sell the business because they are too tied to it. If you are considering selling your business, be absolutely sure you know what you want out of the process because, depending on the type of business, it can be long and difficult if you are indecisive and unprepared. Consider that some sellers continue participating in the business as employees or advisors once the deal closes. Some want to walk away from the business and never look back. And some want a lump sum pay out as opposed to carrying a loan on the sale. The conditions you can create for your sale are infinite – you just have to know what you want.
Seller Parties Have Different Objectives
Typically, a deal begins with a Term Sheet or Letter of Intent (LOI), where both parties iron out the material terms before committing to the costlier and more time-consuming purchase agreement. In this stage, a seller with multiple owners may disagree on the conditions of sale, or some owners just outright won’t want to sell. If the parties – and especially the owners – cannot agree on such material terms in the LOI, there will be no deal. If and when someone makes an unsolicited offer to buy your business, it’s imperative that all owners sit down and evaluate whether they are open to selling the business and upon what terms. It is better to start the process on the same page.
The Seller Is Unorganized
The seller needs to have a complete understanding of their assets, liabilities, and records for the process to move forward smoothly. The due diligence process comes into play after the parties have a signed LOI and have agreed to move forward with some form of purchase agreement. A buyer will not want to purchase a business if they cannot get a complete picture of what a business owns, what it owes, and its history. The documents you provide need to paint a picture for the buyer. This means that all financial and accounting records, corporate minutes, leases, resolutions, employment records, and virtually all other company records and documents will need to be organized and put on display for the buyer’s inspection. If the buyer is unsatisfied with what they see (or don’t see) during due diligence, they will walk away. Some risks just aren’t worth taking.
The Buyer Fails to Find Financing
On the buyer’s side, there is a risk that they fail to secure the funding needed to complete the transaction. This may occur when the buyer doesn’t have the necessary cash on hand, the negotiated price is higher than expected, an investor backs out, or the lender is no longer willing to provide adequate financing for the project after the due diligence process. As a seller, it is difficult to vet a potential buyer’s financial circumstances, so it’s important that your attorney incorporates additional warranties and guarantees to ensure that, even after the deal closes, you will receive the full amount bargained for.
The Deal Gets Dragged Out
In some cases, the parties may come to an impasse over certain terms and conditions or the sales price and payout. The impasse may not result from a dispute on a material term, but rather, one party spending their negotiating capital and good will early in the process being nitpicky. Know what to ask for and pick your battles wisely. Some terms are not worth fighting for and may end up ruining a good deal. This is one of the reasons why it is so important to iron out the main terms of the agreement through an LOI. Further, recruiting the help of legal and financial advisors that have worked on deals in various settings and industries, and know what to spend their negotiating capital on, can certainly keep the deal on track and ensure that negotiations run smoothly.
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While you can’t control all of the issues listed, having an awareness of the factors that lead to a failed (or good) deal and taking the time to plan and prepare yourself, partners, and business for an M&A deal will greatly increase your chances of success. If you are considering a potential acquisition or sale, and need the assistance of a team of qualified attorneys, contact Doida Crow Legal today at info@doidacrow.com or call 720-306-1001.