Mergers and Acquisitions (M&A) Failure Rates Between 70% and 90% (Harvard Business Journal).
How to avoid failed transactions was the topic of a recent panel presentation co-sponsored by The Forbes M+A Group; Anton Collins Mitchell, LLP; Brownstein Hyatt Farber and US Trust During the invite-only presentation, three top business panelists shared their first-hand experiences on the complexities of divestitures and advice on how to avoid common M&A pitfalls.
Moderator Bill Nack, a Managing Director for The Forbes M+A Group, began the discussion by asking panelists to provide an overview of their recent transactions and what made them successful.
Kevin Durban, former owner of Performance Mobility, acquired his company in 2006 as a single store operation. Under his leadership, Performance Mobility expanded to 9 stores in four states, strengthened the management team, and implemented a phantom stock program for employees. In 2016, he was ready to take some chips off the table and the economy made the timing favorable. In 2017, Performance Mobility was successfully acquired by United Access of St. Louis, Missouri. Kevin shared that maintaining clean records and financials was key in the success of his sale. “Many owners treat their companies as personal checking accounts. We were always deliberate about keeping these separate.”
Mike Porter, retired shareholder at Nexus Corporation, discussed how he and his wife purchased Nexus Corporation 23 years ago because they wanted to own their own company and live in Colorado. Nexus became the industry leader in greenhouses for commercial growers, retail garden centers, conservatories, and research facilities. Over the years, they were repeatedly approached by a competitor to sell but they were still having fun. Yet, as key employees began to reach retirement age, Mike and his wife realized they needed to sell while the company still had a strong management team in place. Another factor in timing the sale was the unknown factors associated with the developing cannabis industry. In 2016, Nexus has purchased by Gibraltar Industries, Inc.
Common Mistakes Made by Sellers
Next, Max Hampden, Senior Associate at Lariat Partners, shared some of the most common mistakes he has seen sellers make over the years including:
- Not having a clearly articulated succession plan. According to Mac, not having the right successor in place can have a negative impact on the bottom line. “Most buyers need to rely on the operating team,” said Mac. “It can be a big red flag if the seller has not groomed someone to take over.”
- Hiring friends or acquaintances to be your advisors. Partnering with the right advisors can help you develop the right strategies and locate more buyers. His advice was to take time to vet out potential advisors.
Negotiating the Deal
When asked about some of the major legal or due diligence issues encountered during the selling process, Mike shared specifics about his negotiation process. A buyer had been approaching Mike and his wife for 8 years, but they didn’t know if the proposed offer was good. After working with an advisor to put together a narrative that showcased strong growth opportunities and was supported by third-party facts, they had the ammunition to get a higher price. “We do transactions every 23 years,” said Mike. “We wouldn’t have gotten the higher offer without an experienced advisor.”
Kevin also felt that the selling process would have been much different without trusted advisors, noting that the buyer did not have representation and it hurt them. “We had advisors on our side with knowledge on how transactions work,” said Kevin. “So when there were areas of disagreement, we were able to push back successfully to get the best possible outcome.” Bill Nack added that when Performance Mobility had a single buyer the transaction moved very slowly. However, as soon as there was another buyer as a backup (also known as the Best Alternative to the Negotiated Offer), the original buyer raised the offer and had increased urgency to close the deal. “The ultimate selling price was more than triple the initial offer,” shared Kevin.
Due Diligence Pitfalls
Due diligence is a very time-consuming process, involving a surprising level of detail. It’s often during due diligence when deals fall apart. “Due diligence will test your patience and it is hard not to take it personally,” Kevin told the audience. “When the buyer asked us to slice and dice data in numerous ways, it felt they was testing our integrity. It’s good to have an advisor by your side to provide a reality check and explain this is just the way things are done.”
Providing employees with phantom stock options was a strategy that paid off at Nexus because the people were involved and engaged in helping answer due diligence requests. However, Mike also warned the audience about the emotional aspect of a sale. “Business owners have a strong, emotional tie to the business and the people,” he said. “When our emotions took over and we were ready to walk away, it helped to have a calming partner to keep the process on track.”
Impacts on Valuations
Currently, valuations are high and buyers are plentiful, but there’s a shortage of quality companies to buy. As an experienced buyer, Mac shared some of the ways valuations can come down after a letter of intent is signed and due diligence is complete. “Customer concentration, supplier concentration, environmental risk, healthcare and benefits, can all have an impact on valuation,” said Mac. “Early on, buyers and sellers need to decide what are the deal killers. Pick counsel that knows your goals and have the deal killer points established upfront on both sides.”
When asked what business owners should be thinking about in terms of maximizing the value of their businesses, Kevin encouraged sellers to work with an investment banker on an exit optimization plan. “Three years ago we developed an exit optimization strategy so we knew what to focus on that would deliver value in the future,” said Kevin. “We were so successful that the buyer constantly questioned our results because we had better results that anyone in the industry. It also helped us determine the best go-to-market timing.”
The Role of Wealth Management, Legal Counsel, and Accountants in M&A Transactions
All panelists agreed that engaging a wealth manager as early as possible is essential. Too often they are brought in to the transaction at the end and there isn’t enough time to plan. Likewise, business owners need to be organized from a tax planning perspective early in the process. “Start long before you are planning to sell,” said Chris Reis of Brownstein Hyatt Farber Schreck. “Planning ahead means getting contracts organized and addressing issues such as capital structure. This way you can put your best foot forward right from the start.”
After the presentation, attendees enjoyed some golf at Top Golf Centennial and the opportunity to meet other business owners and advisors. Audience feedback from the event confirmed that the information share by all three panelists was interesting and informative.
TAKE THE FIRST STEP
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