The GP Blog
Why Do Deals Succeed?
Once a sell-side process is started, a wide range of issues can derail a deal. Rather than focus on the negative as in my previous article, this article will focus on what goes right with a deal.
1) Meet or Exceed Projections: the owner’s number one priority should be running the business. If the business continues to meet or exceed projections, there is a good chance that the deal will get done. The opposite is the number one reason why deals die.
2) Set Reasonable Expectations: all sellers and advisors should try to find the best valuation and terms for the company as possible. That being said, the owner’s expectations of value should be reasonable. This should be determined before engaging an advisor, and should be based on market conditions and the characteristics of the business.
3) Open and Honest Communications: issues often come up in the deal process, and it is important to be open and honest with buyers. Buyers are trying to see if the owner can be trusted, so anything that smacks of dishonesty or excessive “spin” can hurt the deal.
4) Perpetual Motion: it is important to both sides of the deal to keep the deal moving. Milestones should be set, and if deadlines are going to be missed or extended this should be communicated as early and as clearly as possible. The investment banker should keep the deal moving and be in communications with attorneys and accountants from both sides.
5) Stay Calm, Resolve Issues Fairly: buyers may bring up issues that could be insulting to owners. No one wants their baby to be called ugly. It is critical to maintain an emotional distance from the deal. When issues come up, try to find a fair resolution. The investment banker can help provide a buffer between buyer and seller and can suggest different solutions to issues. This is often key to saving deals when issues come up.
6) Work Out Major Terms and Issues Up Front: prior to going too far down the line in negotiations, it is best to cover the main terms and issues of a deal as early as possible. Once the major terms are set, it is unlikely that an issue in Paragraph 50, section X of the purchase agreement is going to derail the deal. In contrast, if a deal is not going to work it is best to kill it quickly and move on to the next buyer.
7) Plan Personal Goals, Taxes, Wealth in Advance: ideally, these issues should be taken care of before starting a sale process or very early in the process. Don’t expect to start to set up a living trust 3 days before a closing. Knowing the tax and wealth effects of the deal are important in deciding what type of deal to negotiate for. Be open with your investment banker about your entire portfolio and share the advice from your tax and wealth managers.
8) Clean Up/Resolve Issues Before Starting Project: your investment banker should do due diligence on your company before taking it to market, and be sure to disclose any issues that might affect the deal. Sometimes, it is better to wait 6 months to resolve issues before going to market rather than have an issue derail a deal.
9) Weed Out “Tire Kickers” and “Bottom Fishers” Early: through an organized process, the investment banker can weed out most of the buyers who are not serious. This allows the owner to focus on the buyers who are the most interested in paying a premium value for the business (and who are most likely to close with the best terms). Talking to too many buyers can cause the owner to get deal fatigue and if too much time goes by the good buyers may slip off the hook.
10) Good Understanding of Process, Timeline, Fees, and Milestones Before Starting: as in many cases in business, the best client is a well-informed client. Make sure you understand all aspects of the deal before going forward. Most deals can be run in a flexible manner to suit the particular business being sold, so do not hesitate to ask if something can be done differently. That being said, be sure to listen to your investment banker. The owner may have 50 years’ experience selling products, but selling a company is a different animal.
11) Be Committed to the Deal: many owners get cold feet at some point in the process. Be sure that you are prepared to go through with the sale before starting. Not only will you be wasting a lot of your time and expenses if you pull out, but you may burn any buyers who spent their time and money on the deal too.
Those are the main reasons why deals succeed, but of course there are thousands of other reasons and each deal has a life of its own.
posted at October 28 2011 16:05 by webadmin
GPV 3Q 2011 Update
Q3 started off looking good, then the debt ceiling crisis, S&P downgrade, and subsequent stock market roller coaster ride made things real interesting. IPOs, secondaries, and many M&A deals were put on hold or canceled as all parties hesitated during that period of uncertainty. As the mood has calmed, the sky hasn't fallen and corporate earnings are coming in good (see Google), the market appears to have stabilized.
Some large deals occured in the tech sector in Q3, such as Google-Motorola Mobility, HP-Autonomy, and Broadcom-Net Logic Microsystems. Teradyne also bought LitePoint for $580 million and Electronic Arts acquired Popgames for $750 million. Most deals in the quarter occured before the debt ceiling crisis, although it seems like things were back "on track" by mid-September. IPOs came to a complete stand-still, with only 5 VC-backed IPOs in Q3.
Q4 stands to be much better as long as no shocks occur in the market or economy. Corporations have a large cache of cash and are eager to do deals. Deals that were put on hold in Q3 are starting to move forward. Baby Boomers who own businesses are getting tired of waiting for the perfect market, and in general those businesses that are doing well are getting a lot of attention from buyers.
posted at October 28 2011 15:51 by webadmin
GPV 2011 First Half Update
July 22, 2011:
I recently attended Semicon West (semiconductor equipment) in S.F., and compared to the Sensor Expo in June it was a bit of a disappointment. The SEMI market is expanding, but the number of customers is shrinking as fabs (TSMC, UMC, etc.) take over more of the business, so the importance of this show is dropping. The Solar Show was better attended, but it looked more like a Home Depot exposition than a tech show.
M&A for technology companies for the first half of 2011 was strong according to several sources. One deal that was the talk of Semicon was the Advantest/Verigy acquisition, which leaves only 2 major players in the ATE market (Advantest and Teradyne). Other deals of note so far in 2011 are Microsoft/Skype, Intel/McAfee, Texas Instruments/National Semiconductor, and two hard disk drive deals: Seagate/Samsung HDD Division and Western Digital/Hitachi HDD Division.
The biggest news of the first half was perhaps the resurgence of tech IPO's, such as LinkedIn, Pandora, Freescale, Avaya, and others. This should help raise all boats, as a positive IPO market helps drive valuations and makes everyone feel better about the state of the M&A market. US companies are holding record amounts of cash, and the weak US$ makes acquisitions look cheap for Europeans and Asians, so more M&A should follow in the second half of 2011.
posted at September 13 2011 21:53 by webadmin
Why Do Some Deals Die?
Why do some deals die, when others succeed?
It might not be lucky to start off on the pessimistic side, but I'll save the "do's" for next time. There are a number of things that can happen after a company hires an investment banker that can kill a deal:
1) Underperformance: This is by far the #1 reason why deals die. This is reason 1-99, and everything else is reason #100+. Most deals take at least 6-9 months from start to finish, and if during that time the business misses projections it usually kills the deal, or at least causes it to be re-negotiated. Sellers should make sure from the start that projections are reasonable. During the deal, Owners should work as hard as possible to keep the business performing, even as the deal takes time away from business. If it looks like the business will miss projections, disclose it as early in the process as possible. The process can be paused, and a business can be re-marketed, but the earlier the process is stopped the better. Conversely, over-performing by too much usually causes the seller to want to renegotiate, which can kill deals too (but is certainly the lesser of two evils).
2) Time: In football, the worse your starting field position, the more likely something is going to go wrong before you get in the end zone. Also, parties get “deal fatigue” if things do not keep going forward. Many sharks will die if they do not move forward, planes cannot fly unless they are moving forward, (insert your analogy here). All parties should do what they can to keep things moving and to complete the process quickly.
3) Disclosure Issues: Just like you should tell your fiancé everything about your past before getting married, a seller should reveal everything to his i-banker at the beginning of the process. The i-banker will help the seller decide when and how to deal with any issues. It is better to reveal issues early and discuss how to work it out, rather than have something come up during a deal. If things come up during the deal, disclose quickly and honestly. If issues are hidden AND the deal goes through, there could be penalties (loss of escrow, employment, or earn-out) or fraud/misrepresentation charges, which are much worse than having a deal die or get “paused”. Honesty is always the best policy, and the discloser has the opportunity to put a positive “spin” on the issue and at the same time state how they are going to correct it.
4) External Forces: The recent debt ceiling crisis and stock market roller coaster are one example of how external forces can spook buyers and sellers. A bad economy or market are other examples. Buyers will be wary of companies that have any concentration issues, as they are seen to be especially vulnerable to outside shocks. A company that does well despite external shocks will be especially attractive.
5) Personal Issues: Health, divorce, family problems, etc. can cause a seller to delay or back out of a deal. Either the stress from the deal or from personal issues can poison the situation. It is important to maintain a balance and take a deep breath. Don’t take things personal, it’s just business.
6) Egos: CEOs and owners on both sides of the table tend to have big egos. One role that the i-banker plays is as a buffer between the two parties. Anything controversial should be handled by the banker or attorney, which allows the two parties to focus more on growth, synergies, and other positive aspects to the deal.
7) Vacations: The next client who takes a two-week vacation while I am trying to sell their company will not be permitted back in the country! It is a corollary of Murphy’s Law that something bad will happen while a client is on vacation, and any issue just gets worse if we cannot address it immediately. Long weekends are fine, but certainly nothing more than a week should be allowed and be prepared to spend a lot of time on the phone or on e-mail. Sorry honey, the two-week cruise to Bora Bora will have to happen next year.
8) Various: There are thousands of reasons why deals die, and we all have a few favorite but painful stories. One thing to remember is that many deals have 9 lives, and it is important to keep an open mind and an even keel. With the help of your banker and the rest of the deal team, we’ll help you get to the finish line.
Please contact me with your war stories or additional thoughts: mail@gp-ventures.com
posted at September 13 2011 21:41 by webadmin