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
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