Smith Holland M&A Resources
Common reasons for middle market M&A transaction failure.
Eventually, every business owner will face the same question - How do I sell my company? Business owners spend years building and growing their company while gaining valuable insights that make them experts in their industries. When it comes time to sell, some business owners try to save money and decide against hiring a mergers and acquisitions (M&A) advisor, thinking how hard can it be? Unfortunately, navigating the confusing and complex deal life cycle can be costly.
There are a number of reasons why M&A deals fall apart, but the most common reason is usually the result of an unprofessionally written or inefficiently structured letter of intent (LOI). An LOI in its simplest form includes the overall pricing, closing date, terms and conditions presented by a buyer for the purchase of a seller’s company. Since the buyer typically presents an offer for purchase or LOI, it is important to recognize and negotiate terms that are favorable to the seller. This is where it is crucial to have a trusted M&A advisor on your team.
Even though LOIs are non-binding, a professionally written LOI that finds a balance between what the buyer wants and seller will accept, is a very delicate symphony. Meaning, the buyer will commonly want more vague language that will benefit their side whereas a seller should want more stricter terms. Regrettably, when an M&A deal falls apart (especially one that could have been prevented by an experienced advisor) not only is it a huge waste of time for both the buyer and seller but more importantly, money.
Experienced Buyers vs First Time Sellers
Normally, buyers are much more experienced and if they are submitting an LOI, chances are, it is not their first time presenting an offer to purchase a company. Since most buyers have been through the process before, the LOI they submit will likely include language to their advantage. Buyers usually present an LOI with ambiguous language which leaves interpretation that will need to be clarified on the final purchase agreement. More often than not, buyers have already had to pay the price for expensive lessons learned and ultimately acquired valuable experience from previous deals.
In contrast, most business owners looking to sell are first time sellers and the overall process can be more complicated and exhausting than anticipated. Buyers enjoy banking on seller’s fatigue after hours of conference calls, corporate visits and the tedious task of gathering due diligence documents. For this reason, it is important to have a trusted sell-side M&A advisor that will highlight and define ambiguous language on LOIs, which in the end can be very costly. Hiring an experienced M&A advisor is a valuable asset that transfers most of the burden and time-consuming process from the seller to a professional. As a result, the seller receives important hindsight from years of deals and guidance that levels the playing field.
Letter of Intent to Purchase Agreement
The reason an LOI is such an important document is because this seed with eventually blossom into a purchase agreement. This is why it is so critical to get a dually signed LOI that has definitive terms and conditions with the least amount of interpretation possible. Of course, there is a breaking point of being too strict on terms vs too ambiguous but it is vital to remember that the same buyer that submitted the LOI will once again present a purchase agreement based on that LOI. Simply stated, any terms and conditions open to interpretation will ultimately be in the favor of the buyer and undesirable for the seller in the long run.
It is also important to keep in mind that the majority of buyers, especially capital firms or institutions, are experienced and most likely submitting multiple offers for a number of companies and possibly across many industries. Therefore, those buyers will be less emotional and more willing to walk away from the deal. On the other hand, a seller has invested years into their business and will obviously be more emotionally invested. Buyers are trying to get the best deal and at the same time, sellers are trying to get the highest purchase price.
For instance, any open interpretation gives the buyer leverage to devalue and negotiate a reduced price. Once a purchase agreement is being finalized, the seller can argue and disagree with the buyer but the longer a seller fights, the longer the business remains off the market and usually the seller concedes on most terms and forfeits a good portion of the purchase price to keep the deal moving forward. If the seller believes the buyer is trying to take advantage and the deal falls apart, when the business returns to the market it appears to other interested parties that the original buyer found a problem with the company and the end result is much less attractive. Previously interested buyers may come back to the table, but at a fraction of what their original valuation may have been.
This is why most M&A deals fall apart and the reason it is so important to have a sell-side M&A advisor to make sure the LOI is favorable from the beginning of the process.
Benefits of an Experienced M&A Advisor
If a seller has never sold a business before (and even if they have) they should hire a sell-side M&A advisor and take comfort in having an experienced professional on their side. There are many essential aspects of having an M&A advisor represent and negotiate for a seller. Most important, sellers don’t have a database of potential buyers actively looking to purchase a business. From day one, buyers need to know that there are several other qualified and interested buyers preparing to submit offers. M&A advisors have huge databases that can leverage buyers against buyers, which is the best way to get an LOI and specific deal terms that are favorable for a seller.
A sell-side M&A advisor creates a barrier between buyer and seller so the transaction becomes less personal. It is in the best interest of a buyer to get the lowest purchase price whereas sellers are trying to get the most value. There has to be an intermediate to paint both sides of the picture and that involves a true artist. This is where an experienced mergers and acquisitions advisor, especially during negotiations, can truly demonstrate the valuation and clarify LOI language that will have the best probability of a successful closing for both parties.
Even though an LOI is non-binding, it is the framework of a purchase agreement and the starting point of a successful closing. An experienced M&A advisor has been through hundreds of deals and understands what it takes to negotiate the best LOI for a seller. Unfortunately, once a seller signs an LOI they can’t go back once they realize they could have negotiated more detailed terms or a stronger position. No matter what, when a decision is made there are consequences even if the seller backs out and returns to the market.
M&A deals fall apart for a number of reasons but the most common involves an unprofessionally written or inefficiently structured LOI. Even though an LOI is non-binding, it is vital to make sure this document is not too vague and doesn’t leave room for interpretation in the buyers favor and sellers’ disadvantage. From the beginning, it is important to navigate through the LOI process correctly and having a sell-side M&A advisor who has been through hundreds of deals is the best way to ensure a successful transaction. Otherwise, a seller may think they have a favorable LOI until they realize it has cost them not only the initial buyer but also a reduced valuation when they have to go back onto the market when the deal falls apart.