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M&A Deal Breakers: A Buyer's Perspective

By Generational Equity

M&A Deal Breakers

There is an old saying in deal making:

A deal is not a deal until it dies twice.”

It is this perspective gained from years of experience that keeps most dealmakers in the game (and sane).

But what if you are attempting to close a deal with a buyer WITHOUT professional M&A advice and counsel? Could you ride that emotional rollercoaster without help from seasoned pros, like our team at Generational Equity?

Sadly, many attempt to do so and fall far short of their goal when one or more issues arise at the 11th hour and cause buyers to walk.

So what are some common deal breakers that you should avoid?

First and foremost, make sure your documentation is accurate. This sounds so simple, yet it is probably the least understood by sellers. Unless you have multiple college degrees in finance, accounting, marketing, management, HR, IT, sales, and negotiating, you will have a very tough time making sure that what you present in your documentation is accurate (and timely).

Why?

Because the level of documentation required is impossible to fathom until you attempt to do so. Here is what a few of our clients have to say about this topic:

The common theme you hear from these folks is this: The accuracy of your documentation will directly impact ANY buyers’ comfort level with what you are saying about your business. If your documents are full of errors or inconsistencies, then buyers will “discount” your company valuation and/or apply terms and conditions to protect them from potential loss.

Avoid all of this by taking the time to create documents that correctly portray your opportunity to buyers. The more confidence you can give buyers, the more likely it will be you will close an optimal deal.

Honesty is the Best Policy

This old saying may sound like a given, but the fact is far too many sellers try to hide historical events from business buyers until the 11th hour. They assume that the issue that happened three years ago will ultimately have little impact on the deal. The reality is that to some buyers it might.

It is far better to over-disclose than under-disclosed. Trust me, buyers will find out through due diligence about anything that has happened that affected your company materially in the past.

So let them know about any historic issues that affected your company value and especially any pending legal, HR, financial or managerial items you are currently dealing with. They may seem immaterial to you, but to many buyers they will not be.

Ultimately ask yourself these questions:

  • If I were acquiring my company, what would I want to know about past (and pending) events?
  • Does that issue that we handled three years ago represent an area that I would be concerned with if I were the buyer?
  • What would keep me up at night if I learned about an event at the last minute as the buyer?

The answer to these questions will go a long way to determining what you need to share.

The Future is Key

Finally, create pro forma projections that are not only accurate, but ACHIEVABLE! If your company has been growing at a 10% rate annually for 20 years but you suddenly forecast growth of 30% annually over the next five years, red flags will go up. Especially if you can’t document why this change will happen (see first section above).

This is especially true in the base year of your pro forma, the year that you will use for negotiations with buyers. If you have a calendar year end and you are in due diligence with a buyer in August and your base year is trending 10% behind your forecast, you need to be ready to explain why and how you will catch up by December 31. If you can’t, count on the buyer using a base year number that will be far less than yours in the final deal structure.

In selling a business, this old saying really applies: It is far better to under promise and over deliver.

We hope these tips will be helpful if you are forced to negotiate with a buyer on your own. Avoiding the “two deaths to make a deal” scenario is important for your sanity and emotional wellbeing.

But we believe it is far better to hire an experienced firm to represent you in the most important financial decision of your life. By doing so you will instantly tap into collective years of wisdom and successful deal making experience. Generational Equity has closed more deals over the past 10 years than any other lower middle-market M&A advisory firm in North America. Here is important information about our firm:

If you are interested in learning more about deal breakers and how to avoid them, you should set aside a few hours to attend one of our CEO exit planning conferences. We hold these complimentary meetings throughout North America, and they are designed to educate business owners on exit planning strategies, dealing with buyers, and how to close a deal for the optimal value.

Please contact us if you would like to attend or call us at 972-232-1121.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2017 Generational Equity, LLC. All Rights Reserved.

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