While the numbers behind failure are staggering, when you look at the characteristics of successful M&A transactions, the math is pretty simple.
M&A transactions can fall apart for dozens – maybe even hundreds – of good reasons. There are obstacles and challenges every step of the way from starting the process until closing. No checklist could map all of the uniquely frustrating ways that deal-making can turn from exhilarating to infuriating. When you think of the individuality of every buyer and seller, not to mention all of the personalities involved and the emotions invested in the process, it sometimes seems like a miracle that transactions ever get to the closing table at all! I may not be able to list all the elements of failed M&A transactions, but I can say with confidence that all of the successful deals I’ve been involved with have had three basic characteristics.
- Communication. Communication skills are critical in explaining your business, your management style, the value drivers of your company, and in building the relationship with the other side. Clear, straightforward communication lets you confront issues and discuss challenges head-on. M&A is about being transparent in your motives and your goals, in addition to talking through the problems, not avoiding them.
- Building trust. I tell all of my clients to talk about whatever they want on the first call, but to focus the whole time on whether they trust the person on the other end of the phone. My (rather scientific) litmus test is to ask my client – buyer or seller – if they’d leave their dog in the care of the person they’re speaking with. If something in your gut is giving you pause about the person you’re dealing with, the deal almost always falls apart. The opposite may not necessarily be true – you may trust many of the individuals you speak with during the M&A process, but there’s only one party to the transaction – but I have yet to work on a deal in which my client says that they do not trust the person they are dealing with. M&A cannot be an adversarial process – it’s about building a trusting relationship and teaming up to create a brighter future for everyone involved. Lack of trust is expensive. Waiting to share information, or sharing information a bit at a time, just extends the time before the parties can understand if they are in the same ballpark in terms of value. Excessive due diligence – beyond what is reasonable to confirm what you thought when you made the offer in the first place – takes up the time of expensive people.
- Accepting risk. Successful deals negotiate risk transfer and identify the real value drivers early on in the process. I can’t tell you how many deals fall apart because one side has rejected any iota of risk. Buyers that are unwilling to accept standard business risks find themselves overpaying for firms that don’t need to be acquired. In the real world, key clients and star employees can walk out the door. Competitors can win work you thought you’d be able to get. These things happen. By the same token, selling your firm doesn’t absolve you of all of the stresses of running a business once you sign on the dotted line. You’re still on the hook for plenty of the risks and liabilities associated with your business. Sellers are paid a nice chunk of money on the belief that they are handing over a business that can generate future cash flow. Reps and warranties, earnouts, and employment agreement are reasonable requests from buyers to mitigate these cash flow risks from being different than represented.
I’m sure there are many more characteristics of successful M&A deals, but these seem to be found in deals of all sizes and when working with buyers and sellers. Email me with some of the other “tried and true” characteristics you’ve found in the market – we’d love to hear from you!
Jamie Claire Kiser is Zweig Group’s director of M&A services. Contact her at jkiser@zweiggroup.com.