Avoid these common M&A mistakes, which happen a lot when firms try to close a deal without the guidance of a seasoned pro.
When we talk to sellers in this industry, we often find that they have minimal experience with M&A. There’s nothing wrong with that. The problems arise when firms either seek to go at it themselves, or use inexperienced M&A professionals. This is a short list of four common mistakes made by sellers in our industry that we hear about on an all-too-regular basis. Mistakes made in these four areas during the M&A process reduce the final consideration you receive for selling your firm, and, unfortunately, can kill an otherwise tenable deal.
- Underestimating the time commitment. An external ownership transition is not an easy process. Successful M&A transactions are incredibly time consuming for the seller. From preparation to meetings, negotiations to due diligence, sellers will have to devote considerable time to the M&A process. M&A transactions usually take between six and nine months to close in our industry. Even with a team of experts (see item three, below, for more on that!), every seller feels exhausted – but hopefully relieved – at the end of the M&A marathon.
- Not organizing information ahead of time. The sheer volume of information that will be requested by a company interested in acquiring your firm is staggering. Everything from financial statements to contracts, employee information, corporate organizational documents, insurance information, and more will need to be shared with a buyer. Firms that gather the information ahead of time and either create a virtual data room, known as a VDR, or otherwise have these documents in an organized place, communicate to the potential buyer that they are serious and methodical about this process.
- Not hiring the right external team. This may sound self-serving, but as someone who works with business brokers on a regular basis, I can tell you that using a knowledgeable consultant with industry experience is the best way to assure a prompt transaction and a high price for your firm. I recently worked across the table with a general business broker, a firm that sells every type of company. They sent me a standard glossy prospectus with over twenty pages of bright charts and graphs – that had very little information that is actually relevant in our industry. For example, the prospectus didn’t disclose that the company was an MBE/DBE, and didn’t include net service revenue! In addition to a consultant, you’ve got to hire an M&A attorney with industry experience. Your regular corporate attorney does not know how to close an M&A deal.
- Having an unrealistic price expectation and misunderstanding of deal components. To avoid having an unrealistic expectation for the selling price of your firm, you need to understand true industry comparables. Do not tell a prospective buyer that you should be worth the same earnings ratio as Apple. You’re not Apple. In our industry, we see net service revenue, or NSR, and book value as the two consistent metrics that often correlate to the final sales price. Also, don’t slam the door on a prospective buyer based on the sales price discussed verbally. Remember that earn-outs, salaries, stock options, bonuses, and what is being acquired (Are you keeping cash? Receivables? Those can be tremendously valuable – and liquid!), are also critical parts of the deal.
Jamie Claire Kiser is Zweig Group’s director of M&A. Contact her at jkiser@zweiggroup.com.
This article is from issue 1145 of The Zweig Letter. Interested in more management advice every week from Mark Zweig, the Zweig Group team, and a talented list of other guest writers? Click here for to get a free trial of The Zweig Letter.