Trying to manage the process and negotiate directly with a potential buyer when you have been approached puts you at a disadvantage in a number of ways. Public companies understand this – even though they often have deep internal resources to draw from – and never approach a transaction without an advisor.
If the initial conversations seem to have merit and the shareholders and Board believe there may be a good potential opportunity, now is the time to engage an experienced M&A firm to outsource the process to.
Following are just a few pivotal reasons to hire an experienced M&A advisory team when you get approached by a company with an interest in acquiring you:
1. The attention of the key people in the company is diverted from growing and managing the company to focusing on the demands of the potential buyer(s); this often causes results to decline, ultimately impacting valuation unfavorably. It is very difficult to focus on selling your company while simultaneously working on growing your company.
2. The company may not be very well prepared and so could appear weak or disorganized. Not putting your best foot forward at the outset will negatively impact your first impression which will have a direct impact on an offer.
3. In such a busy and competitive M&A market, why would you only talk to one or a few buyers? It is almost guaranteed that you will leave money on the table.
4. A sale process is difficult to manage on your own and can often drag on for months (a transaction becomes less likely to close the longer it takes). In some cases, this is a strategy by the buyer to wear down the shareholders to some degree in the hopes they will end up accepting an inferior offer because they’ve got deal fatigue – “sunk cost” principal.
5. Negotiating an Offer directly between a seller and buyer is fraught with difficulty. It’s an emotional process that needs an arm’s length, dispassionate, and skilled negotiating team able to effectively work as equals with what is often a highly experienced deal team on the other side of the table. As an intermediary, we provide buyers with the opportunity to speak freely without getting an emotional response from owners. They can float ideas which may help in crafting a successful transaction.
6. When you do receive the offer, how will you know whether it is the best you could do? Or whether this is even the best buyer? A good advisor can provide expert guidance on the quality of the offer and the buyer.
7. Hiring an advisor allows the sellers to preserve their future relationship with the buyer (who they will be working alongside for some period of time post-sale) and to also provide them with the ability to have a designated “bad cop” to do all the tough work they would find difficult.
8. We have seen a number of instances where an LOI is signed and as diligence progresses, the final purchase agreement sees the inclusion of valuation claw-back clauses or the addition of unrealistic earn-outs that make the initial offer almost impossible to obtain.
9. While some owners may have sold one or even several previous companies, experienced advisory firms have done hundreds of transactions and know how to structure and negotiate an optimal transaction and clean deal structure.
10. Skilled advisors actually get the transaction closed. This point can’t be underestimated – in many cases deals run off the rails long before they have a chance to close, after owners and executives have invested months’ of effort (see point 1).
11. Engaging an M&A firm to represent you adds instant credibility to the prospective buyer that you are serious and keeps buyers on their best behaviour.
12. Advisors have seen many mistakes made by sellers and buyers. This experience is invaluable and can save your deal from the same problems.
It’s imperative to work with someone who can successfully identify and market you to the right potential buyers and knows how to create a competitive atmosphere by bringing multiple interested buyers to the table.
If you think that you can just put your head down and build a great company and product and that the buyers will pay fair value, take your chances. The reality is that decent companies can drive better valuation outcomes than great companies by creating healthy and authentic competition for the deal.
If you’d like to learn more about how Tequity drives increased value in a transaction, let’s have a call. Find a time here.