In previous articles, we discussed mistakes #1 to #6 of the 10 Biggest Mistakes Buyers Make when acquiring businesses. In this article, we examine the final four mistakes buyers make when buying businesses.
Mistake #7: Negotiating too soon
Deals are a lot like courtships. Most people would never think of asking someone to marry them on their first date, yet we consistently see buyers fall into the trap of trying to negotiate a deal at their first meeting with sellers.
Perhaps one of the biggest mistakes you can make as a buyer during a first meeting with a seller is to ask the following question early in the meeting: “How much do you want for your business?” By asking this question, you have just signaled to the seller the only thing important to you about their business is the price. Every business owner wants to believe the buyer is more interested in their company than just getting a good deal.
Buyers often tell me, “We always ask about price first because if the seller wants more than we’re willing to spend, why waste any time?” While I cannot argue the logic, I have not seen this particular method work well except in situations where buyers expect to pay less than market value for the companies they are buying…or are acquiring poor performing companies.
I understand many acquirers are concerned about “falling in love” with a deal for fear of paying too much. However, giving a deal the time to properly run its course doesn’t necessarily mean overpaying. But if you begin the negotiations too soon, you risk jeopardizing the deal before you ever get started.
Mistake #8: Not having proper legal counsel
Even the smallest of transactions may have its complexities. Using a seasoned, experienced M&A attorney to assist you with the transaction is imperative. If you/your company have not acquired a business before, you need to engage the services of appropriate legal counsel. If it is a larger, more complex transaction, you need an experienced legal team.
For example, we were working with a client who was acquiring distributors of imaging supplies. The attorney they traditionally used for their transactions was a great guy who operated as a solo practitioner. Unfortunately, the last deal we found for our client was a prospect who not only distributed imaging supplies, but was also a remanufacturer who owned its own facilities, had made significant investments in Intellectual Property and patents, and also had operations outside of the USA (in Europe and Africa).
While their attorney was certainly knowledgeable and completely capable of working on relatively small transactions in the USA, he was not experienced working on transactions requiring environmental surveys let alone cross-border employment and complex domestic and international Intellectual Property issues.
At the end of the day, our client, in concert with us and their local attorney, identified and engaged the services of a larger, deeper law firm who had experience in all the facets of the size and type of transaction our client was contemplating. Without the involvement of the larger firm, this transaction would not have been completed.
Even if yours is a small, simple transaction, do not underestimate the importance of having strong legal counsel supporting you in the transaction.
Mistake #9: No clear plan for Due Diligence
Due diligence (“DD”) is the investigative process buyers undertake to appraise and assess the viability of a business prior to closing on a purchase of the company. The “formal” DD process generally begins after buyer & seller execute a Term Sheet or Letter of Intent (LOI) for the deal. The transaction does not close until the buyer has satisfactorily completed its DD process.
The DD process is intrusive to a business and makes even the most seasoned of sellers apprehensive. DD can cause frustration and tense moments between buyer and seller at a time where the parties are supposed to be strengthening relations, not straining them.
Thus, it is very important for buyers to have a carefully designed DD plan developed BEFORE they issue an LOI or Term Sheet to the seller. There is a fine line between asking for too much and not enough information in the DD process. Furthermore, nothing frustrates a seller more than a buyer who continues to develop list after list of DD questions throughout the process, seemingly devoid of logic or explanation. Another frustration for sellers is buyers who supply a DD list without taking care to indicate the information they’ve already received and reviewed.
Recently, we represented the owners of an office/imaging supplies/equipment dealer with multiple locations. The company had total revenues of approximately $10 million. We received offers from multiple buyers and narrowed our choices to two parties. Along with their LOI, we asked each party to supply their DD request list. One buyer had a 25 page list with a total of 595 questions and data requests. The other buyer had a simplified list and took the time to explain why they were making some specific requests of what could be construed as very sensitive information.
With both offers similar in value and terms, our client chose the offer from the buyer whose DD process would be simpler and less invasive to the company. When we queried the buyer who submitted what we called the “War and Peace” DD list, they admitted this was their first potential acquisition and they asked their CFO to put together a DD list. The CFO reached out to a colleague who provided a sample list his company used to purchase a manufacturing concern with factories around the world. Clearly, with DD lists, one size does not fit all.
Take care when developing your DD list and make sure to fit the process and your DD plans to the target.
Mistake #10: No clear post-close integration plan
Perhaps the biggest mistake we see buyers make is spending all of their time worrying about making the deal happen and virtually no time planning for what happens after the deal closes.
Often, buyers are so focused on the process of getting a deal done that they forget to plan for the integration of their newly acquired business into their own company. There are myriad “to do” items to complete before closing including: integrating/transferring employees to the buyer’s benefits plan; opening bank accounts and ordering new checks; transferring contracts, customer relationships, vendor contracts, leases, deposits, and more. However, these are the relatively “easy” tasks to accomplish and do not involve integration issues.
What are some of the bigger issues/concerns to plan for? How will communications be handled from the buyer to the seller after closing? Who will be responsible for hiring/firing employees at the acquired company? How will you merge sales teams? How will you manage disparate order processing/customer service processes? How will you merge/manage/use different software platforms used by the companies? These are but a few of the issues to consider.
We advise our clients to spend as much time thinking about post-close integration as they do the transaction itself. Furthermore, we also work with our clients to help develop a DD plan which will help identify any post-close integration traps or problems so they may be better prepared prior to completing the deal.
Buyers who do not plan properly for post-close integration are like the old analogy of the dog that chases after and catches the car only to say: “What do I do now?” Don’t get caught “with a car in your mouth” and not know what to do; take time to plan for a successful closing and integration.
I am happy to answer any of your questions regarding this subject or any previous articles about the 10 Biggest Mistakes Buyers Make. In my next article, I’ll present the 5 Biggest Deal Killers we see today.
