Running a business is hard enough. Added projects—especially complex ones such as an M&A deal—will only compete for your time and energy and might result in unexpected costs. That’s why it’s important to be as savvy as the owner across the negotiating table.
Most owners don’t realize the enormous amount of preparation and work required to successfully close a mergers and acquisitions transaction. A good advisor will commit significant time and resources to the process. They’ll ease the burden on the management team—and help you get more favorable terms.
Mergers and acquisitions: What’s the big deal?
Mergers and acquisitions (M&A) transactions have lots of moving parts. How complex are they? Let’s just say that 70% to 90% of M&A deals don’t cross the finish line.1
According to Torey Hinkson and George Calfo, managing directors with the Mergers & Acquisitions group at Truist Securities, that’s because an M&A deal is unlike any other type of negotiation that a business owner will enter into. Mergers and acquisitions have their own process, negotiating points, and language. Each transaction is very nuanced in terms of objectives, timing, and other factors.
“Owners and their internal advisors are experts at operating and growing their business,” says Hinkson. “But they’ll likely be selling it to someone who’s an expert in buying businesses. Which is something most owners only do once in a lifetime.” Owners who are looking at making their first purchase of another business will be in the same boat if they go up against someone on the sell side who has a solid M&A strategy—or who operates regularly in that space, such as venture capital firms.
M&A advisory services, such as those provided by investment banks, provide key insights, access to resources, and relationships with others in the M&A space. This can help owners avoid a less-than-ideal deal structure, whether they are on the buy side or sell side.
If you’re in the market—or on the market—the sooner you can bring an M&A advisor on board, the better. Read this before your first conversation to learn more about M&A, its potential pitfalls, and how an M&A advisor can help you navigate them.
Mergers and acquisitions: What’s the difference?
When is it a merger and when is it an acquisition? Or is every instance both a merger and an acquisition? The terms seem almost interchangeable.
“People will use the term ‘merger’ when two similar-sized businesses are coming together,” says Hinkson. “But even in that scenario, from a legal perspective, there’s typically one entity acquiring the other.”
Calfo suggests that the terms “merger” or “merger of equals” are sometimes used to demonstrate to both companies—and the wider world—that this is meant to be a unification of resources and culture, not a usurping of power. “A merger—or merger of equals—gives the impression of mutuality. But the industry nomenclature would just be ‘mergers and acquisitions.’”
Exploring the three steps of the M&A process
“The M&A process really begins with the client’s objectives,” Calfo says, whether they’re the seller or the buyer.
Hinkson says, “We work with our selling clients to understand what they’re trying to achieve because that shapes the profile of buyer we look to and the tools we use to help get them to a transaction that makes sense to them.”
Sell-side owner objectives vary and can include maximum price, employee concerns, legacy preservation, and a strategy need or desire that is greater than the available resources.
For example, some owners want to exit their business and retire, while others are looking for significant liquidity but are open to staying with the business post-transaction. And some owners may wish to exclude certain competitors from the buyer universe due to customer, supplier, or corporate-culture reasons.
Truist Securities M&A advisors work with prospective buyers in the same personalized way. They begin by understanding the history and culture of their client’s company, its goals, and what outcomes they hope for in an M&A deal. They might ask you questions like: Do you want to expand to an adjacent product or service category (horizontal expansion) to diversify offerings and add revenue streams? Are you looking to purchase a competitor, which could expand your market.share? Or are you looking for a company at another point in the supply chain, such as one that sources the raw materials you use, which might help hedge against supply-chain challenges?
Although every deal is unique, there are three main steps to the M&A process.
Step 1. Preparation
Before reaching a decision to sell a business, owners and stakeholders should ensure it’s in good shape. There should be a clear understanding of the business financials as well as a clear strategy for the future.
At this point, the seller will gather and provide a variety of detailed documents and other materials that paint a clear picture of the company’s financials and key metrics. This will help them market the business to potential buyers—and help potential buyers make a decision about whether to dig deeper.
For prospective buyers, preparation primarily involves communicating with their M&A advisor about their goals, reviewing opportunities their advisor provides, and working to ensure they will be able to deploy capital when the time comes to make a purchase.
“Spending time in preparation is valuable because that’s going to drive everything else and can result in a smoother process overall,” says Hinkson.
The M&A advisor’s role: Preparation, says Calfo, begins with asking three questions: Is the market ready for a transaction of this nature? Is my business? Am I?
An M&A advisor can help you gather the answers that will help you move forward—even if that means taking some time to add value and get your personal finances in order before proceeding with the next step.
Step 2. Marketing and evaluation
During this step, advisors like Hinkson and Calfo help owners shop the business to potential buyers. Research firms may also supply reports to provide potential buyers with a better understanding of market opportunities.
The M&A advisor’s role: An M&A advisor serves as the primary interface with potential buyers, allowing the business owner to focus on running the business. The advisor manages the data flow between the various buyers and sets the timeframe during this phase of the process.
Step 3. Confirmatory due diligence and final negotiations
Another important step in the process is confirmatory due diligence, which involves reviewing the materials provided by the prospective seller. This helps the potential buyer ensure it’s a good fit for their objectives. It’s also the time to ask for further information or clarification on any aspect of the details or deal.
In final negotiations, lawyers and advisors on both sides will structure a deal by negotiating the terms and conditions of the transaction. This may include the purchase price, payment structure, and other contractual obligations. Pricing may be adjusted based on information learned in confirmatory due diligence.
The M&A advisor’s role: During due diligence, there are multiple workstreams happening simultaneously. On the sell side, the M&A advisor manages each of the potential buyers, their respective advisors, and the data room. The advisor ensures that interaction with the selling business management is minimal, allowing them to focus on running the business.
On the buy side, the M&A advisor will assist in reviewing the due diligence, asking additional questions, and negotiating terms and price points based, in part, on what was learned from the deep dive into the seller’s records.
On both sides, the M&A advisor serves as the principal negotiator on business issues, working in close coordination with the other company’s attorneys and accountants. The advisor also oversees the completion of multiple workstreams and any outstanding items.
While the M&A process is somewhat standard, Calfo admits that the actual events in a deal are mapped based on the seller’s circumstances.
How M&A deals can fail—and what to look out for
Mergers and acquisitions can fail for various internal and external reasons. Hinkson and Calfo share a few common pitfalls that M&A advisors can help you avoid or mitigate.
M&A deals may seem to revolve around dollars and cents, but there are real people on both sides of the transaction, too. Sellers may wonder: How will the new owners run the business? How will they treat employees? What are their values? And do these values align with the way I currently run my business? Am I concerned about how my employees are treated when the transaction is complete?
“Most of the time when deals don’t work out, it’s because of cultural factors. Workforces didn’t align and that couldn’t be resolved,” says Hinkson.
During the marketing phase, buyers may say whatever sellers want to hear to get in the room with you. But if a buyer changes terms without good reason, it’s a good indicator that you’re not going to get the deal you signed on for.
An experienced M&A advisor can evaluate whether a buyer has done enough work to really commit to the terms they are proposing at the Indication of Interest (IOI) or Letter of Intent (LOI) phase. The advisor also knows the market terms for specifical deal points and can press buyers from a position of knowledge and experience.
In the due diligence phase, a company is scrutinized while the buyer tries to understand all they can about the business. If it’s discovered that an organization’s underlying business performance is not what was presented during preparation, the deal can go south quickly. An M&A advisor can help proactively solve this challenge by combing through your business plan and records to represent your business in as accurate and favorable a way as possible.
Preparation is the key to successful transactions.
“When we look back on previous transactions, there’s a common theme to the deals that clients deemed successful. They all have a dimension of preparedness,” says Calfo.
A good M&A advisor takes the time to prepare clients professionally and personally for all aspects of selling a business. This includes an often overlooked area: What you’ll do with yourself and your money after the transaction is completed. Are you embarking on a new business venture? Are you retiring? And what does either of those options look like for you?
For buyers, an advisor can help them answer the question, “What will happen after the sale?” What type of transition period will there be, where you may need the seller to provide services until you develop the infrastructure to take over completely? Having an M&A advisor can also ease tensions during negotiations, which can make the transition period go more smoothly.
Truist clients, they note, don’t have to remember to consult an M&A advisor. Their Truist relationship manager will introduce M&A opportunities and M&A advisors to each client when the time is right. That’s a perfect example of Truist Business Lifecycle Advisory in action: We begin with candid conversations with each client so we can proactively bring them solutions and opportunities at every stage of their business lifecycle.
“If you start conversations with an M&A advisor early,” says Hinkson, “you can begin the process of getting the business—and yourself—ready for the transition. The more preparation you do on the front end, the more optionality you create for yourself, so you’ll truly be ready to buy or sell when the time is right.”