What Is the Transaction?

As discussed in Chapter 4, private company owners usually have multiple options when it comes to transitioning ownership in their business. Each of these alternatives might address different issues the client is trying to solve or objectives they are targeting to achieve. Each of these options could represent different buyers, different values, and—important for the M&A advisor—a different process.

Value Expectations

Unrealistic valuation expectations can, at a minimum, cause significant frustration between an M&A advisor and the client. At worst, they can be the root cause of a sale process failing. Often, sellers will create value expectations based on sensational media reports or “country club multiples,” comparing their company to a data point without consideration for the health, performance, relative size, and many other attributes of their specific business. Having a valuation discussion with the client early on, based on analysis and supporting data, can save both parties time and disappointment, and in many cases start the aligning process if the engagement is to move forward.

This is also the time to discuss the client's priorities. Is getting top dollar the overriding concern, or is price one issue among others, such as the effect of the transaction on family members, key employees, or other stakeholders? (See Chapter 4 for more discussion on M&A from the owner's perspective.)

Prepare for these discussions by compiling industry research with empirical knowledge of recent M&A trends and transactions in the client company's industry. Be prepared to discuss facts and figures, and try not to fall into the trap of believing the stories that begin with “I heard my competitor sold for …”

Some preliminary financial analysis is needed to gain a basic understanding of the business and the implications for a transaction. It allows the advisor to begin to understand the management, operations, and capital structure of the potential client's business. The advisor should review preliminary financial information and perform basic industry research. In doing so, the advisor should keep in mind valuation metrics, the appeal to active buyers, and the potential impact of economic volatility. This research will allow the advisor to develop an estimated valuation range for discussion purposes. If the engagement is for a recapitalization or acquisition, the same information is required to assess the likely financing alternatives and constraints.

Present the valuation in a range. Provide a balanced perspective. Be careful not to be too pessimistic or conservative; rather, be realistic and able to see and highlight the exceptional areas of performance and value in company while addressing the issues and weaknesses of the business with ideas to mitigate their downside. One of the benefits of a disciplined transaction process is that it will uncover the realizable market value. Also, keep in mind that the terms of the deal are as important as the valuation. It is the advisor's role to get the best overall transaction for the client, keeping in mind all their ambitions and goals for the process.

Process

Just as setting expectations is important with regard to valuation, so is establishing a reasonable understanding of the process, the timeline, and the likely terms of a transaction. Take time to document and educate clients about key steps and then keep them updated as the process progresses. Remember, as an advisor you go through this process many times, but most sellers have not done it before and will not do it again. Also discuss the client's own decision rights and authority: Who has to approve a deal and how will those other parties, if any, be included in the process?

Advisors should create a process checklist that can be reviewed with a seller. This list might include a generic timeline that shows milestones and identifies responsibilities and deadlines that will occur during the process. Preview and describe expected terms and conditions to manage expectations. Some of these include:

• Exclusivity provisions in the letter of intent
• Representations and warranties the seller may be expected to sign in a purchase agreement
• Indemnification concepts and provisions
• Earnouts or contingent payments
• Escrows and holdbacks

Early disclosure of the known negatives of a deal is usually in the best interest of all parties to reduce surprises and proactively address issues. Reviewing the process with a seller may uncover issues that will likely be revealed (or should be revealed):

• What are the transferability issues?
• What is the potential impact (either way) on key people?
• What are the market vulnerabilities?
• How much work will need to be done to get the client's books in order for a prospective buyer?
• What are the last three or four disruptive events and why did they occur?
• What do I do after I sell?
• What skeletons are in the closet?

Remember, surprises kill deals!

Socializing the planned transaction process, timing, expected valuation, and terms usually solicits feedback, achieves buy‐in, and should generate alignment among the deal team.

Research Market Buyers

To research and identify buyers in the market, the M&A advisor should begin by understanding the selling company's strategy and business operations, and then research and understand the industry of the company. With this information, the following questions can be asked:

• Who are the most likely buyers?
• Are there related industries that might be a strategic fit for this company?
• Who has been actively buying in this industry?
• What private equity groups are buying in this industry or expressing an interest in this market?
• Has the seller been approached with any unsolicited offers?

There are many tools and databases that can be used to research the industry and help in accumulating a potential list of buyers. In Chapter 10, we talk more about technology being used in the M&A process. When researching buyers, the advisor should attempt to identify the right person in the organization to contact. In the case of corporate buyers, it is common for larger companies to have a specific corporate development team or lead that is responsible for acquisitions. For smaller corporate buyers, it is likely to be the chief executive officer or chief financial officer. Many private equity groups have a partner dedicated to evaluating or filtering new opportunities, or it is possible that one of the partners has experience in the specific industry of the client company. Therefore, it is critical to research the exact individual who will be receiving the seller's marketing materials so that the book is sent to the right person.

Preparation

Regardless of the format or sequence of the contents, it is key to tell the story of the business—how it creates value and why it is going to be relevant in the future. There are variations in assembling the materials for the book, but most contain the following common sections, in roughly a similar order:

• Executive summary
• Business overview and history
• Organization structure (corporate structure, parent/sub, brother/sister)
• Description of products, services, processes, and so on
• Sales, marketing, and growth opportunities
• Competitive landscape
• Risks and limitations
• Financial discussion (summary and recast)
• Exhibit A: Pro forma financials
• Exhibit B: Historical financials
• Exhibit C: Other supplemental information

While no two companies' books are alike, buyers are often looking for some common points to be made. Consider these typical key points:

• Why the owners/shareholders are selling the company
• What the desired transaction is
• Differentiating qualities of the business
• Competitive advantages
• Growth opportunities
• Profitability
• Brand positioning
• Marketing strategy
• Shipping and pricing
• Customer service and support

In addition to highlighting the positive elements of the company, an advisor is wise to share some negative points as well. This is done for a few reasons. Proactively sharing negative attributes allows the advisor to put them in as favorable a light as possible. Sharing some of the challenges and weaknesses of the company will allow the advisor to explain why they represent an opportunity for the buyer. No company is perfect. Therefore, revealing the negative elements shows that the company is real and may actually help to explain why the seller wants to sell. Typical negative issues include:

• Limitations/gaps in management
• Customer concentration
• Reasons for lack of growth
• Sales‐team/sales‐channel limitations

Seller Motivation

When marketing a closely held company, perhaps one of the most important facts to cover is the seller's motivation for selling. Whether consciously or subconsciously, buyers often wonder if the seller's motivation is based on negative facts not known by the buyer. Such a belief can greatly increase the risk that the deal will not proceed smoothly to a successful closing. Therefore, in almost every closely held company sale, the advisor should openly explain the seller's motivation and rationale. Generally, there is almost always one or more sufficient nonfinancial reasons driving this decision.

Motives that will resonate with buyers include:

• Undercapitalization. Private equity groups especially like to hear that sellers are looking to sell or recapitalize because they just do not have the financial horsepower to carry on with their vision for the company's future or support rapid growth.
• Need for additional management strength. Many strategic buyers take pride in the management team they have developed and therefore are looking for companies to acquire that are seeking to strengthen management to improve operating results.
• Retirement due to age or health. Assuming the seller is at a reasonable age to retire, this explanation may be a natural driver. A related rationale can be that the seller is aging and wants to diversify his personal financial risk as the needs of his business continue. This can create an ideal scenario for a private equity group, particularly if the seller desires to stay with the business for some time.
• Management wants to buy out owner. Some private equity groups like to fund management buyouts, and therefore this motivation matches their desire to invest in these situations.
• Need to achieve economies of scale. Strategic buyers are often attracted to a company whose operations can become much more efficient and productive when merged with a larger entity, or that have offerings that can be sold into markets currently beyond its reach, but that the acquirer serves.

Financial Disclosures

The financial statement analysis section of the book is clearly important, since the economics of the deal are often of primary significance to a buyer. A clear and concise presentation of the financial story is important.

Most financial disclosures will begin with a summary of the historical (and perhaps forecasted) earnings before interest, taxes, depreciation, and amortization (EBITDA). This will generally include a three‐ to five‐year historical analysis, plus information for the current year and a forecasted year or two. EBITDA calculations should be shown (including add‐backs), so that presented EBITDA can be reconciled back to net income from the financial statements. In addition, it generally makes sense to summarize the significant elements of the income statement such as revenue, gross margin, net income, and so on. This provides context to the EBITDA levels presented (i.e., EBITDA is growing at a similar rate as gross margin, etc.).

One‐off situations or extraordinary add‐backs should be footnoted or explained when presenting normalized EBITDA as is described in Chapter 12, “Financial Analysis and Modeling.”

Specific EBITDA Presentations

In some situations, a special presentation can be made for a specific buyer or investor. The EBITDA presentation can be normalized to highlight special synergies or add‐backs that exist only with that specific buyer. See Chapter 12 for a detailed discussion of normalized EBITDA.

Balance Sheet Presentation

Some M&A advisors include a normalized or postclosing balance sheet in the financial disclosures section of the marketing book. This can give buyers a better sense of the balance‐sheet‐related issues and questions they may have, such as:

• What is the normal or average working capital to be included in the transaction?
• Which assets are included in the sale? Which are not?
• Which liabilities does the seller expect to be assumed by the buyer?

Other Financial Disclosures

Depending on the circumstances, other financial elements of the company should be disclosed and explained to provide buyers with a solid understanding of the financial picture of the company and prepare them to make an educated and complete offer. Here are some other financial disclosures to consider:

• Maintenance versus growth capital expenditures
• Working capital needs
• Seasonality trends
• Cyclical trends

Prospective Financial Presentation

In most situations, advisors want to present forecasted or prospective financial statements as a part of the marketing book. However, presenting these future statements (or parts of them) requires some special considerations:

• Be careful to explain that these are management's forecasts—not the advisor's.
• Use footnotes to explain the key assumptions being made in generating the forecast.
• Tie the forecasts to specific key assumptions and metrics, which can then be explained and further supported in other parts of the book.
• Present forecasted statements and summaries in the same format as historical statements.
• Make sure they are believable—avoid hockey‐stick forecasts or unrealistic growth patterns.

Clear the List with the Seller

Building a list of buyer targets was discussed earlier. Before any information is sent to any of these targeted buyers, the M&A advisor should share the compiled list with the seller for review/approval. It is possible that the seller may know something about these companies that you did not learn in your research, which would make them off limits for the seller. In some cases, the seller will not want certain buyer targets to learn that the company is for sale. These situations should be discussed with the seller to determine who will be included on the marketing distribution list.

M&A advisors may disagree with the removal of certain buyer targets from the list. They may debate the need to provide this buyer target with the company's information, because that buyer target may be a prime candidate to acquire the company. However, the decision is ultimately the seller's to make. An M&A advisor should respect the seller's wishes, and if the seller does not want any materials being sent to a particular party, then that party should be designated as “do not contact.”

Initiate Contact with Buyers

Once the seller has given the authority to contact each buyer target, the M&A advisor will generally send a blind summary or teaser to the targeted buyers. As noted previously, care should be given to address the information to the appropriate individual at the specific organization so that the teaser is actually received and reviewed.

Most M&A advisors create and maintain their own databases of buyer targets for each transaction to track who has been contacted, when information was sent, and other research information. Some tools help the M&A advisor to remember when to follow up and can track notes made by associates or others working with the advisor. In addition, some database tools even rank buyers according to likelihood of acquisition. Those ranked at the top will be given more attention, with more follow‐up phone calls, e‐mails, and so on.

Seldom is sending a single e‐mail with a blind summary enough to capture a buyer's attention. Even the best and most likely buyer targets will often need follow‐up phone calls to specifically point out the benefits of the potential company acquisition being marketed.

Keep in mind that there are cases where it is better for management or other advisors to reach out and contact potential buyers because of existing relationships or access.

Obtain Nondisclosure Agreements

If a buyer target receives the teaser information and is interested in the concept, the buyer will want to learn more about the company. Of course, this is why the book has been prepared and is ready to be distributed. But, before distribution of the marketing book, the buyer must sign a nondisclosure agreement (NDA).

Some M&A advisors maintain their own template NDA that can be sent to buyers when they show interest in the company. Standard NDAs for employee matters or customer relationships are usually insufficient to cover an M&A transaction, so regardless of whose NDA is being used, ensure that it is tailored for deals. In some cases, the NDA may even be sent with the teaser in the initial e‐mail, along with a comment such as, “If you are interested in the company described in the attached Executive Summary, please sign and return the attached NDA to receive more information.”

The seller's attorney may want to review and comment on the completeness of the template NDA, especially if the seller has particular confidentiality concerns. Although M&A advisors may send their template NDA, many buyers will send back their own template NDA or make edits to the original NDA. These situations should be discussed with the seller or their attorney to ensure that the changes are acceptable.

Distribute the Book

After an NDA has been signed and accepted, the full book can be distributed to the buyer target. In some cases the M&A advisor may want to tailor the book to specifically address issues important to the buyer. In addition, a separate “book summary” might be sent along with the marketing book, as discussed earlier in this chapter. For clarity, distribution of materials is primarily done electronically through e‐mail or via the VDR. In a few cases, there is a physical document.

Follow Up, Discuss, and Set Expectations

M&A advisors should maintain regular contact with those who have been provided the book. The goal is to determine which of the buyer targets are interested and capable of making an offer to purchase. In most cases, buyers will want additional information, questions answered, and even an opportunity to visit the company and meet and interview key personnel before an offer is submitted.

In the process of developing the buyer list, it may be helpful to prioritize potential buyers by strategic fit. Especially in the case of highly ranked target buyers, the M&A advisor should do more than rely on the book to convey the possible value of the seller to the buyer. Instigate and seek to have a call or meeting with key management on the buyer's team to share the seller's thinking about strategic value to the buyer and to learn what the buyer is thinking, too. The process of selling a company is proactive, just as selling most other things in life.

Depending on the number of interested buyers, balancing the many requests, following up with multiple buyer targets, and coordinating these efforts successfully can be very time consuming. The M&A advisor's role is critical in shielding the seller from the distraction of the process and allowing the seller to stay focused on the continuing operations and performance of the business.

Negotiated Sale

A negotiated sale is where there is only one buyer in discussions with the seller at a time. The advantage of this process is that it allows the seller to maintain maximum confidentiality. The seller can engage with only one buyer at a time and therefore keep an announcement that the company is being sold confidential. The negative side of a negotiated sale is the lack of leverage with the single buyer. The main negotiating point is that the seller maintains an ability to walk away and potentially find another buyer or retain ownership. Figure 7.2 shows the key steps of a negotiated transaction.

Private Auction

A private auction (sometimes called a limited auction) is the ideal negotiating process for most private market M&A transactions. A limited auction is created when a small group of buyers competes with the knowledge that others are also interested. Unlike a traditional auction, there is a limited group of buyers who know of the deal and can have assurance that the deal is not being shopped and disclosed industry‐wide. It allows for the benefit of competition while keeping the process relatively quiet within a small group of suitors. There are some challenges faced by an M&A advisor in this situation.

The M&A advisor must attempt to identify and bring offers from a variety of different targeted buyers at nearly the same time. This is especially a challenge when the reaction times of buyers can differ greatly. In general, private equity groups react and bring offers quicker than strategic corporate buyers, who may be waiting for the proper operating conditions or seasonality, or who have a longer decision‐making process. For these reasons, experienced M&A advisors learn to approach slower groups first and purposely delay the solicitation of an offer from quicker groups. Some M&A advisors use bid process letters to give bidders instructions for expected offer terms and to set deadlines. There needs to be a realistic timeline to bring multiple offers to the seller within a tight window of opportunity for the process to work.

Because most offers are solicited under the terms of mutual nondisclosure, the names of potential buyers and the exact terms being offered should not be disclosed to other buyers. However, the limited auction is successful only when buyers know there are other offers and other bidders involved. Therefore, the M&A advisor must delicately negotiate with buyers to inform them that other bidders exist and to encourage better price and terms, without disclosing who the others are or the exact terms of their offers.

The limited auction process should discover the realizable value of the company at that time in the market. As we mentioned earlier in the book, the sellers of middle market companies will typically have multiple objectives in going to market, including maximizing the sale price. Once it becomes obvious through the initial indications of interest or draft letters of intent how the market values and views the selling company, the decision process tends to shift to “who do the sellers want to sell to?” among those bidders who expressed interest. Which buyer does the seller trust, believe will and can close quickly, and will be a good steward of their legacy? With that decision, the M&A advisor can approach the desired buyer with an informed “ask” of value and terms that the seller is willing to say “yes” to and that is defensible with competing offers and market data. This is one way of optimizing the outcome of the process to achieve both maximum value and other objectives.

Figure 7.3 shows the key steps of a private or limited auction.

Public Auction

Although most private market transactions attempt to use the limited auction as their process for driving value, there are certain situations where a public auction (sometimes referred to as a formal or broad auction) is used to solicit offers. In a broad auction the seller uses stages and deadlines to manage a large group of potential buyers. Generally all diligence materials are made available to the buyers via an electronic data room in advance of receiving offers. In addition, parameters for the terms of the offers are generally limited to a few variables (price, escrow amounts, etc.). The buyers are given a deadline to submit offers, which are then generally binding on both buyer and seller at the conclusion of the auction. Broad auctions are not common but can be quite useful in certain situations, such as the sale of specific intellectual property (patents, software licenses, etc.). Among the downsides of this type of auction are the negatives of putting a “For Sale” sign on the company and the open awareness and flow of information within the industry and community. No matter how tightly nondisclosures are managed, in a broad auction, seller information tends to leak. Accordingly, it takes a company that has significant market opportunity and very strong buyer demand to enable a formal or broad auction to work.

Term Sheets

Term sheets are often used in capital‐raising projects, such as angel investments, venture capital, or bank credit facilities. Occasionally, a term sheet is used to express interest and basic terms between a buyer and seller in a full acquisition transaction. Although a term sheet can be useful for negotiating basic elements of the deal, such as price or payment terms, they are generally structured in a bullet‐point format and often lack major components of the deal that might be critical in making a decision to accept the offer.

Indication of Interest (IOI)

Sometimes buyers will want to perform more due diligence or conduct meetings with the company's management in advance of preparing a full letter of intent. At the same time, the seller may be reluctant to invest time meeting with buyers without knowing they are serious and are at least reasonably close with regard to their assessment of value. In these situations, the buyer may draft an indication of interest to the seller to show this interest and set expectations for future discussions. In transactions with a large amount of buyer interest, the IOI is often used to “boil down” or narrow the list to a manageable group of buyers who express the highest value range.

Letters of Intent

A complete letter of intent (LOI) is used to establish a written framework for the mutual understanding of the key transaction points between the buyer and seller. Buyers will generally draft the initial letter of intent, although it is common for various redlined versions to be passed back and forth as part of the negotiation process. When completed and agreed on, a good letter of intent will provide a road map and highlight the major elements of the deal to be documented in a definitive agreement. One philosophy in drafting the LOI is to negotiate as many of the key deal points as possible. This takes additional time, but ensures that both parties are aligned before granting exclusivity and embarking on due diligence. The alternative is to negotiate a rather broad or loose LOI that leaves some of the terms of the deal undefined, to be negotiated when the definitive documents are drafted. The risk in this case is that the company will have invested time and money in due diligence and likely will have become emotionally tied to the deal, thus having less leverage to get what it wants. There is a balance to achieving the right level of detail in the letter of intent while maintaining momentum in the deal and keeping all parties focused. In general, the deal terms do not get better nor does the price go up for the seller after signing the LOI.

Most LOIs will include both binding and nonbinding provisions. The major deal terms will generally be expressed in the nonbinding sections with issues such as confidentiality and exclusivity as the most common binding provisions. Keep in mind that even though these provisions are nonbinding legally, we want them to be binding in principle to prevent retrading after the LOI is signed.

Typical Nonbinding Provisions of an LOI

• Nature of the deal (e.g., stock versus asset deal)
• Price and terms (type and timing of consideration)
• Other significant requests in the deal (employment agreements, noncompete terms, closing time and place, etc.)
• Definition of the working capital to be delivered at closing and how it is to be calculated
• Understanding of key employee roles postclosing
• Definition of the CEO's role postclosing
• Key dates or timelines for the deal to progress (when financial and legal due diligence will be completed, when a first draft of the purchase agreement will be provided, etc.)
• Basic understanding of the representations, warranties, and indemnity caps

Typical Binding Provisions of an LOI

• Exclusivity (no‐shop provision)
• Confidentiality
• Due diligence expectations
• Deposits (and whether they are refundable)
• Breakup fees (rare)
• Expenses (both buyer and seller are responsible for themselves)

Because letters of intent have both binding and nonbinding provisions, they can create contentious situations between the buyer and seller. A common cause for friction in negotiating a letter of intent is generally the exclusivity granted to the buyer. It is reasonable for buyers to want to lock up the seller for a period so they have some assurance that the seller will not continue to shop for better offers while they are legitimately completing their due diligence and investing in the process.

However, sellers need to be cautious to avoid lengthy lockup periods that might allow the buyer to leverage the price down unfairly and keep the seller off the market. To avoid this situation, sellers may want to insert language in the exclusivity section of the letter of intent that allows them to terminate the buyer's exclusivity should the buyer propose a significant change in price or terms or deviate from the expected process (such as performing due diligence and delivering purchase agreement drafts).

Deal Structure

A good letter of intent will contain the primary deal structure terms. While there is always room for negotiation on certain terms in the definitive agreements, most of the significant deal structure should be defined in the letter of intent.

The negotiation of an M&A transaction is never as black and white as merely maximizing price. There are many other terms and structural differences that need to be compared, all of which collectively make up the total value of the transaction to the seller. In addition to price, the following elements should be considered to evaluate the total value (and risk) of the deal to the seller:

• Asset versus stock structure
• Tax deferral structures
• Nonstandard representations and warranties
• Deferred payment terms (holdbacks, escrows, deferred payments)
• Buyer's financing issues
• Alternative purchase price consideration
• Earnouts

Asset versus Stock Structure

The most fundamental question when negotiating a business purchase is whether the transaction will be structured as an asset or stock sale. The same price can have drastically different tax and legal impacts on the seller under each structure. Therefore, this primary issue should be addressed up front in any offer. Without addressing the specific tax or legal issues to be discussed in other chapters (particularly Chapters 17 and 18), here are the general “business” advantages and disadvantages comparing the two:

Primary Motivations for Stock Transactions

• Seller's tax motivation—single taxation at capital gains rates.
• Buyer is allowed assumption of seller's contracts, rights, and so on, without assignment (although there may be change‐of‐control consents required).

Primary Motivations for Asset Transactions

• Buyer avoids unintended liability transfer (i.e., less risk).
• Buyer receives a stepped‐up basis in the assets, allowing them tax depreciation and usually lower tax liability on future earnings for a number of years postclosing.

Other Tax Deferral Techniques

In addition to the decision to structure as an asset versus a stock transaction, there are other structural alternatives that may save or defer taxes for the seller. If some of these tax‐saving structures can be identified in advance at the offer stage, they may represent additional value. These are some tax‐motivated structuring methods that could be identified in an offer:

• Section 1031 (like‐kind) exchanges
• Statutory mergers
• Favorable allocation of purchase price
• Installment sale treatment
• “F” reorganization or 338(h)(10) provisions
• Section 721 rollover equity

Price and Valuation Changes

Because the price or valuation is generally a nonbinding provision in the letter of intent, it is technically subject to negotiation until a definitive agreement is signed. This is one reason why time kills deals. Over time, either side's expectation of value might change. The seller's perspective of value might begin to increase if performance is improving since the LOI was signed. And, of course, buyers are watching for negative signs right up to the closing date. Again, keeping a deal moving forward and maintaining momentum is the best protection against this deal killer.

Terms and Conditions Changes

Similar to price and valuation, key terms of the deal are also generally nonbinding until closing. In addition, business conditions that are outside the control of either party (such as the economy, lending terms, pandemics and shutdowns, industry trends, etc.) can affect a transaction at any time leading up to the close. Many transactions scheduled to close in March of 2020 were delayed due to Covid and then never completed; others were renegotiated. Again, momentum and speed to closing are the best prevention for this deal killer.

Third‐Party Challenges

There are often third parties that hold the keys to a transaction getting completed, or at least completed on time. These can include: lender approval, governmental approval, lease and contract assignments, union approval, minority shareholders' consent, and key employee agreements. The key to avoiding these becoming deal killers is advance identification and monitoring of the needs and requirements of each party and to make sure not to wait until the last minute if possible. Third parties generally have nothing substantial to gain or lose and are therefore not as motivated to act as the buyer and seller.

Allocation of Risk

Sellers wish to leave the business with no continued risk beyond certain payments or benefits like earnouts. Buyers generally do not want to take on any risk for issues that may have been created before they purchase or take control of the company—therein lies the natural tension. Most of the time this deal killer can be prevented if both parties are reasonable and are using experienced legal counsel who have similar definitions of “reasonable and customary” allocation of risk. Level heads can prevail to prevent these issues from killing a deal.

Other Preclosing Mistakes

Additional common issues that cause deals to derail or fail include:

• Being impatient and indecisive
• Either party attempting to retrade or materially change the key transaction terms after signing the LOI
• Telling others at the wrong time (early disclosure to employees, vendors, customers, etc.)
• Leaving loose ends (e.g., failing to buy out minority shareholders or settle options or bonuses before closing)
• Failing to take responsibility for problems or issues, and allowing them to be discovered by the buyer, creating a surprise
• Allowing business performance to drop during the sale process (short‐timers syndrome)
• Failing to disclose intentions to compete or retain certain assets otherwise considered standard

Postsale Integration

While closing may be the finish line for the seller, it represents a new start for the buyer. Integration can refer to the process of combining the recently acquired company with the buyer's organization (whether entirely or partially), or the adoption and implementation of new management routines and reporting for a financial buyer. Either way, many acquisitions fail to deliver the expected results, not because of bad terms or pricing, but because of poor planning and missteps with integration.

Advisors can play a role in setting up a successful post‐deal integration. (They may also, though rarely, play a role in executing the integration—but this is a different process and requires a different agreement, in which the advisor is compensated by the new owner.) Buyers sometimes separate the diligence process from the integration process. For their part, sellers sometimes focus so intently on the deal process that they neglect to help their company prepare for the transition. Each of these is a mistake, as great ideas, strategies, problems, and planning opportunities can be identified during due diligence. These are the issues, ideas, and opportunities that can provide the feedstock for a solid integration plan and postclosing execution, all focused on value creation. M&A deal teams should include the integration manager of the buyer as soon as practical as the process enters formal due diligence. This is a natural entry point for integration planning, with an eye toward the eventual launch of the first 100 days' integration plan execution. The seller should also care. With many transactions having some form of contingent postclosing payment due, the seller should want to have alignment on key operating issues that could directly impact earning those future payments and assuring a smooth transition for employees, customers, and suppliers.