Structuring a Merger & Acquisition Transaction to the Seller’s Advantage
By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)
Are you ready to sell your business in a merger & acquisition transaction? Maybe you’ve grown your company to the point where it needs the marketing muscle of a larger corporation to continue growing or needs more cash to achieve its promise or maybe you’re just ready for a new challenge. In any case you need to know what you want to get out of the merger & acquisition transaction, how the market works and how bargaining power varies throughout the M&A sales process.
Generally speaking, merger & acquisition transaction activity follows equity valuations. When stocks are rising and high, M&A buyers tend to be more confident and aggressive in their pricing than when stocks are falling and low or when the economy and stock market is uncertain as to direction. So a rising market, rising merger and acquisition transaction value and deal volume often happen at the same time. Down markets, lower merger and acquisition transaction values and deal volume are reflections of uncertainties concerning the future and happen simultaneously as well.
In a traditional privately held or family business there are a number of reasons why that business may be for sale in a merger & acquisition transaction including retirement of the founders or their just wanting to do something else or the company needing more clout to continue growth. The seller’s reason is very important to how a merger & acquisition transaction is negotiated and structured. As part of getting ready the seller must clearly understand its goals and its needs so that they will be able to weigh one M&A offer verses another. Sellers also need to have defensible financial statements, be able to articulate business objectives for the next few years and have supporting detail to present to prospective M&A buyers. Knowing the tax consequences of alternative types of mergers & acquisitions transactions is often helpful. Ideally a seller should use the time before going to market to get its house in order.
Merger & acquisition valuation, structure, timing and the certainty of getting the M&A transaction done are important. One of the major reasons for mergers & acquisitions transactions falling through is failure to meet current financial objectives. There is always a trade-off between being aggressive with projections to maximize merger & acquisition transaction value and being conservative with projections to avoid a miss. It’s always easier to have a conversation with a buyer along the lines of we’re going to do better than we told you we were going to do than the converse. In any case, having realistic projections are a matter of necessity.
A worst-case situation from a seller’s viewpoint in a merger & acquisition transaction is being in a position where the company must be sold to a particular buyer, so having actionable options and bargaining power are important. Unless a sale in a merger & acquisition is an alternative to going out of business, a seller’s bargaining power starts at a fairly high level and actually increases early in the M&A transaction as the marketing process takes hold. Bargaining power actually decreases after a letter of intent is signed and final negotiations take place. Many sellers don’t use the time spent with a potential M&A buyer before a letter of intent is signed to surface problems. This is really the best time to do so because this is the time when a seller holds the most power and can put the best spin on problems without doing major damage. Later on if problems surface that could have been previously disclosed, sellers lose credibility and buyer confidence. Why does a seller’s bargaining power lessen as mergers & acquisitions negotiations go forward? Because as time goes on an M&A buyer recognizes that it is the preferred bidder, that the price it has offered is high enough, that it has an exclusive negotiation time period, etc.
The following are important points to remember if you’re thinking of selling your company in a merger & acquisition transaction; have defensible financial statements; know your tax situation; seek to create alternative prospective M&A buyers; think carefully before executing a letter of intent; if an exclusive period must be granted, seek to make the exclusive period as short as possible; make the M&A buyer’s achievement of performance milestones a condition for the continuation of an exclusivity period to avoid dragging out the merger & acquisition process; limit the length of the merger & acquisition due diligence period; close the M&A transaction as quickly as possible; and lastly, surface problems early in the mergers and acquisitions process when your leverage is highest and your bargaining power is the greatest. One last piece of advice to remember is that time to close an M&A transaction is your enemy because time kills all mergers and acquisitions transactions if time deadlines are extended beyond a reasonable, short period.
Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at email@example.com.
Copyright 2010 Jack Lyons. All Rights Reserved.