The Hard Yards - Financier Worldwide, June 2013

Despite evidence of confidence growing across M&A markets, strategic acquirers and private equity investors remain highly selective about the acquisitions that they are willing to commit substantial resources to.

In the mid-market, this has manifested itself in a reluctance to participate in a highly competitive ‘auction’ sale process for all but the most strategic of targets.

Many advisers have recognised this and have designed more flexible processes to ensure that buyer and seller have the necessary level of interaction in order to get comfortable with closing a transaction.

More flexible processes enable a buyer to become more comfortable with the ‘soft’ aspects of a deal which frequently make or break a deal should intractable ‘hard’ issues emerge.

Managing expectations

When anticipating a sale, emphasis should be placed on the need to take a business to market with a set of well-thought out and credible financial forecasts. In too many cases sellers succumb to the irresistible temptation to inflate their projections to create the most positive impression of the company’s growth potential.

While this may result in attractive first round offers, in the pressure cooker scenario of a due diligence process the most important barometer for any buyer will be to see the company delivering against those projections.

In the run-up to a sale process, careful tactical consideration should be given to budgeting for the monthly phasing of revenues and profitability. The goal should be for the company to be achieving every monthly budget target as the process progresses.

Unearth your dead

Every business has its skeletons. Some are well known; others are as unexpected and as surprising to the current owners as to the prospective buyer. Whatever their severity, it would be naive for a vendor that is aware of such skeletons to assume that an acquirer will not unearth them. An acquirer that uncovers a material issue that it feels should have been disclosed may feel that it has been intentionally misled – a breach of trust from which many transactions do not recover.

With time, there are relatively few issues that cannot be resolved and much better that this happen prior to initiating the sale process.

Close-in to close

Acquirer due diligence has become more drawn-out and invasive. The four to six week period of exclusivity between agreeing a deal and legal completion common in easier times has become eight to ten weeks for all but the most sought-after assets. The longer these processes take, the more likely it is that issues will emerge and the more significance that risk-averse acquirers will attach to them.

This is no environment for a passive seller. While it is common in large transactions for acquirers to be asked to submit a detailed mark-up of a draft legal contract supplied by the seller’s lawyers alongside their final written offer, in reality few acquirers are inclined to do so on smaller deals where it is still a competitive process. If they do, the mark-up is invariably cursory. However, securing a clear understanding of how accommodating a buyer is likely to be at the legal stage is hugely helpful for a seller in deciding which buyer to back. Rather than confront acquirers with a 140 page legal contract and get short shrift, better to present to the purchaser a ‘key legal terms’ schedule which sets out the seller’s distilled ‘non-negotiable’ positions and points of principle. You will achieve a much more meaningful level of engagement with multiple buyers through using this 10 or 12 page tool, understanding each of their positions on the issues that really matter to you before selecting your preferred purchaser and granting exclusivity.

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