As an owner, one way to maximize value in your business is to demonstrate that you’re not the smartest person in the room. In an ideal state, you work yourself out of a job, moving on to an advisory role while your management team runs day-to-day operations.

With that said, it’s equally important that your goals and values are in sync with your managers’.  When selling a business, you want to show buyers a positive work culture in which team members work well together and make each other better.

Over the years, we’ve seen gifted people who are very good at doing their technical jobs, but who are either poor managers or don’t get along with ownership. As an owner, that’s a tough position to be in. Do you accept the conflict if the business is continuing to make money, or do you replace management in hopes of finding a better personality fit?

If you find yourself in that scenario, you have a couple of options. You can replace management, you can try to fix the culture issues, or you can go into a sale process being upfront about team dynamics.

The first option, replacing management, could be difficult as the talent market tightens. Moreover, you should try to complete any key staff changes at least a year before you go to market. (Keep this is mind if your management team is nearing retirement as well. You don’t want to lose all your key leaders right at the time you yourself want to exit the business.)

The second option is to address the cultural issues with your existing team. You might start by looking at your own leadership style by working with an executive coach. Or, bring in a consultant like SM Advisors or Initiative One to address team issues. Some outside perspective and consensus-building can go a long way toward building a shared vision.

Finally, you can go to market, acknowledging that team dynamics are a weak spot for your business. It’s very tough to hide in-fighting—conflict almost always come out during the sale process.

In this scenario, you might actively partner with management employees, positioning the sale as an opportunity to find new ownership that better fits their vision for the business. This is a wise route if management would be particularly hard to replace. Key employees who feel shortchanged or undervalued can chase away buyers, holding your deal hostage in exchange for a bigger salary, bonus structure, or even equity.

Alternately, you can work with potential buyers to pinpoint personality misfits that a buyer could better fill with their own people. If your team is dysfunctional but profitable, some buyers will see that as an opportunity to grow even more, once team dynamics have been addressed.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Deciding to pursue a merger or acquisition can be a complicated process fraught with risk. Even when the financials look good and the potential rewards seem great, there are several reasons why a buyer might decide to walk away from a deal. Understanding these reasons can help sellers prepare for negotiations and improve the likelihood of a successful outcome.

Here are eight common reasons why M&A buyers might decide not to proceed with a deal:

1. Big Surprises in Due Diligence:  During due diligence, the buyer may discover that the target company is not what they expected. This could be due to operational issues, poor recordkeeping, inadequate systems, or other concerns. If the buyer believes that these problems make the investment too risky, they may walk away. That’s why it’s important to “go ugly early.” In other words, put all the negatives on the table right away, to reduce the chance of surprises ruining a deal later on.
2. Financial Concerns:  When evaluating an opportunity, buyers are looking at a company’s financial health and future earnings potential. If, during due diligence, they find significant financial issues, such as declining revenue, over-aggressive addbacks to prop up EBITDA, or inaccurate financial statements, the buyer may abort the deal process.
3. Cultural Red Flags:  An acquisition involves the integration of people and organizational cultures. Buyers and sellers should have had culture discussions before the letter of intent stage. But sometimes new information reveals itself as the parties work together. If the buyer perceives significant cultural misalignment, they may walk away to avoid potential integration challenges or disruption to their own corporate culture.
4. Liability Concerns:  As part of due diligence, buyers look at a range of risk factors. They don’t want to face an unexpected lawsuit or deal with the aftermath of someone else’s improper corporate conduct. Concerns here include ethical and legal issues, including non-discrimination and employment practices, regulatory requirements, and contracts, as well as tax liabilities.
5. Environmental Issues:  Many transactions will include an environmental site analysis. Even if you aren’t selling the real estate with the business, the buyers may want assurances that the business hasn’t been the source of any unknown leaks or contamination. Unfortunately, environmental events do occur, and some sellers find themselves tied up in years of environmental remediation issues before they are able to alleviate buyer worries and put their business back on the market.
6. Strategic Shifts:  Changes in a buyer’s strategic priorities can prompt them to walk away from an acquisition. Sometimes a buyer’s board of directors or investors don’t approve the deal. Something as simple as the buyer losing a key executive who championed the deal can sideline an otherwise healthy transaction. We’ve seen it happen!
7. Unresolved Negotiation Issues:  Negotiating an M&A deal requires reaching consensus on a wide range of deal terms, including price, payment terms, contractual obligations, warranties, working capital, and other deal-specific issues. If the buyer and seller cannot resolve key negotiation points, it can lead to deal termination. Resolving these issues can be a critical point of failure for many deals. That’s why it’s a good idea to work with an experienced M&A advisor and attorney who knows what’s normal and customary for your industry and won’t obstruct your deal with overzealous demands or omit critical deal terms. You want an attorney who will protect your interests, but you also want a proven deal maker, not a deal breaker. This is also why you want the buyer to outline as many deal terms as possible in the letter of intent (LOI). At the LOI stage, you still have other buyers at the table, giving you more leverage and options.
8. External factors:  Finally, some deals get foiled by external factors outside everyone’s control. For example, COVID-19 killed or delayed many deals. The dot.com and housing busts, 9-11, political shifts, supply chain disruptions, strikes, rising interest rates—these are just some of the many external events that have delayed deals or stopped them in their tracks.

It is important to note that walking away from an M&A deal can be costly for both the buyer and the seller. The buyer loses the money they have spent on due diligence, and the seller may lose the opportunity to sell their company. However, in some cases, walking away is the best option for both parties.

Before entering into an LOI with a buyer, your advisors can help you check their refences and deal history. You want a buyer with a track record of completing deals and staying true to commitments.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

When it comes time to sell your company, the right M&A firm or investment bank can make all the difference. From preparing a stellar offering memorandum, to running a well-organized process, to generating multiple offers, to negotiating the best possible deal for you, your advisor needs to bring the right mix of transactional skill, processes, resources, and chemistry to the table. This article presents several questions that you should be asking as you search for the right M&A advisor.  

Why do you want to represent my business?

• In today’s market, a successful investment banker will turn away more opportunities than they accept. They need to know they’re a good fit for you and your business. And they need to be confident that they can successfully sell your business and meet your goals.  

What’s your fee structure?

• M&A advisor fees usually vary with the size and complexity of the transaction. The 2022-2023 M&A Fee Guide from FIRMEX helps pull the curtain back on M&A fees, revealing what’s normal and customary for the industry.  
• The bulk of the advisor’s fee should be earned as a success fee, when a deal closes. The most common success fee structure, used by 40% of survey respondents, was the Lehman formula in which the fee percentage decreases as the deal gets bigger. Roughly a third charge a fixed percentage, and 18% used an accelerator formula which gives the advisor a higher percentage on deals that exceed a benchmark price. According to the FIRMEX report, the most common fee for a $5 million deal is between 6.1 to 8%. For deals over $150 million, the most common fee is between 1.1% and 2%. 
• Most investment bankers (81%) also charge an upfront retainer. According to the FIRMEX report, lump-sum retainer fees generally fall in the $26,000 to $50,000 range, while monthly fees fall between $5,000 to $10,000 a month.  
• When evaluating advisors, consider whether their fees are similar to the above. If fees are significantly higher or lower, proceed with caution. The right fee arrangement aligns the advisor’s incentives with your own.  

What is your experience in selling businesses like mine?

• Consider deal size and industry experience. Do they work on deals of similar size to yours?  Also, no advisor can be well-versed in every industry, but they may have partners with strong experience in your space. 

Who have you worked with in the past?

• Ask to speak with a few past clients directly. Do they feel they got good value in exchange for the advisor’s fee? Was the advisor transparent and forthcoming with status updates? Did they do what they said they’d do? 

How many people will work on my deal?

• An investment bank will typically have a team of people assisting with marketing, research, and managing the details of due diligence. Expect a mix of senior advisors with experience and contacts as well as more junior analysts to help manage the workload.  

How many other deals will you be representing?

• Arguably, a lead advisor with a full team behind them could successfully represent four or five engagements at a time. Advisors with less junior staff generally handle two or three. Much beyond that, and they could lose focus or be unavailable to you at critical times.  

What is your success rate and why have deals failed in the past?

• No investment bank closes every one of their transactions. There are many reasons deals fall apart, including unforeseen market changes, inaccurate business records, and shareholder conflicts, just to name a few. A successful advisor will be able to identify a lot of pitfalls ahead of time and may not take on higher risk deals. Asking this question can help you get a sense of how confident they are in their ability to sell your business, as well as how they handle bumps in the road.   

On average, how many offers do you get per deal?

• You’re looking for an investment bank who can bring multiple buyers to the table at the same time. This creates an auction-like environment and gives you options to choose a buyer that’s the best fit for your goals. 

What’s your average over benchmark?

• In the lower middle market, deals are marketed without a published asking price so as not to create an artificial ceiling on deal value. A benchmark is a private target price set between the seller and the advisor based on an objective assessment of the business and the market. An advisor who outperforms benchmark is doing the necessary work to obtain the maximum value the market will bear.  

How will you ensure the confidentiality of my business information?

• Ask if you’ll be able to review marketing materials and buyer lists before information is released. Talk about other steps, including non-disclosure agreements, secure online deal rooms, buyer financial disclosures, and other tools that will be used to protect confidentiality and vet buyer inquiries throughout the sale process.  

Asking the above questions will help you gain a better understanding of an advisor’s qualifications, experience, and approach, and determine if they are the right fit for you. 

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.