Small Business M&A: The Difference Between Success and Failure

 

Over the years, Revitalization Partner has assisted several companies with M&A transactions. We have worked with Private Equity groups, Investment Bankers and Business Brokers.

While working on these transactions, we learned how acquiring a small, seller-owned business was different from the traditional M&A process involving larger companies and, often, investment Bankers.

Most smaller companies of the size of a seller-owned business are offered for sale with business brokers. In these cases, the businesses learned of each other through being in the same or similar markets or, in one case, where RP was serving as an advisor to both companies.

 

AN EXCELLENT STRATEGIC MATCH …

It those cases, it turned out that the buyer and seller were excellent strategic matches. In one case, our clients are in a services businesses serving mostly commercial clients and the other company in in a portion of the same business mostly serving state, local and federal agencies.

The acquiring company is about three times as large as the seller and has a broader based management and financial structure. In the other case, the buyer was in the software business and the seller was in the hardware and systems business in the same market.

But with no business broker and being too small a deal for an investment banker, how does the deal get done to everyone’s satisfaction?  First, you need a starting point that everyone can agree on.

 

INDEPENDENT BUSINESS VALUATION …

In both cases, the selling companies had business valuations done by a valuation firm that was respected by the buyer. 

The buyer based the valuation on that study, with the LOI stating that the buyer would conduct due diligence to verify the valuation.

This is an easy way to reach an agreed-on price without the emotion that is often generated by valuation discussions.

The one case, the initial offer consisted of cash plus shares in the buyer. 

In that case, the buyer had a yearly valuation done by an independent third party, so the share value was fixed. 

In the other case, the Seller was to get cash and a note from the acquiring company. As the acquirer was private equity backed, the seller felt comfortable with the note.

 

 

HOW ABOUT THE CULTURE?

The other issue when doing an acquisition is one of culture. In these cases, the management of the two companies spent some time together and both believed there would be a good cultural fit. 

In one case, in order to attempt to prevent the problems that often occur between buyer and seller, it was decided that each business would continue to operate independently without a lot of top down directives from the buyer. 

In the other case, the owner and seller felt comfortable in working for the senior manager of the acquirer as he felt that manager had the experience to grow the business.

 

MISTAKES AND LESSONS LEARNED …

While it all sounds wonderful, there were several mistakes made, any of which could have killed these deals. And some lessons learned by both parties.

1. Regardless of the size of the deal, each party should use deal lawyers.  In one case, the seller use utilized their business attorneys; who are very good lawyers, but a few important tax issues popped up where buyer nor seller had the experience to address them. In the case of the other transaction, the seller utilized his personal attorney who specialized in estate planning. In his zeal to “protect” the seller, he almost protected his client out of the deal. Only the client overriding his attorney allowed the transaction to close.

2. Make sure that all parties completely understand the deal they are agreeing to. In one case, the attorney really did not fully understand the nature of the transaction and wanted to make changes at the last minute as he “learned more” about the nature of the transaction. In another case, a member of management tried to make a last-minute change the he believed was more favorable to the seller.

3. It is important to keep the negotiations open and friendly.

While the issues above created a bit of angst with both buyer and seller in both transactions, the management teams liked each other and realized that completion of the transaction would meet both parties’ goals. As a result, working through the issues never became personal.

 

BENEFITS FROM HAVING A 3rd PARTY …

The four companies were fortunate to have had a third-party involved that could fairly represent both sides and approach the sale process with mutual trust and respect.

For companies with less of a relationship between buyer and seller, there is no doubt that the use of an independent third party to shepherd the deal through the process, combined with the right attorneys, can bring a deal to conclusion.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.