11 Deal Making Lessons by an Investment Banker- Part 3
During negotiations entrepreneurs need to have a plan and stick to it
Editor’s note: This is Part 3 of 3: leadership characteristics that can lead to great business success. Find: Part 1 Lessons one to five here, Part 2 Lessons six and seven here
I remind you that I began these series of articles after I was asked the question: What makes a great deal maker? In this article I address issues of basic business principles that are so often neglected in the heat of once in a lifetime transaction of selling a business or raising capital. Selling a business or raising capital is not dissimilar to a professional sports team arriving at their Superbowl, World Series or Championship game. To arrive at the big game, the owners, managers, coaches and players must have successfully executed, as a team, the fundamentals of their strategic plan over an entire season.
Here are the last four lessons to generate success:
- Prioritize Objectives – Begin with the End in Mind – Steven Covey
One of the tricky challenges for many business owners involves carefully considering all of their objectives.
As expected, most sellers focus on maximizing their selling price. But a fixation on a singular selling price can be costly if it is at the expense of considering other more qualitative objectives including:
1) protecting key employees (remember employment contracts)
2) maximizing after tax proceeds
3) composition of purchase price (debt, notes, earnout, rollover equity
4) reducing future liability (those reps, warrantees and escrows)
5) life after closing (retaining an equity ownership stake, earn-outs and non-competes)
6) protecting confidentiality during the process. To close a successful transaction, entrepreneurs need to balance a complex and often contradictory set of objectives. It is important to work with advisors to plan an executable strategy with clarity around your key priorities.
During negotiations remind yourself that you don’t need to win every negotiating issue, just the important ones.
- Practice & Planning – Fortune favors the Prepared Mind- Louis Pasteur
Be one step ahead of the purchaser. Companies don’t think twice about a year-long product roll out, while their preparation for raising capital is often done at one meeting with their management team.
Years ago we represented a selling company that was owned 50:50 by each of the two founders. One owner did some careful estate planning before the transaction, and the other didn’t. The result was that upon the sale of the company, the planner got to keep almost twice the after-tax proceeds than his unprepared partner.
Planning and preparation include many key steps:
1) review your key contracts from a buyer’s perspective
2) review management and how they will present themselves
3) review your special sauce and determine if there are steps to enhance and protect
4) anticipate buyers concerns
5) identify barriers of entry for a potential buyer thinking about whether they can use their resources to build your business
6) review your systems and financials with your accountant or independent third party, asking about weaknesses.
Prepare, prepare, prepare: In deal making there is no substitute for preparation. Planning pays.
- Understand why buyer is buying – Determine what your customers need and work backward, Jeff Bezos, Amazon CEO and founder
The best dealmakers understand that, from a buyer’s perspective, the ultimate business value is a combination of the value of the company that they are acquiring plus the perceived value they will bring to the business post transaction. Therefore the better a seller understands why the buyer is interested in investing, the better he can position his company for an optimal transaction. Business owners should take the time and effort to understand the buyer’s strengths, their needs and then build their confidence.
Always remember that buyers are buying into the future and they need to be confident in their ability to meet their own strategic objectives.
- Quality Advisors You are known by the Company you keep. Aesop
Sellers need to surround themselves with first-rate advisors: bankers, lawyers and accountants from day one. Although this is always sound advice, it is particularly true in M&A transactions where the uneven playing field heavily favors experienced buyers.
It is intuitive but rarely appreciated that there is a significant experience mismatch between an M&A team from a Fortune 1000 and an entrepreneur who is doing a once in a lifetime transaction. Failure to recognize this can be detrimental to the transaction process and ultimately to maximizing value. Entrepreneurs need to level the playing field during this strategic transaction by surrounding himself with a strong and experienced deal team. Failure to consider and address such detailed issues such as corporate organization, poorly structured leases, customer contracts, unprotected IP, weak non-compete agreements and so on can put the owner at a considerable disadvantage.
Talk to other business owners and your trusted advisors about attracting a top flight M&A team of experienced, professional advisors.
One Truism is to Expect the Unexpected
The one consistent truth I have experienced in every deal over 25 years is that there will be surprises. Successful entrepreneurs have developed extraordinarily good instincts, but when it comes to the worlds of capital raising and selling their business their instincts often fail them or fail to arrive on time. Understanding the process, from the technicalities of the deal, to selecting the right team and being prepared for the human elements of fear, excitement, confidence and more is what enables the owner to maximize value. The best dealmakers remain calm, focused and have back up plans to deal with the inevitable surprises. By keeping the 11 factors I have shared across these 3 articles in mind a business owner is taking important steps in laying the groundwork for the completion of a successful transaction.
Parts 1 and 2:
Part one: 11 Deal Making Lessons Learned By an Investment
Part two: 11 Deal Making Lessons Learned By an Investment
Related content:
5 Tips Before Buying a Business
