If a strategy is considered to be the distinct game plan in which businesses create value and operate, then every business has a strategy or at the very least, makes strategic decisions.  Whether it is a good strategy and acted upon consistently throughout the organization, is another story.  Every time management makes a move, such as launching a new product, for example, it inevitably becomes a part of their strategy, consciously or unconsciously, written or unwritten, communicated or not communicated.
So while every business has a strategy, less have an up-to-date and comprehensive strategic plan, and even less that have a dynamic strategic planning and execution process that is embedded, documented, articulated, understood, and acted upon consistently and continually throughout the organization.

Businesses that are strategy-focused outperform their competitors. That is, those that have a clear vision and strategy that guides, directs, and prioritizes everything and everyone from resource allocation including time and capital, to daily activities such as, which call to return first.  Moreover, research has shown, that strategy execution competency is far more important than the strategic plan itself.  Companies with brilliant strategies but poor execution lag those with average plans but with superior and deliberate execution skills, presuming of course their plans are not fundamentally flawed.  Even then, when executed properly, the chances of a poor strategy ruining a strategy-focused business is low, because competent execution includes continuous feedback and appropriate adjustments as a business continues along its path towards achieving its envisioned future.

Translating the business strategy into business operations is where “the rubber hits the road”.  Deciding on key strategic goals, who is responsible etc., across each of the business's functional areas is only the first step.  Each goal must be a SMART goal (specific, measurable, attainable, relevant, and timely).

Kaplan and Norton’s “Balanced Scorecard” is a strategic management and planning system used by thousands of businesses around the world.  A Balanced Scorecard helps teams set their strategic objectives and targets, decide on how to measure success, and identify the specific actions/initiatives that need to be undertaken.  The Balanced Scorecard helps organizations consider their most important strategic objectives across four perspectives: financial (eg: return on equity), customer (what will be our value proposition to the customers in our chosen market), internal processes (what do we need to excel in to service our chosen market/customers and achieve our financial goals), and growth/learning and development (how do we deepen our capabilities such as critical skills, systems, etc.).  Each of the specific objectives for each perspective links to other objectives, through a cause and effect relationship culminating in achieving the ultimate financial goal(s). 
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The Balanced Scorecard is an effective way to create buy-in from everyone and create an interactive and dynamic strategy management system that allows the entire team to work towards common, organization-wide strategic goals.  When implemented with determination, it can help transform your business into a strategy-focused business that can achieve breakthrough performance.

Negotiations between a buyer and a seller throughout a complex M&A transaction are never easy; even when there are two motivated parties and lots of mutual goodwill.  A successful close is pre-empted by agreeing to the finer terms of a deal; some that favour the buyer and others that favour the seller.  It is rare for either party to claim post-close, that they made the perfect deal.  The inevitable compromises during the negotiation process usually at best lead to a good deal for both parties, and in most cases require flexibility.

Knowing where and when to exercise flexibility can be tricky.  It starts with being able to Listen to Learn.  Listening to learn helps uncover unspoken assumptions or misunderstandings that can lead to a failed negotiation.  With a deeper understanding of the counter-party’s key priorities, there is a better chance that a solution can be found that works for everyone.  It also helps negotiators find the right compromise or limit the time spent on an undoable deal.  It is always best to get to the Red Flags as soon as possible.

Obviously, when both parties have flexibility on the purchase price and deal terms, it can help increase the probability of a successful close.  While buyers often prefer to share the acquisition risk with the seller through some type of deferred payments, such as earnouts, equity rolls, or vendor financing, sellers often prefer all-cash deals.  Sellers are advised to seriously consider all the positive and negative implications of deferred payments.  Sometimes deferred payments can provide significant tax savings that should be explored with the seller's professional tax advisor.
Having flexibility on the deal process, timing, exclusivity periods, etc. can also help both buyers and sellers close more deals, even though the relative advantage for the buyer or the seller can vary widely.

Inevitably, there are negotiating points that are zero-sum.  In other words, if the seller wins, the buyer loses and vice versa.  This can often be true around the relative tax implications for each party.  It can also be the case during the negotiation of the purchase and sale agreement, which can be an unwinnable battle between the legal teams if one or both legal teams are too inflexible.  The legalese around reps and warranties, the magnitude of the basket and caps, and the relative indemnifications can have huge legal and financial implications for both the buyer and the seller.  The key here is to have experienced legal teams that have completed numerous M&A deals and understand the “give and take” mentality required to get to the finish line.  If one party zealously protects the legal risks for their client and thereby pushes a disproportionate amount of risk to the counterparty, the deal will normally never get completed.

For buyers, having flexible financing options arranged beforehand will also help close more deals.

Both buyers and sellers always need to be prepared to “walk” from deals that do not meet their highest priorities.  For sellers that means ensuring that there are alternative buyers or the option for continued ownership.  For buyers, that may mean building and/or developing a new business unit rather than buying or pursuing another suitable candidate.
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Some buyers and sellers view the M&A negotiating process as a game of chess or poker.  That is, each move requires a countermove, and you need to outwit your opponent.  If either party is playing games by holding onto key information too long, negotiating in bad faith, or simply continually moving the goalposts, the likelihood of a successful transaction is very low.  A better approach is to provide the information required by the counterparty as needed and when appropriate, gain meaningful insight into each other’s key objectives, and work together to find the workable solutions to the inevitable roadblocks to getting a good deal completed.

Getting your business “Exit-Ready” in advance of a sale or transition takes a different mindset - one that could be described as getting “Lean, Mean and Clean”.  Lean, mean, and clean businesses are not only more saleable but will also attract a larger set of potential buyers that will help drive value and exit choices for the seller.  Transitioning a business to the next generation or to new management is also likely to be smoother and more successful when all the business affairs are rationalized, simplified, and well organized.

Every business owner and management team strives to keep purchasing expenses in line, however, often the majority of the time and effort is spent with the key suppliers, i.e. the 20% of the suppliers that make up 80% of the purchases.  According to Expense Reduction Analysts’ Tony Davies, the savings that are possible from expenses derived from the other 80% of suppliers, what he calls the “Tail Spend”, can be ripe for improvement.  Most businesses can reduce their Tail Spend by somewhere between 10 and 40%.  These expenses typically include things like waster management contracts, janitorial/office cleaning services, pest control, cell/telecom services, etc.  A systematic review can yield results that translate directly to the bottom line, as well as drive the value of the business.  Incorporating a Tail Spend monitoring process will also drive enterprise value and its marketability.

The opportunities to make a business leaner and meaner can extend well beyond expense reduction strategies with suppliers.  Are there redundant assets that can be disposed of to generate some cash?  Should the real property be sold and leased back?  Can you tighten your working capital needs with just-in-time inventory management or take advantage of supplier payment terms?  It is always advisable to make sure the business is not carrying excess working capital unless it is in the form of cash or cash equivalents.

Getting leaner and meaner may also involve the streamlining of the products and services you offer, by discontinuing lower margin products.  It may mean a greater focus on specific markets or customers and letting go of underperforming divisions or firing unprofitable customers.  It may mean raising the bar for the minimum return expectations for new expansionary capital expenditures, the entry of new markets, or the launch of new products.

Cleaning up the balance sheet well in advance of a potential sale or transition is also advisable. Perhaps there is goodwill or non-performing investments that should be written off.  Implementing a regular process to assess inventory turns by SKU or product line can help improve the management of slow-moving inventory or help to ensure obsolete inventory is written off or written down when appropriate.

Cleaning up the business physically can also make a business more marketable.  That doesn’t necessarily mean undertaking extensive office renovations, for example, but rather thinking through the best way to “stage” the business, like a realtor may stage a home before listing it.  We all know that you only get one chance to make a good first impression and it is amazing how that can translate into confidence by the buyer that they are acquiring a quality, well-run business.

Cleaning up the business can also entail updating and modernizing safety programs, standard operating procedures, supplier agreements, etc.
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Businesses in the lower-middle market are often quite lean when it comes to personnel, but an “over-stretched” workforce has little capacity to focus on becoming leaner, meaner, and cleaner. Sometimes the best approach may be to strengthen the management bench, fill in some personnel gaps, or reorganize the team before a sale or transition.  In other words, you may need to take one step back to move two steps forward but a well-trained workforce with a solid management team and well-defined roles, responsibilities, and incentives, may be the epitome of a “clean” business.

Selling a business is tough, but even tougher when a buyer(s) seems obsessed with analyzing risk that in the seller’s mind may be immaterial.  Owner/Operators and management teams are often so familiar with the business, its operations, and the market, that they can become immune, and sometimes complacent, to the inherent risks that may be deeply embedded in the business. 

A new owner or potential buyer needs time to understand and assess those embedded risks and the strategies they can use to mitigate them or they will simply discount their offer to cover their perceived downside risk.

Of course, when the buyer is intimately familiar with the industry, the ability to understand and assess those embedded risks will be a lot easier.  However, even when a buyer has experience in the industry, they are starting from a point of fear – fear they will make a disastrous acquisition that will haunt them for years.  Meanwhile, the seller is starting from a point of comfort with those same risks.  Same facts but with a vastly different viewpoint!

The fear of loss is a powerful human emotion.  One simply needs to look at what happens in the stock market when overall sentiment changes from greed to fear.  Studies have shown that fear of losing money is much stronger than the desire to make money.  Sellers need to understand this basic human reality before they begin negotiating a sale of their business.

Add to this, that buyers also tend to be hesitant to accept or at least somewhat skeptical of the business’s upside potential.  No wonder so many M&A discussions go nowhere!

So how does a seller prepare, knowing that most buyers will focus on the risks and be skeptical of the upside potential; the balance of which will be reflected in an offer.

The first step is to objectively identify the inherent risk in all aspects of the business: operations, suppliers, human resources, customers, etc.  Just because something has not happened in the past, does not mean that it can not happen in the future.  Buyers will not place much weight on that argument.

Starting with the top line, what are the risks associated with the market you participate in and the customers you serve.  Are there steps you can take to mitigate the potential for customer defection, even if no one is leaving?  Can you demonstrate customer loyalty with more than simply pointing to historical sales, with tools like Net Promoter Scores?  Are there strategies you can deploy to make customers stickier?

On the operations side, are your operating procedures up to date and relevant?  Can they be effectively used to train new staff when employees leave, even if you believe they will stay until retirement?  Do they incorporate the latest and best practices for safety, regulatory compliance, and quality control?

Risks that buyers may perceive around sales employees or key management defection can be mitigated with stay bonuses or other incentive structures.

Are there new suppliers that you need to bring in as backup or are current supplier contracts in need of a revisit?

It is important to understand that by being flexible on the deal structure, you can help alleviate the concerns buyers have about the risks associated with buying the business.  Being open to an equity roll, vendor take-back, or earnout, for example, will demonstrate confidence in the existing business and its operations, but will have the added value in that it demonstrates confidence in its future as well.
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When the buyer perceives the seller wants to “run for the hills”, it can be extremely difficult to capture true value.

One important aspect impacting the value of a business is its customer quality: an important component of a business’s revenue quality.  High-quality revenue is generally considered to be sales that are sustainable, predictable, and profitable and thereby reduce the risk for any new owner or management team.

While customer concentration levels (eg: the percentage of business coming from top customers) and customer churn rates (loyalty) are normally assessed by potential buyers, the true value of a business’s customer quality is often poorly articulated by sellers and thereby risks not being not fully reflected in an offer.  Just because you can point to some blue-chip, well-paying, loyal customers, doesn't mean a buyer is going to pay an above-market premium for the business.

However, whenever you can demonstrate a track record, with hard data, on the actions you have taken to improve customer quality and its impact on bottom-line results, you are much more likely to have potential buyers pay higher multiples.  And even if you're not a seller, who doesn't want higher-quality customers to grow and simultaneously build resiliency into the business.

Traditional tools like Net Promoter Score (NPS), Customer Experience Management (CXM), and Customer Relationship Management (CRM) can be useful ways to measure and guide management on initiatives that improve customer quality.  However, often you may need to go much further.  It means moving from data and information, to intelligent insight, to actions, to results.

As an example, I recently spoke to the owner of a fast-growing natural foods business.  With detailed data on sales per point of distribution, he was able to show, for his business, the difference in quality between customers even when purchasing similar amounts of product each year.  He knew exactly when to double down on successful product launches with one customer and when to back off and ride out the relationship with other customers.  It was a matter of focusing his efforts where he got the best results with insights from robust data.  In another example, a business services company was able to demonstrate the actions they took with specific customers to drive the percentage of sales as recurring contracted revenue.

There are numerous advanced tools available to business owners to measure and monitor important intent and sentiment data about your market, business, products, etc. across internal systems such as your CRM and outside sources such as social media.  Many of these tools are now using advanced analytics, artificial intelligence, and big data to provide insights not available to business owners only a few short years ago.

The key is to find the right tool(s) for your business to help your sales and marketing teams expand and grow your base of high-quality accounts.
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Bottom line, being able to use data to demonstrate the quality of your customers, along with the strategic initiatives you undertake to improve customer quality, can translate into higher valuations.

One of my favourite business books of all time is “Blue Ocean Strategy” by Chan Kim and Renée Mauborgne.  It was first published in 2005 and has since been published in forty-three languages with over four and a half million copies sold.

The basic premise is that most businesses compete in a “Red Ocean”, symbolized by the blood spilled from the fierce, undifferentiated competition in industries with low margins and stagnant or declining demand.  The book, and an assortment of online courses and tools that have since been developed by the authors, help business owners and management teams move their business towards a “Blue Ocean”, where they simultaneously lower costs and grow in uncontested market space by creating new demand.  Think about how crazy it would have sounded years ago to have a watch that measures your heartbeat or a phone that takes pictures.

The shift to a Blue Ocean market requires that business owners think outside the box and is by no means easy to implement.

The first step is to initiate a change in mindset and to explore the possibilities.  Most businesses have invested heavily in their current market space, by investing in real assets such as equipment, facilities, etc. as well as soft assets such as the workforce, customer relationships, training, IP, marketing, etc.  It can be incredibly difficult to pivot a business from the Red Ocean into a new market unless everyone buys in.

For relatively successful, established, larger organizations, the organizational mindset change needed can be monumental with embedded agendas, politics, systems, etc.  In these cases, it is likely best to implement a Blue Ocean strategy in a specific business unit or product line where the chances of buy-in and success are higher. Theoretically, smaller, more nimble, entrepreneurial-led businesses in the lower-middle market are much more adept at implementing a Blue Ocean strategy.

Traditional strategies focus on differentiating yourself by focusing on your core strengths with specific customer segments within your existing market, by either lowering costs or adding unique value.  Blue Ocean strategies entail utilizing your core strengths to open up brand new markets by creating new demand.  It typically requires the use of the right side of your brain.  However, for those of you like me that seem to be deficient in the creativity department, the Blue Ocean book along with the tools it outlines, help you and your team find those viable opportunities to pursue that can begin to move your business, business unit, product line, or product into a new uncontested market space.

Once the creative juices are flowing and the mindset has changed, the next step is to pick the best opportunity and begin to formulate the strategy and its implementation roadmap.  The book walks the reader through ways to break through traditional competitive market boundaries and reconstruct them to unlock value with current “non-customers”.  It also addresses the multitude of traps and obstacles that you are likely to encounter along the way.

The critics say that for many businesses moving to a Blue Ocean is nearly impossible.  In the end, the book helps owners think about ways to innovate and refocus their efforts on where to invest their time, energy, and resources by moving away from the highly contested Red Ocean and leveraging their core strengths and capabilities.
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In my humble opinion, most people will garner some ideas that they can use, regardless of what business they are in.

Many would argue that one of the most important factors impacting the value of a business, is its employees and its management team.  A business that relies on its owner for too many critical functions is risky for a new owner and therefore worth a lot less.  Incorporating Human Resource (HR) best practices to manage, train, promote, motivate, compensate, retain, recruit and attract the best people can drive enterprise value and its marketability when it comes time to sell.  Like many “best practices” it can also provide the business a competitive edge.

To meet the needs and expectations of the business, each job throughout the organization should have clearly defined competencies as part of an up-to-date job description. The organization should also have a system to ensure that employees are sufficiently proficient in those competencies. Competencies can be thought of as the observable behaviours, knowledge, ability, and skills of an employee’s performance in a specific function.  In other words, it is more about the “how” employees and management perform the tasks associated with their job than the “what.”  Defined competencies for a specific job can include both general competencies, such as “customer service” and functional or technical competencies that are job-specific, such as “engineering design.”

Defining the specific competencies, along with clear definitions of expected proficiency levels, for each job, can become the backbone of an effective HR management system.  Besides the obvious benefit of using for performance evaluation reviews and determining compensation levels, the incorporation of competencies into job descriptions has many other benefits.  For example, managers and supervisors can use both job-specific and general competencies to evaluate potential candidates against open positions.

With the right systems in place, management can gain a deeper understanding of the organization’s competency gaps which can be incorporated into training or recruitment programs.  This becomes critical as a company grows or when there is a change in strategy.  Management can use them to re-organize functional responsibilities within a business unit or across the entire company. Employees can use competencies to self-assess their suitability for open positions or to help craft their career path within the business.
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The bottom line is that when employees and management understand what they need to be good at, how it is measured, and how it contributes to the company’s overall success, they become more engaged.  And there is nothing more powerful than an engaged management team and workforce with clear goals and a common purpose when it comes time to sell.

An aggressive acquisition strategy can be a way to scale a well-financed business quickly, but it also comes with a multitude of risks, that need to be carefully addressed.  All too often, acquisition strategies are simply, “we will look at opportunities as they are presented to us”.  The wrong acquisition can be a drain on resources and can weaken a strong company.  On the other hand, a well-thought-out, clearly defined acquisition strategy will not only improve the likelihood of closing a deal but can also strengthen your company’s competitive position, drive enterprise value, and formulate the basis for the post-acquisition integration process.

Strategy-First
One way to start thinking about the best acquisition strategy is to think of a hub and spoke, where your business is the hub, and each spoke represents a different segment of business types that may fit.  The first decision is to determine which spoke represents the best opportunities.  Each spoke can represent various opportunities up and down the supply chain (backward or forward vertical integration) or horizontal integration opportunities to consolidate and scale the business by expanding into new regions or adjacent product lines. What does the seller universe look like along each spoke?  Are there enough potential targets to warrant an all-out acquisition effort in a particular business segment?

Perhaps more importantly, which spoke represents the best opportunity to strengthen your weaknesses or enhance your current strengths in the market.

Vertical integration acquisition strategies can sometimes represent a higher risk than horizontal strategies if the acquirer moves outside their comfort zone and core competencies.  However, there are situations when capturing a bigger slice of the margins up and down the supply chain can be highly rewarding.

Synergies
Part of the decision on the best strategy to pursue should also be based on where the biggest potential synergies lie.  In low-margin, low-growth, red ocean markets, cost synergies are often a major driver for M&A.  Be careful, however, since it is common for acquirers to end up with significantly fewer savings than originally anticipated, post-acquisition.  It is best to be conservative in estimating the savings that will materialize.

More often, focusing on opportunities with synergies that will grow the topline or improve margins is a better approach.  Using M&A to expand capabilities and/or product lines, grow into new markets, acquire talent, cross-sell products, etc. can also be difficult, but the potential upside is often much larger than when cost synergies are the primary driver.

Financing and Deal Size
It is important to clearly define how any acquisition would be financed before going out and soliciting targets.  Your risk appetite, balance sheet, and access to additional debt or equity capital will determine the maximum size of any acquisition.  If the use of outside capital is planned, it is best to have those strategic conversations with your sources well in advance of going out in the market.

Small deals can also be a problem, in that they can often take as much time to negotiate and close as larger deals.  Smaller deals need to have elevated strategic importance.

Assemble the Team
We addressed this topic in greater detail in a previous blog article, however, the M&A team is typically made up of both internal and external resources.  At a minimum you will need a corporate lawyer with deep experience in M&A.  You may also be well advised to hire an intermediary to act as an outsourced corporate development team to help ensure your success and to assist you in completing any due diligence, negotiate a favourable deal, and to help you navigate through the complex process.

Generate the Target List
An effective acquisition strategy requires upfront research to generate a viable list of potential candidates with the right contacts, target ownership structure, and estimated size.  Keep in mind that it can be a numbers game.  Many candidates will have little interest in even exploring a dialogue if it is not part of their plan or it’s not the right time, and as such, may ignore your inquiry.  To be successful, the list should be robust and categorized from highest to lowest priorities.

We have found that it is better to be specific and targeted, rather than broad and general.

Articulate your Value Proposition
Don’t assume a potential target will immediately see the benefits of opening a dialogue with you to discuss the sale of their business. They will need to understand the value proposition from their perspective and/or you will have to be able to provide a solution to a problem they have.  As such, the value proposition will need to be clearly articulated and presented in a way that will allow them to quickly assess the opportunity.  It is always best to be flexible in how any deal would be structured to get the dialogue started.

It is also important to get your strategy and value proposition in front of Investment Bankers, M&A Advisors, and other intermediaries that participate in your industry.  Otherwise, you may miss out on an attractive and active opportunity that is already in the market.  Many business owners will simply forward your inquiry to their representative when they get approached, but it may be remiss to count on it. There also may be potential candidates that are not on your list or that you are not aware of.
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Successful acquisition strategies take an immense amount of planning and resources.  Acquisitions can be game-changers or they can become a fatal drag on a well-run company.  For most companies, simply exploring opportunities as they present themselves is not a viable approach if growing through acquisitions is a priority.

In our “Business Valuation Mythology 101 – Part I” blog article, we outlined some common misconceptions often held by sellers on how potential buyers view and value their businesses.  Myths one to four included 1) asset quality, 2) industry-standard multiples, 3) enterprise value equals equity value, and 4) the working capital assumed in the transaction.  In Part II we outline three additional common myths often held by sellers, including owner benefit add-backs, growth projections, and potential synergies.

Myth #5 – Owner-benefit add-backs
It is not uncommon for closely-held businesses to accrue some benefits to their owner(s) as business expenses, to minimize taxes.  After all, no one likes to pay more taxes than necessary.  Legitimate owner-related expenses such as a company car, travel, meals, etc., should not be added back to earnings when the financials are presented to a potential buyer unless they are “above market” or it can be demonstrated that they will disappear under new ownership.

While personal items such as the family cottage renovation expenses or the country club membership should be added back, it forces buyers to distinguish between a legitimate future business operating expense and those that will be non-recurring.  This can create uncertainty and can impact a buyer’s perception of value as well as their appetite for completing a deal.  It rarely is as simple as identifying and adding back the personal historical expenses.

It is always best to have clean financials, (or even audited statements), purged of any unjustifiable personal expenses, for at least a few years before the sale of the business.  This may mean the business will pay more in taxes but it will help bridge any gap between taxable income from the company’s tax filings and the financial statements.  Most professional buyers will value the business based on GAAP (Generally Accepted Accounting Principles) or some other accounting standard such as IRFS (International Financial Reporting Standards) rather than OAAP (Owner Accepted Accounting Principles).

Myth #6 – Growth projections - The buyer will pay for the business's growth potential 
While this is partially true, the proverbial “hockey stick” projections presented by an overly optimistic seller is usually highly discounted by a buyer, especially if it is based on a strategy that the seller has little experience in executing.  Buyers will make some assumptions on growth as they build their valuation models, however, those assumptions will be mostly based on historical trends.  Anything above this trend will be treated more as “ideas” rather than viable projections.

While ideas create optimism on what may be possible for a new owner, any tie-in to the financial projections should be layered-in and presented more as speculative potential, rather than true projections.  It is important to separate what is doable based on track record and what is possible based on new ideas, wherever possible.

Myth #7 – The buyer will pay the seller for potential post-acquisition synergies
Synergies can be cost savings, such as when redundant personnel are eliminated post-acquisition, or revenue synergies, such as cross-selling opportunities.  While the magnitude of synergies varies by each potential buyer, their value may not be reflected in an offer to the seller, since there is a risk that the synergies will not materialize.  Of course, there are always exceptions.  For example, where a big industry player makes a highly strategic acquisition and pays an outsized multiple for a scarce asset.  But in normal M&A transactions, the buyer will tend to pay the least amount they can or at least no more than fair market value (FMV).  They will often only make offers that exceed FMV when they are pushed via a competitive marketing process.  Even then, many strategic buyers exercise discipline and will not pay more than their perception of FMV, particularly if have a robust pipeline of potential acquisition targets and can simply “move on” to the next target.

There can be situations when there is a strong case for a buyer to use some of the future expected synergies to sweeten an offer beyond FMV to knock out other competitors from acquiring a target.  However, in most cases, both cost and revenue synergies are used primarily to justify the acquisition with internal stakeholders, such as lenders, outside shareholders, or investors.

There are several other myths out there that we will address in future blog articles.

Whether you are selling your business or buying another, one of the first steps is to assemble a professional team to assist you in completing a transaction.  Like any team, there is potential for overlapping responsibilities and/or gaps that can dramatically impact the speed and ultimately the outcome of any transaction.  Negotiating a deal with a counterparty is further complicated by the composition of the opposing party’s team, and is often undertaken against a backdrop of distractions, competing motivations, and sometimes self-serving interests.

At the very least, every transaction requires a competent business lawyer to draw up the agreements, perform title searches, litigation searches, etc.  The key, however, is to select an experienced M&A lawyer that understands the entire process and how to get deals done.  Negotiating the Purchase and Sale Agreement (PSA); particularly the representations and warranties, and indemnity clauses requires compromises between the buyer and seller.  When there is legal counsel on both sides with deep M&A experience, those negotiations often go well.  When one, or worse, when both have little M&A experience, it often leads to the insistence by one or by both parties, of overly protective risk mitigation clauses resulting in a failed close, despite being a commercially feasible transaction for both parties.

There are also a host of tax-related issues that arise from an M&A transaction, and therefore getting a professional and experienced tax advisor is also critical.  They need to be well versed in the latest tax issues and must be able to work closely with the legal team to structure the deal to minimize the tax implications for their client.  As is the case with the negotiation of the legal terms in the PSA, what is good for the seller is often not good for the buyer, and vise versa, so they need to be able to understand “market norms” and find the best compromise for their client.
Besides a good lawyer and tax accountant, there are key members of the management team that will need to be involved.  In some cases, your internal resources, tax accounting expertise, and experienced legal counsel will be all you need to close a deal.  There are times, however, when the buyer and/or seller is well-advised to broaden the outside team further by hiring an M&A Advisor/Investment Bank and/or a Transaction Services Firm.

When a client hires an M&A Advisor/Investment Bank to help them sell their business, one of the most important areas in which they add value is by running a professional, competitive process, that often generates multiple offers, for which the seller might consider.  More buyer competition can often lead to better terms and higher valuations for the seller, plus it creates the necessary competitive tension and urgency to push potential buyers to act.  As a professional that is in the market daily, constantly talking to CEOs and investors, they use their industry and M&A experience to help formulate the go-to-market strategy that best meets their client’s goals and objectives.  With an intermediary, emotions are eliminated from preliminary discussions and important relationships are preserved.

The sell-side M&A Advisor works with management to prepare the marketing materials and handle the preliminary discussions with potential buyers to qualify them, so that management can stay focused on running the business. They help the management team prepare for the deep due diligence most buyers require by building and managing the data room and keeping the complex discussions with multiple parties organized so that the best candidates are filtered through the process funnel during the initial bidding stages.  They help the seller screen the initial bids and prepare for management meetings with select buyers and negotiate a Letter of Intent (LOI) with the best buyer.

Once an accepted LOI is in place, the M&A Advisor/Investment Banker’s role tends to transition to “Project Manager”.  A good analogy might be is that they act as the general contractor for a complicated construction project.  They make sure the plumber’s work is coordinated with the electrician, for example.  A good M&A Advisor knows the boundaries of where one professional’s expertise ends and another’s begins.  They make sure the deal is moving forward, due diligence is completed, and are motivated to close the transaction, under terms and conditions that are in their client’s best interests.  They use their considerable experience in M&A to creatively solve problems during the complex negotiation process, and almost certainly increase the probability of a successful close.

On the buy-side, the M&A Advisor’s role can range from simply supporting a deal by conducting a market and business valuation of the target to aid in the preparation of a competitive bid to a full search and buy-side role, whereby the M&A Advisor becomes an outsourced corporate development extension of the client.

Of course, the buyer's banker may or may not be an important member of the M&A team, depending on how the deal is financed.  Even when no bank financing is needed, it is always best to keep your banker in the loop, as an acquisition will often mean a material change in the business and it operations.

Sometimes, it is advisable, for either the seller or the buyer to hire an independent Transaction Services Firm.  The Transaction Services Firm (usually an accounting firm) is hired to conduct a Quality of Earnings (Q of E) Review.  A Q of E analysis is a detailed review of the company’s financial statements, its revenue, its expenses, etc. to determine the accuracy of its historical earnings and its sustainable cash flow.  It is especially important in M&A transactions that have numerous EBITDA adjustments or related company transactions.  It is becoming more common for buyers to routinely hire a Transactions Service Firm as part of their financial due diligence process.

Some of the larger “full-service” Investment Banks insist that their sell-side clients use their internal Q of E team in advance of going to market.  Like a buyer sponsored Q of E, it sometimes has a place for the seller to initiate the review as it will build a credible story around any financial adjustments with buyers during the process.  However, there is a strong case to be made that the Investment Bank and the Q of E service provider be independent. Q of E analysis fees are a billable service and just like legal and outside tax advisory services, they should have no incentives in place to close a deal.

Finally, sellers should seriously consider hiring a wealth manager to assist in making the best tax-effective use of the sale proceeds.
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Whether you are a potential buyer or seller, M&A transactions can make or break companies.  It is critical that business owners carefully consider all their options on who and how they assemble their M&A team.