Three Points of M&A Transaction Vulnerability

Any M&A deal experiences tensions — regardless of how well negotiations seem to be progressing. But sellers should keep in mind that at certain points during the transaction the sale is more likely to unravel. You need to be especially vigilant during these times, taking seriously any disagreement that could become a deal-killer. Better yet, address the issues before you even arrive at these stages of the transaction.

Vulnerability #1: Initial meeting

Until you and a prospective buyer actually meet and due diligence is underway, your company exists only in the abstract for a buyer. You’re an appealing prospect that looks good on paper. But buyers know that your business’s actual operations, financials and people may end up looking less attractive in person.

To avoid disillusioning a prospective buyer, know your company’s shortcomings and be transparent and honest about them — on paper and in person. If several members of your management team are ineffective or a unit is underperforming, be upfront and explain how you’re working to change that. You might, for example, discuss plans to replace the weak executives and explain how you’re paying down or refinancing loans.

Vulnerability #2: Price negotiations

Negotiations over the purchase price can be fraught with tension. Some sellers feel insulted by their prospective buyer’s initial offer, while buyers often get frustrated when a seller insists on a price that’s far above what the buyer believes the business is worth. 

You can reduce the chance of conflict by first discussing your pricing strategy with your M&A advisor. Understanding your counterpart’s valuation approach will help you respond more objectively. Don’t sit down at the negotiation table and announce your minimum expectations. Instead, with a price range in mind, maintain a clear, consistent message throughout negotiations. Remember to remain flexible and realistic. Pushing for a price that earnings and assets don’t support will likely lead to disappointment. 

Vulnerability #3: Due diligence

The final weeks before you close can be nerve-wracking. You may worry that your buyer will turn up negative information that merits a new round of negotiations — or even destroy the deal.

Your buyer is almost certain to uncover any legal liabilities or less-than-stellar financial records. So bring them up before due diligence begins.

Smooth the way

There’s a chance that a serious conflict will develop during the sale of your business. Fortunately, you can predict the rocky stages of your transaction and smooth the way before you get there.

Copyright © 2014 Thomson Reuters / BizActions.