The Value of Certainty
By Tom Zucker,
The ability to have someone express interest in buying your business is common.
The ability to receive a qualified letter of intent to purchase your business is unusual.
The ability to close the transaction at desired price and terms is priceless.
The closing of an M&A transaction involves great technical skill combined with finesse only gained from years of experience. The orchestration of family, attorneys, accountants, buyers, sellers, and a variety of other important stakeholders would make an orchestra conductor blush. The transaction advisory role requires the ability to be an assertive and forceful negotiator at one moment, and a friendly and comforting advisor the next. While the M&A transaction does not involve life or death decisions, it certainly carries great financial gain or potential harm to one’s business. Yet countless business owners attempt to sell their businesses without proper M&A representation and suffer the greatest risk of all… the lack of certainty that the transaction will close timely and at the price and terms that are acceptable to the business owner.
An M&A transaction can be disruptive to your business. The owner and the leadership of the business are bombarded with significant requests for information, bludgeoned with probing questions, and are travelling down a road rarely or never travelled. The different terminology and perspectives would make a skilled business owner wonder if they ever played the game of business before, and cause them to respond and react much more slowly and cautiously. An often heard phrase on M&A transactions rings loud and true, “Deals do not get better with time”. The role of an M&A advisor is vital to ensuring that the momentum of the deal is maintained and that a delay in timing is not detrimental to the business.
In addition to maintaining momentum and minimizing the risk of time, the other important role that an M&A advisor plays is reducing anxiety and fear. Fear and anxiety are experienced by both the buyer and seller during a transaction by both the buyer and seller. The buyer fears that hidden risks and problems exist and are being withheld during their discovery process. The seller fears that the buyer is going to modify price and terms of the transaction. The legal documentation process involves an important element called representations and warranties. A simplistic summary of this part of the purchase agreement is that the seller will set aside money in escrow to satisfy any representations that are inaccurate or untrue. If the owner tells the truth and properly discloses potential issues, the risk from having a representation and warranty claim is greatly reduced. Sounds simple but this is one area where fear runs rampant… and imagined and unlikely risks get larger.
In a recent transaction, the seller of the business was reviewing his first version of the asset purchase agreement. The fearful topic of representations and warranties emerged and the fear of disaster hit my client like a ton of bricks. The lawyer explained that half of the purchase price could have to be returned if…. my client stopped listening and the blood rushed out of his body. After 20 years of building the business the thought of having 50% of the purchase price returned to the buyer was paralyzing. The lawyer did not know what they said nor the emotional impact on the client until those fateful words left his mouth….. “The sale is off.” The room was silent and binders and folders ready to be packed. I spoke softly and reassuredly to the group and my client. If you tell the truth and present the facts of your knowledge… the risk is minimal. A pulse returned. I explored the likelihood of the events that would cause such a claim and realized that no such event has happened in the past and the likelihood was low of it happening in the future. Lastly, I reassured him that our deal experience and the attorneys’ transactional experience would protect him from this risk. The deal was back on… the blood was flowing again. This is just one example of how fear impacts the M&A process and how important perspective and experience is during the sale of one’s business.
The ability to have a qualified back up buyer provides additional certainty to a seller. Without the fear of competition and potentially not purchasing the desired business, the buyer has the upper hand at the negotiating table. By having multiple offers on your business, the buyer knows that timing, price and terms are not easily renegotiated if they desire to purchase your business. The certainty provided by having other offers in the event that the buyer modifies price or terms is priceless. This certainty only comes from having multiple offers and competition usually provided by a competitive auction process.
Most business owners will claim that the role of an M&A advisor is to make a market for your private business. Many former business owners who have sold their businesses would indicate that the true value of an M&A advisor is the certainty that they provide that a transaction will occur and the desired price and terms.