This series of posts explores the strategic and psychological aspects of M&A processes from a sell-side perspective.
Rather than being a technical piece on the financial mechanics involved, it focuses on the interpersonal dynamics and negotiation techniques that play a crucial yet often underestimated role in the success of these complex transactions.
Part I includes a brief introduction to M&A and explores how an adviser can add value to the process.
What is M&A?
Mergers & Acquisitions – when a business is combined with or bought by another entity. In practice – especially when involving SMEs (small and medium enterprises) – it’s almost always the latter (an acquisition), although some deals may be marketed as a merger.
What’s all the fuss about?
For anyone that’s been through the rigmarole of buying a house, which usually involves one property, one lender and a handful of contracts, imagine instead a process that involves several asset classes and finance providers, dozens of customers, suppliers and commercial contracts, and potentially hundreds of employees.
And instead of it involving one person (or a couple) selling to another one or two people, it may involve numerous shareholders and decision makers on either side.
For the owners of SMEs that have carefully nurtured a successful, profitable business from nothing, pouring their heart and soul into it over many years along the way, selling up will be one of the most momentous events of their life. The emotion involved adds an extra layer of intricacy to what is already a highly complex process.
Part I: the role of the M&A advisor
Lesson 1: removing the emotion
An M&A transaction can be made to run much more smoothly – and achieve a better outcome – by managing the emotion involved.
One of the most important roles of an adviser is to act as a neutralising buffer between the buyer and seller: a good adviser will push hard in negotiations whilst allowing both sides to develop and maintain a good relationship, which is especially important when the sellers will remain involved in the business post-transaction.
When a deal hits the inevitable bumps in the road, both sides can vent their frustrations to the adviser who acts as the mediator – managing communication and dissipating tension whilst insuring the transaction continues to move forward.
Per the old adage of Epictetus, an advisor should use their two ears and one mouth in proportion – they should invest time in listening intently to both sides, to filter out the emotion and truly understand their position and the underlying motives. This allows the adviser to find a compromise, plot a route forwards and respond with a clear, consistent message.
In addition to resolving disputes, the ability to remove emotion plays a crucial role in the negotiation of price and other key terms of the deal. With a life-changing sum of money at stake and deal completion seemingly within touching distance, logic and reason can become clouded by the fear of losing the deal. This fear is often irrational, yet is commonly experienced by a seller and can be used as a tool of manipulation by a more seasoned buyer.
Unencumbered by this emotional strain and armed with the cumulative experience of past transactions, an advisor is well placed to know what is reasonable and what is not when on the defensive, and also when and how to push for more.
Lesson 2: take the strain
Another key role played by a sell-side adviser is to enable the company’s leadership team to continue to devote due attention to the business.
If everything goes to plan, an M&A process will take around 6 months – that’s a long time for management to be sidetracked from their day jobs. It’s crucial that the business continues to perform well during the process as the buyer will be keeping a close eye on monthly management accounts and a decline in trading performance could result in an adjustment to price.
The adviser should take care of the heavy lifting aspects of the transaction: producing the IM (information memorandum), contacting potential buyers, managing information requests and the various streams of DD (due diligence), and liaising with the legal advisers.
To achieve this, the management team should invest time up front with the adviser to help them develop a thorough understanding of the business. This will enable the adviser to produce a strong IM, conduct a thorough sense-check of the financials, and ultimately be in a position to respond to the majority of questions posed by interested parties and only engage the management team where necessary.
This saves time in the long run by weeding out buyers that are not the right fit before they progress to advanced phases of the process. Management presentations are a time intensive and repetitive exercise; only a small number should take place to ensure they are all performed at a high standard.
Part II: matchmaking
The second part in this series will focus on finding the right buyer and explore how to maximise value through the creation of desire and competitive tension.