Ensuring the Successful Close of a Lower Middle Market Sale Transaction
Selling a company is often difficult and time-consuming. The merger and acquisition (M&A) process is one that requires careful planning, competent professionals assisting the company, and an understanding of the deal dynamics involved in the negotiations. Companies that have not been engaged in many M&A transactions frequently make mistakes that can result in a less favorable price or terms that would have otherwise been obtainable —or even kill the deal altogether.
Based on various studies and experience, a large percentage of Lower Middle Market (generally owner-operated business with $5M to $50M of revenue) transactions fail to close or they close with not very favourable terms. The primary reasons for this are:
Unprepared Seller
Unsophisticated Buyer
Time Kills Deals
Agreement on Net Working Capital Target
Issues Uncovered During Due Diligence
It is important that the owner retain an experienced M&A advisor to lead them through the long sale process and guide them through the issues that may lead to failure to close the transaction. Let’s delve into the above issues and see how a good advisor can alleviate them.
Unprepared Seller
Before we accept a sale mandate, we ensure that the client is adequately prepared to undergo the sale process. We prepare a valuation of the business and undertake a detailed pre-going to market review (e.g., corporate records, financial records, material contracts, litigation, regulatory compliance, etc.) so that the seller knows the current status of its business to avoid surprises down the road. We spend time with a potential seller to understand his objectives in pursuing a sale, manage value expectations and ensure that the owner is surrounded by a competent team of trusted advisors to guide him/her through the sale process.
Unsophisticated Buyer
Before we introduce a potential buyer to our client, we perform a due diligence review of the buyer to determine their ability to close the transaction, secure financing, their relationship with lenders, and their available equity. We strive to introduce buyers with a demonstrated track record of being able to secure financing and close deals.
Time Kills Deals
Time is the enemy of all deals. As the transaction drags on either the buyer or the seller may lose interest. Every deal has a life of its own and its own momentum. Recognizing the ebb and flow of the deal momentum is critical to deal success. One of our key strengths is to ensure deal momentum. When negotiating the Letter of Intent, we advise our client on providing a small exclusivity window and sixty to ninety days to close. We set milestone targets and have weekly meetings to ensure all parties are aligned and moving towards the same close date.
Agreement on Net Working Capital Target
As part of the sale process, a normal level of working capital is required to be maintained in the business upon sale. An inadequate target can have a material impact on the purchase price for the buyer or the seller at closing and typically this target calculation is left until late in the sale process. We at Distinct Capital work with our client to determine the appropriate Net Working Capital Target prior to starting the process. We also ensure that the Net Working Capital Target methodology is agreed to by both parties in the Letter of Intent. This reduces the risk of any unfavourable surprises during due diligence or any unfavourable adjustments to the purchase price at or post-closing.
Issues Uncovered During Due Diligence
Some of the key contentious issues raised during due diligence revolve around:
High customer concentration
Overstated EBITDA add-backs
Unsustainable growth projections
Unusual revenue swings
Inaccurate financial statements
Top management weakness
Distinct Capital Partners works with its clients to ensure that there is proper disclosure of these issues in the Confidential Information Memorandum. We ensure there is accurate commentary around financial performance, that EBITDA add-backs are substantiated and growth projections are consistent with implemented strategies, industry performance, and historical company performance.
The team at Distinct Capital Partners has worked with both buyers and sellers and has successfully closed hundreds of M&A transactions. We know the key issues in a sale process and we take proactive measures to alleviate them for our clients to enable a successful outcome.