Common Transaction Roadblocks
Once you’ve made the decision to sell your business or take on an investor, you may find yourself in unfamiliar territory. The transaction process can be complex, and with so many moving parts it is no surprise that there are often delays or even times where it feels as if the transaction may not reach the finish line. We’ve put together a list to help business owners understand these potential roadblocks and how to avoid them.
Nonalignment Among Ownership & Management
Everyone who has an existing ownership stake in the business should be on the same page prior to entering a transaction process, otherwise a deal could be dead on arrival. This requires frank discussion to determine the outcomes each owner is looking for and how to prioritize these, as well as setting some boundaries as to terms the owners as a group will or will not accept. Similarly, you should ensure that anyone else that will be included in the transaction – key management figures that will co-invest, for example – are aligned on the future plans for the company. Buyers will want to speak to more than just the owner during the diligence process, and it is important that the company has a clear plan for future growth that everyone can articulate.
Going into a sale process, owners should have realistic expectations of valuation, timeline to closing, and the thoroughness of the process. Do your research before starting the transaction – including asking your advisors – to understand the market for your company. If it’s not in line with your expectations, there may be another path that makes more sense. How long a transaction takes will vary depending on the business, but generally you can expect that the entire process will take several months, even once you’ve entered into an official agreement with a buyer. Owners should also recognize early on that the time commitment required of them as the seller is significant, even with a team of advisors. Understanding these basics about the timeline will help you avoid feeling overwhelmed or burned out.
During the diligence process you should also be prepared for how much buyers will be digging into both the business and you personally. Expect “next level” questions that help buyers learn about the culture, you as the owner (especially if you are planning on staying with the company after closing), and requests to speak to your key customers or suppliers (usually later in the process). Owners who enter the process with unrealistic expectations will quickly find themselves at the very least in protracted discussions with the buyers on these sticking points, taking away time that could be spent pushing the transaction forward towards closing.
Inexperienced Advisor Team
When choosing advisors to assist with the transaction, many owners naturally look to people they’ve worked with in the past, such as a family or corporate attorney or the CPA who files their taxes every year. In some cases, these advisors may not have much familiarity with M&A transactions. Having someone on your transaction team – whether that’s a specialized M&A attorney, a CPA familiar with sale transactions, or an investment banker – who has experience in the transaction process is vital to avoiding unnecessary negotiations or delays. An experienced advisor will have a better grasp on what deal terms are standard, or “market”, throughout the process and which are material to you as the seller. They also play a vital role in helping to shape the expectations you have going in (see above point about realistic expectations). If none of your advisors have been through a transaction, you’re essentially navigating the process blind. At a minimum this can waste time and negotiating power; at worst, negotiations stall over a term that doesn’t materially affect you.
Data and Due Diligence
Regardless of industry or type of company, a transaction process involves a lot of data, and both the content and the timing of that data can turn into significant roadblocks. Common data requests include financial statements, revenue by customer, employee roster, and tax returns, among others. The content also tells the story of your business and the information you’re providing to buyers; this should be consistent and accurate from the time you first hit the market to closing. Once buyers dig into the business, if they find that the real story or numbers are different or changed, it can lead to renegotiation of terms or other delays. A good advisor can help you articulate your story and check your numbers early in the process.
Availability of data will also have a significant impact on the speed of the process. After a letter of intent is agreed upon, the closing date is highly contingent upon how quickly you can provide data to the buyer. To prepare for this and avoid any delays, collect and organize your data before you start the process. Make sure your books are closed – and consider having them audited – and your managers can access data for their department easily. Don’t wait until the request list arrives in your inbox to discover that all of your employment records need to be scanned in or your CPA is on vacation and can’t send over your tax filings for another two weeks. If you have an internal CFO, controller, or bookkeeper who will lead the collection and dispersion of data, be as transparent as possible (and that you are comfortable with) to set expectations so that this person is not overwhelmed with the process.
As the deal progresses, legal documentation starts to take center stage. Documents such as the LOI, purchase agreement, and employment agreements will be sent to your team for comments or edits prior to anyone signing. If, once the documents are received, the seller’s attorney takes several weeks to turn those comments back over to the buyer’s team, this can push out the timeline of closing, especially if there are multiple rounds of negotiations or changes. You should take the time needed to work through the document, understand all the points, and negotiate any changes, but make sure your team is prioritizing these documents as days can quickly turn into weeks.
As discussed above, the agreement between buyer and seller is based upon the performance of the company at the time the transaction began. If EBITDA trends down significantly during the transaction, a deal could pause. Losing a big customer or key employees leaving during diligence run a similar risk if they have an immediate or projected impact on performance. The quality of earnings review that a buyer may run via an outside firm could also play into this, if they find that the EBITDA provided is not sufficiently substantiated, for example. Obviously, a business experiences minor fluctuations or has its own business cycle, so this refers more to unusual or unexpected trends in performance. To help avoid this, a balancing act is required of the owner during the transaction process: you must balance pushing the business forward and execution of your projected performance with the time and mindshare needed for the transaction itself. Advisors can obviously help take some of the transaction burden, but owners should keep an eye on both closely to make sure neither suffers.
Once major documents are finalized and diligence winds down, most of the potential roadblocks are in the rearview. At this point you’re likely past the deal-breakers, but may still have some details arise that could delay closing. These can include landlord consent if you lease real estate for the business, liens on the business that lenders were unaware of earlier on, or regulatory filings or approvals for certain types of companies. By anticipating any nuances like this in your business early on, you can prepare before the final stages of a deal.
Bottom line, selling your company or taking on an investor is a complex, time-consuming transaction for owners. Understanding the process and potential roadblocks before even turning down the road can help a seller prepare in advance and ensures a smoother transaction for all parties.