How to Make or Break a Business Acquisition

 By R. Carter Freeman, President, Janas Associates.
Reprinted with permission from Los Angeles Business Journal
May 27 - June 2, 2002.

As the economy has slowed over the past year and a half, the level of business merger activity has, not surprisingly, slowed as well - particularly in comparison with the accelerated pace of the '90s. Last year, one source reported a 16.4 percent drop from the prior year in the number of merger and acquisition transactions completed, with a total M&A deal value in 2001 of about $700 billion.

Nevertheless, deals are getting done. Market forces and the economic environment are only two factors that contribute to a successful business sale. Other critical factors can make or break a deal, and sellers should keep the following points in mind:

An intermediary serves a valuable role. An experienced intermediary brings detailed knowledge and expertise to a process in which the seller is probably not experienced. Even a relatively small business sale is a complex process, and the involvement of a professional who has "been there and done that" many times before makes life easier for both parties.

Negotiations in a business sale are not always friendly. Negotiations frequently become contentious. An experienced intermediary can take the "flack" as the middleman. This role is important, because there is ordinarily a transition period and a continuing relationship between buyer and seller after the transaction is completed. The intermediary helps buyer and seller maintain respect and professionalism.

* Credibility is everything. The sale of a business comes down to one factor: CREDIBILITY. Preparation of a detailed Confidential Business Review by the intermediary firm representing the seller contributes to the seller's credibility. The Review describes the history, current condition and prospects for the seller's company and brings to light issues, problems or concerns that need to be addressed, as well as describing the positive aspects of the business.

When potential road blocks are disclosed and discussed early in the process, this action goes to the heart of credibility. An experienced intermediary takes an analytical look at the business and asks a series of probing questions in an effort to help resolve issues and challenges that can impede the transaction.

* Sellers who are open to all forms of deal offerings, are more likely to complete their transactions successfully. Business owners and their advisors should consider different ways of structuring the deal. This is especially true in today's economic environment, where sellers typically assume more risk than they did a couple of years ago. Previously, transactions included a larger portion of cash. Leverage is more difficult to obtain today, so deal structures are more likely to include earnouts in which sellers receive performance based compensation and promissory notes.

* Teamwork on the part of buyer and seller helps achieve the desired result. The seller's team should include the business owner, company executives, legal counsel, CPA firm and the intermediary. The intermediary serves as the "quarterback," responsible for leading the team and ensuring that team members know their responsibilities, tasks and deadlines. The team should "huddle" regularly, starting early in the process. The intermediary should be actively involved until the transaction is closed.

* Create a win-win outcome for the buyer and the seller. Both buyer and seller want a favorable deal. But they both also want to make a deal, which means compromise so that both sides feel they have "won" when the deal is completed.

Deal making is always about people. To have a successful negotiation, both sides need to understand each other's wants and needs. This level of understanding requires the intermediary to ask many questions and listen to the answers. The goal is to structure a transaction that comes as close as possible to meeting the needs (both real and perceived) of both sides.

The Seller's Commitment Is Crucial

With the economic slowdown, the level of business merger and acquisition activity slowed. Nevertheless, deals are getting done and activity levels are increasing. While market forces and the economic environment are factors in closing a successful sale, there are many other factors as well, including the seller's commitment to selling.

One of the strongest signals a seller can send is that he or she is committed to engaging an experienced intermediary. Statistics show that only one in four companies that go on the market eventually sells. However, when an accomplished intermediary is involved, success rates for business sales can more than double the statistical success rate. An intermediary in your corner will add the critical "make or break" factor when you undertake the sale of your valued business.

R. Carter Freeman, CMC, is the Chairman of Janas Associates, a professional services firm in Pasadena that provides merger and acquisition, corporate finance and management consulting services to businesses. During his 35+ year career, Carter has advised clients in mergers and acquisitions and provided investment banking and consulting services to numerous types and sizes of companies. For further information, please call (626) 432-7000 or send email to rcf@janascorp.com.