Selling a company in the built environment can be difficult and time consuming. The merger and acquisition (M&A) process is one that requires careful planning, competent professionals assisting the selling firm, and an understanding of the deal dynamics involved in the negotiations. Principals, CPA’s and attorneys that have not been engaged in many M&A transactions frequently make mistakes that can result in a less than favorable price, terms or even kill a deal altogether.
Having worked on many, many merger and acquisition deals over the past 10 years, we have found two things to be true. Every deal is different and there are common mistakes that sellers and buyers often make that complicate deals and harm their own self-interest.
The following is a list of common mistakes made by companies attempting to sell their firm themselves:
1. Not being prepared for the effort, priority, and time a deal will take.
Successful exits through M&A are possible; however, they can be time consuming, involve significant due diligence review by a buyer, and require advance preparation, the right priority and resource commitment by the seller. Acquisitions, from start to finish often take 10 to 12 months or more to complete.
2. Not having an appropriate Non-Disclosure Agreement (NDA) in place.
When selling a company, confidentiality is key.A well-drafted nondisclosure agreement (NDA) is essential to protect the company’s proprietary information, employees, and clients. Sometimes buyers are strategic competitors. While it is not necessary when first contacting a buyer with basic, general information about the seller, it can be a mistake to engage in extensive disclosure during an M&A process without an NDA in place. The NDA requires the potential buyer to not disclose or use confidential information of the seller. It also restricts the buyer’s ability to contact employees, customers, and suppliers. The NDA should prohibit the buyer from soliciting or hiring any employees of the seller if a deal is not consummated, for a designated period.
3. Not obtaining the appropriate legal counsel.
The seller and buyer should avoid a general practitioner or general corporate attorney, but instead use an attorney that specializes in M&A to guide them through, draft and help negotiate the appropriate deal documents. There are many difficult and complicated issues in structuring M&A deals, reviewing acquisition agreements, and executing the final transaction. An attorney should be contacted who understands M & A issues thoroughly, customary market terms, the M&A legal landscape, is responsive with a sense of urgency and priority, and who has experience with other acquisitions.
4. Not hiring an M&A Advisor with industry experience.
An M&A advisor experienced in the built environment, like Stonemill Partners, can bring enormous value when buying or selling a company. Here are some examples:
- Assisting through an optimal sale process.
- Helping to prepare an executive summary of selling attributes and confidential information memorandums.
- Finding and contacting prospective buyers or sellers.
- Coordinating meetings with potential buyers or sellers and facilitating communication.
- Obtaining signed NDAs.
- Coordinating and facilitating the responses to due diligence requests.
- Prepping the management team for presentations.
- Assisting in the negotiations of deal terms and purchase price.
- Advising on market comparable valuations.
- Assisting the parties through Integration and Transition planning.
5. Having an inadequate understanding of market comparables.
A well-informed seller will have an understanding of the competitive landscape, as the buyer will be asking many questions about how the seller is differentiated in the marketplace. To avoid having unrealistic selling price expectations, the seller needs to understand how other comparable companies are being valued in the marketplace. If your competitors have sold for certain multiples of EBITDA, you will need a compelling rationale why you should be valued much more than they were.
6. Not negotiating the key terms of the deal in a letter of intent (LOI).
A selling company’s bargaining power is greatest prior to signing a letter of intent. This is the point of negotiation. Some of the key terms to negotiate in the letter of intent include:
The purchase price, and how it will be paid.
Any adjustments to the price and how these adjustments will be calculated (such as working capital.
The scope and length of the Non-Compete Agreement.
7. Failing to negotiate and agree upon a favorable acquisition agreement.
One key to the successful sale of a company in the built environment is having a well-drafted acquisition agreement. Some of the key provisions included in the acquisition agreement include:
- Conditions to close: (a seller will ideally want to limit these to ensure that it can actually close the transaction quickly).
- Adjustments to the price (a seller ideally wants to avoid downward adjustment mechanisms based on working capital adjustments, employee issues, etc.).
- The milestones for earn outs and/or contingent, future purchase price payments.
- Where stock is to be issued to the selling stockholders, the extent of rights and restrictions on that stock (such as registration rights, co-sale rights, rights of first refusal, Board of Director representation, etc.).
- The nature of the representations and warranties (a seller wants these qualified to the greatest extent possible with materiality and knowledge qualifiers). Intellectual property, financial and liability representations and warranties are the primary areas of focus here.
8. Not appreciating the fact that time can kill deals.
The longer an M&A process drags on, the higher the likelihood that the deal will not happen, or the terms will change. The buyer seller and their advisors must have a sense of urgency in getting things done, responding to due diligence requests, and turning around red-line markups of documents to name a few.
9. Neglecting the day-to-day operation of the business during the M&A process, including business development.
The process of selling a company can be distracting and somewhat time consuming. Management must keep its eye on the ball and ensure that the company continues to grow and operate efficiently. One of the worst things that can happen in an acquisition process is for the selling company’s financial situation to deteriorate during the process. This could kill the deal or result in the buyer renegotiating price and terms.
10. Failing to communicate the vision and strategic fit.
The selling company must be able to effectively communicate to prospective buyers the company’s culture, growth strategy and vision. Regardless of the company’s current performance, unless a buyer is excited that the company will continue to grow and be valuable to the buyer in the future, a deal may not happen. If the buyer is a strategic buyer, synergies, and strategic fit of combining the two companies come more into play.
11. Absence of credible financial projections.
The buyer will spend time doing due diligence on the company’s current financials and future projections (backlog and pipeline). Unreasonable projections or unrealistic assumptions will adversely affect the credibility of the seller. The seller must be able to convincingly demonstrate the reasonableness of projections.
12. Not considering change of control/assignment provisions in key contracts.
If the selling company has key contracts, licenses, or leases that require consents from third parties in connection with a change in control of the company, it is critical that these consent requirements be identified early in the process. A plan should be developed to obtain the consents in a timely manner. A buyer may insist that the consents be obtained prior to closing.
13. Not adequately taking into account employee-related issues.
Transactions will typically include a number of employee related issues. The questions that frequently arise in M&A transactions revolve around key employee treatment as well as a plan for retention and motivation of the company’s employees. A detailed plan should be developed before letting employees know that the company is being acquired.
14. Not understanding negotiation dynamics.
All M&A negotiations require a give and take attitude on both sides. In the built environment, there is usually a balance of risk between buyer and seller.
15. Not carefully negotiating earn-out provisions.
An earn-out arrangement provides a seller the potential to earn additional payments following the closing if certain milestones are achieved. The inclusion of an earn-out provision in an acquisition agreement can be useful in bridging the valuation gap between a seller and a buyer. Some key points to negotiating an earn out include:
- Identification of realistic financial milestones to be achieved before the earn-out is payable.
- What items are included or excluded from the calculation of the milestones?
- What is the timetable for the earn-out?
- What payments are required as milestones are achieved and when are payments made?
- Is there a cap on the earn-out payments?