14/09/2023
Trust is critical in M&A transactions. Both parties are naturally suspicious of each other, and tensions run high even in the smoothest of deals, so any ant can be magnified into an elephant. Buyers worry that they are paying too much, there are hidden problems with the business, and that they will be taken for a ride. Among a thousand things, sellers worry that buyers will use any little issue to change the deal or that the buyer will drag out the deal forever. To avoid bigger problems, it is important to establish trust from the beginning and to continue to be trustworthy throughout the process.
For sellers, establishing trust begins with the materials that are presented in the beginning. The owner has spent 10, 20, or 30+ years establishing the image of the business, but many buyers will not know much about the company. If the materials are prepared professionally and organized, without too much fluff, that is a good start.
We often see deals that are over-pumped, with statements such as “premier leader in the field.” If that is true, great, but all statements should be substantiated. If revenues are €100 million, and the industry leader’s sales are €1 billion, then maybe you’re not an industry leader (but you could be a leader within a certain niche, so go with that). Many buyers avoid overpromoted sellers because they feel that the seller’s valuation expectations will be too high or that the M&A advisory will back up a dump truck full of manure.
Sellers should make sure that their materials, documents (financial, legal, and environmental), and projections are well-organized and reasonable. It is fine to promote the pros of acquiring the business but be sure to be realistic. We often include a few cons, but we are sure to describe how these can be opportunities to grow the business (e.g., adding sales resources can help grow revenues, adding equipment can improve efficiency, etc.). Letting your guard down a little bit is a good way to establish trust. We usually recommend that sellers and buyers have at least one dinner meeting together before signing a letter of intent. Meeting in an informal setting can help grow a more trusting relationship (or it can prove to both sides that a deal won’t work, which is better to determine early in the process).
For buyers, it is important to disclose their strategy for acquiring the business, their availability of funds, and their timing for closing a deal. Buyers almost always find something wrong with the business, but if the business is growing and the owner has otherwise been open, buyers will sometimes overlook small issues. If a buyer senses that the owner has not been open, or if the owner is slow in providing documents that prove to be incorrect, a buyer may alter their offer significantly or walk away from the deal.
One of the biggest dealbreakers is if something major comes up during a deal. If trust is well-established, it is easier to recover from a surprise. Keeping a deal on track depends on how both sides react to surprises. If the seller discovers an issue, or if something comes up while working on a deal (such as a major customer cancels orders), it is important to disclose the matter quickly and perhaps suggest a resolution. A seller should not try to hide issues, as it is bad if the issue comes up in due diligence, but it’s even worse if it comes up after a deal is closed.
If the buyer discovers the issue, it is also important to disclose the issue in a timely manner, as well as provide a suggestion for resolution. It’s okay to wait until due diligence is completed to present a list of minor issues, but if a major deal-killing issue comes up, it is best to resolve things immediately. We have seen buyers wait until both sides have gone through several edits of the Share Purchase Agreement (and major legal costs) before disclosing a deal-killing issue. We have also seen buyers bring up major issues in due diligence that were disclosed way earlier in the confidential memo. Sellers are more likely to step away from the table if they feel that the buyer is not behaving in a trustworthy manner.
Because most deals include earn-outs, seller notes, ongoing involvement by the owner, and other activities after closing, it is important that both sides have established a level of trust. The legal responsibilities of both sides should be clearly stated in their agreements, but those documents are not worth much if the working relationship has been damaged during the sale process. Mostly for sellers, but also for buyers, it is key to remember that while “it’s just business,” we are still dealing with people who have feelings. If the owner and the buyer have a good, trusting business relationship, that will flow down through the organizations of both sides, which will help to ensure a smooth integration.