By: Stuart Sorkin
The experience and chemistry of your acquisition advisors are equally important. The wrong advisors will not only wreck an acquisition, they can damage your company’s reputation. For example, a company’s three-year business plan called for development of a new product line and acquisition of a business to help roll it out to a broad customer base. The owner asked the company’s CPA and attorney to jointly direct the M&A effort. Neither had much M&A experience, but the owner trusted them because they had served his company for more than ten years. Together, the CPA and attorney interviewed and selected an investment banker to identify acquisition targets.
Thirteen candidate companies were found, but the screening process quickly eliminated eleven of them. The buyer’s president met with the CEOs of the two remaining companies and selected the target company based on strategic alignment—even though the price was high. An LOI was signed and the due diligence process began. In an effort to negotiate a lower price, the CPA was so aggressive in citing inadequacies in the seller’s financial records and performance that the seller’s CEO said, “It felt like I was working with Jack the Ripper.” The deal ended abruptly after a shouting match between the CPA and the seller’s CFO.
Your acquisition team must have experts with broad M&A expertise that you can trust to give you straight answers—but they also must have the right chemistry. The wrong advisers can kill your deal and hurt your company’s reputation. M&A deals frequently begin with good rapport between the buyer and the seller, but that rapport can dissipate quickly in the heat of negotiations. When patience is wearing thin and tempers flare, you want a team that will calm the waters and use their ingenuity to make an impossible deal possible.
You can’t be too careful in selecting your advisors; they will make or break your deal. While, as the owner, you ultimately make all of the decisions, surround yourself with acquisition all-stars including:
• An investment banker who will help find and evaluate candidates, and take the lead during most of the negotiations;
• An accountant/CPA who will lead financial due diligence, advise you on tax-advantaged ways to structure the deal, and work with your attorney and broker effectively;
• A finance expert who will help arrange financing for the deal;
• An attorney who will lead the legal and human resources parts of due diligence, work with your CPA to document a tax-advantaged deal, and prepare the purchase agreement and other documents; and
• An industry expert, usually an executive from your staff, who will evaluate the seller’s customer base and product/service offerings.
In some transactions, one expert can serve multiple roles. For example, with appropriate conflict-of-interest disclosures, Stuart has represented both the buyer and seller in several deals. This approach reduces costs and expedites closing because one professional prepares the documents with no back-and-forth between attorneys on boilerplate. The buyer and seller, if they desire, can engage other legal counsel to review particular provisions in the agreements that are of concern to them.
But which adviser from the list above should you hire first? There are two approaches to selecting your team. First, if you have a trusted associate, such as a Board member, executive, or a CPA or attorney who has M&A experience in your industry, that person may lead the acquisition team and help you select an investment banker. Second, if a trusted advisor isn’t available, choose an investment banker yourself. We recommend approaching an investment banker first because an investment banker usually directs the acquisition and coordinates the negotiations. In addition, an investment banker will know accountants and attorneys who have been successful in transactions in your industry. Interview the recommended candidates and pick advisors with whom you feel a rapport.
Many owners rely on the CPAs and attorneys who represented them in the past—which may or may not be appropriate. Obviously, an advisor who serves you well has your trust and understands your business and personal situations. However, they may lack the expertise or personality to handle a complex acquisition. So you may be working with a stranger on the most important deal of your career. Interview thoroughly and hire carefully. Systematically evaluate the candidates’ records:
• Are they thoroughly versed in the unique issues of your business?
• Have they represented other companies in your industry and closed those transactions successfully?
• Do they understand the tax laws involved in structuring your deal?
• Are they familiar with pricing issues, earn-outs and representations, and warranties that are common in your industry?
• Will they appear credible to the seller?
Take a long, hard look at your current advisers to decide if you will need more qualified advisors to ensure the deal will go through.
If you don’t have a full-time acquisition specialist on your staff, you will probably need to hire an investment banker to direct the search and screening process. Investment bankers often are in contact with owners who have expressed a desire to sell. Buyers are at a disadvantage in such cases because parameters of the sale have already been determined. For example, sellers choose a time to sell, the asking price, and the payment terms. A buyer can only respond. However, that doesn’t mean you are at the mercy of a seller. At times, a buyer can initiate the inquiry to a seller who has not publicly announced an intention to sell. Investment bankers know how to conduct such inquiries and create seller interest when none had existed. We recommend that you provide written acquisition criteria to several investment bankers, interview them, and select the one who understands your objectives best and has a clear plan to find candidates.
Most growing companies lack the internal resources that a Fortune-1000 company can apply to an acquisition. So it is essential for them to recruit advisors to augment the availability and expertise of their staff. Some companies use a “war room” to conduct acquisition meetings and store confidential data. They find a war room helps communications and stimulates a feeling of shared purpose, especially among executives who manage acquisitions in parallel with other corporate functions. Even so, small companies can compete favorably with large companies in the acquisition arena by training executives in M&A processes and hiring experts on a retainer basis—avoiding the Jack the Rippers, of course!
© 2010 Hughes & Bentzen, PLLC.