M&A, mergers and acquisitions can be a terrific way to increase the value of your business and accelerate growth, but there’s always a lot on the line when you do that, and it can be such an emotional rollercoaster. Luckily, today’s guest is an M&A expert who’s going to explain what to expect when you’re expecting to do a merger acquisition so that you could enter the process with more confidence. Stay tuned.

 

This is Business Confidential Now with Hanna Hasl-Kelchner helping you see business issues hiding in plain view that matter to your bottom line.

 

Welcome to Business Confidential. Now I’m your host, Hanna Hasl-Kelchner, and today, I’m pleased to welcome Kison Patel to the show. Kison is the founder and CEO of M&A Science, where they provide industry training about mergers and acquisitions management and best practices, whether you’re buying or selling and regardless of your funding sources.

 

Kison is also the author of two books, Agile M&A: Proven Techniques to Close Deals Faster and Maximize Value, like who wouldn’t want that? And M&A Tactics Handbook: Advice from Corporate Development Practitioners for Each Stage of the Deals Lifecycle. So, let’s have him join us now. Welcome to Business Confidential Now, Kison.

 

Hi, Hanna. Thanks for having me.

 

It’s good to have you here. I’m really looking forward to our conversation because M&A, mergers and acquisitions is not something that we’ve talked about on the show. And I’m sure our listeners are aware of M&A, but many have probably not actually been involved in the details of making such a deal happen and certainly not at the level of expertise that you train other merger and acquisition industry practitioners on.

 

So, if it’s okay with you, I’d like to just start with some basics because merger or acquisition is a little bit more complicated than buying a car. So, for the sake of discussion today, let’s assume that a buyer and a seller have identified each other. They’ve gotten sort of done this little dance. And what are the different stages in moving forward that people can expect before popping the champagne cork and celebrating?

 

Yeah. I mean, I guess that’s sometimes it’s the events that leadup to identifying the buyer and seller that could change the structure of the deal itself. For example, if we went through an intensive auction process, then it may be very competitive all the way to a close. But if we courted a buyer that we know through a business partnership, or a relationship over a number of years, and it was more of a subtle escalation to doing an acquisition, then we may have much longer time horizons to go through the different deal stages.

 

So now, once we’ve gotten to the point where buyers and sellers are giving these indications of a potential deal, usually, they’ll spend the time to review information to come up with an offer. And this may be some early diligence where they’ll have a list of sample financial information, operation information that they want to gather to start building out a model on which they’re going to determine their value or target price that they’d like to purchase the business for.

 

Then, they would propose through a letter of intent or referred to as also an LOI the general terms on which they would do business if they were to outline an exclusivity period or the due diligence period for them to be able to go through and do what the industry refers to as confirmatory diligence. And that’s when you’re really getting into the weeds, making sure what’s represented is accurate and true, that you’re paying for it with value, that you anticipate identifying what the risks are in the deal.

 

If there’s any potential red flags, and at the time, you should be preparing for what you’re going to do after you buy this business. Typically, there’s a plan to create value, be able to start getting some of the details and building that project plan out so your team will be ready to execute with the integration or post-closing activities.

 

When you go from this LOI and you go through that confirmatory diligence, I’m assuming the lawyers would actually go together and start preparing a purchase agreement. That purchase agreement could be either a stock purchase agreement or an asset purchase agreement, and there’s various reasons why you go one direction or another. A lot of times with large companies, an asset could be complex because you’re essentially terminating all the employees employment and rehiring them.

 

In the other organization where a stock may be less disruptive of having to change HR system, payroll and things of that sort, maybe you have some visas attached to it. So, there are various reasons why you would go down one form of purchase agreement versus another. And once that purchase agreement gets settled, there’s a lot of little nuances to it because there’s a lot of details on liability and the disclosure schedules and that need to be agreed to. And then once everything gets finalized, that’s when we can get to assign to close.

 

You know, depending on the nature of the deal, you may announce a deal ahead of time, if there’s some regulatory contingencies involved, or you may end up just doing the closing announcement on the same day. And that’s when the deal finally solidifies, the ownership is transferred, and then the series of post close events or integration or post-merger integration would then begin. And that’s when all the fun begins and a lot of change that ends up happening for both organizations to become one.

 

It’s quite a process. And you know, it almost sounds like, yes, you’re dating, then you’re going steady and then you’re going through the whole wedding planning and then finally, you’re moving in together. If you’re a smaller, or a midsized business who’s selling, what professional advisors do you recommend the business owner with be consulting during the M&A process?

 

 

Definitely a good lawyer. I think having a lawyer experienced in M&A specifically in the industry they operate in is well worth it. Just having somebody that knows the nuances in the industry, who’s familiar with doing transactions, they’re probably going to be your best guide for understanding the agreements, the risk, and knowing the general structure and flow of the process. You may want to engage with other resources that have M&A experience.

 

Maybe early on in terms of preparing a business, I think often gets underestimated or there’s a lot of work to really prepare business with all the considerations on the diligence the buyer’s going to do. And if you’ve got a messy house, it’s going to be a big turnoff and may sort of discount the value of your business or potentially turn away some potential buyers.

 

So having somebody such as a CFO that has gone through an M&A process was familiar with M&A. It could be another good resource to bring on as an advisor to help prepare the company for sale, and then I think the industry is pretty familiar with the investment banks. So, if you are going to run a process having an investment bank, they may have a network you can leverage of being familiar with potential buyers already.

 

And then if you wanted to do that type of auction process to really create a competitive environment to bid up a price, they can help conduct that kind of auction process as well. All right. So, I think those in the front-end preparation, if you get somebody in the finance side, such as a CFO that’s done M&A, your banker to sort of know the landscape of the buyers, has the relationships and the lawyer to really make sure that the terms come together.

 

Those are probably the key resources I would look at in terms of having advisors to give you a full coverage for a small business that may be transacting.

 

So, of all of those advisors, clearly the CFO helping you prepare is one thing, but with all of them need to be brought in upfront or at different stages? What are your thoughts on that?

 

I would say early on, the CFO, the financial advisor, just to help give you a sense of what a company should look like that’s prepared to go to market, maybe they can set up the data room, set up some of the information that’s to be reviewed, really help with the prep work. And then as you go to the actual identifying a buyer’s, probably when you switch over to interviewing and networking with various bankers and these are all things the earlier you do, the better.

 

The longer the more well-planned out of an exit you have, the better outcomes you’re likely to have, sort of knowing ahead of time who are the potential bankers having them do a bake off to present their opinions on the value of your business and giving you the opportunity to identify who you be comfortable working with or have the confidence in working with. And then once you go through that, I think around that time too, it’s when you want to also have a lawyer in mind that you’re going to work with in the transaction.

 

I think a common small business mistake is getting the go-to business attorney, the local attorney that you’re used to working with because you have a relationship and think, “Hey, this is another activity,” but M&A is so distinctly unique that if you – one side has a lawyer that doesn’t have much M&A experience, it could definitely be an unfair advantage for the other side.

 

I agree with you. I’m wearing my lawyer hat for just a nanosecond, I’ve seen people make that mistake, not just with M&A transactions, but across a wide variety of business transactions. Somebody does their office lease and they think, “Oh, I can now do my DUI or my parking ticket.” And that’s not quite how it works. I mean, yeah, they could give it a shot, give it to a paralegal and see what happens.

 

But also with other types of legal transactions, they may know next to nothing about antitrust and other types of contracts or regulatory issues. So, yes, attorneys specialize just as bankers specialize, like doctors specialize. So, it definitely pays to have the right people on your team. Now, you’ve mentioned the word valuation several times and everybody wants to have someone show them the money or whatever else goes into creating the value. How can a seller of a business maximize their value.

 

One, that starts with preparation. Going beyond that, it’s understanding the value to the buyer. It’s a little different than real estate. It’s not, “Hey, Zillow is going to tell me my approximate value for the business.” The value of a business is the interpretation of the buyer. It’s unique to the buyer. If it’s a company that’s maybe a private equity firm that’s doing the first acquisition in that space, they’re going to look at it and really look for financial returns and focus on that.

 

Whereas a large corporate strategic may have a totally different view that they’re not buying a business to continue operating, but that they’re going to integrate to help get another product out to market faster, or to maybe add that product into their massive distribution channel where they can see a strong revenue potential through that scale of their distribution. They’re going to have a very different view on what the value of that business is.

 

So, I think having an understanding of what their interpretation of the value would be to these different types of buyers, and then also understanding how they would operate your business. What’s that go forward plan look like? What’s the new home for your business, or is it going to be running as a standalone and continue the same brand and legacy? Is it going to get completely integrated and folded into a larger company and really become part of it? Different outcomes when it comes to looking at the sort of long-term operating model for that business.

 

So, that’s a big one is looking at from the buyer’s perspective, how are they going to value your business? And I think having those conversations with them earlier, understanding who the potential acquirers are in your space, usually, they’re pretty open to having a discussion and sharing what their strategy is, whether you’d be a fit, why they wouldn’t be a fit. Those are all good things to do to start getting a sense of what value is. And then obviously bankers will give you opinions on value and range as well.

 

If you’re on the buy side, let’s sit on the other side of the table for a second. What can be done to make a merger acquisition more successful in your experience?

 

I would say including the buyer in the activities that are happening early. Usually, these M&A deals are driven by a vision of creating value and there’s this end state sort of picture in mind. That picture needs to come to the very frontend of the process so that you can be aligned with the company you’re acquiring around what the end state is going to look like, how they’re going to be involved, how we can work together to outline a go to market and understand what the customer experience is going to look like when our organizations come together.

 

And can we rally around that customer experience knowing that both of our organizations are both trying to serve our customers the best we can? And when we do combine companies, what is that going to look like? How are we going to continue improving it to give that company we’re acquiring visibility into our organization, the way it’s structured, and what it’s going to look like when they get integrated into it? Having them part of that process, that planning so that they’re on board when it comes time to make these drastic changes.

 

One of the biggest challenges for a company acquiring other business is putting this business through one of the largest magnitude of change management any organization can possibly endure, and doing that without upsetting a bunch of people and getting them frustrated to the point they quit their job and go somewhere else along with all the value that they generated with them.

 

So, having that that transparency, strong communication, inclusion and the planning both, again, that I think we underestimate how well people can take the bad news as long as they can understand it and that the information is communicated. People tend to be on board like, “Hey, we do have to make some changes. We’re going to eliminate your role, but we’re going to take care of you. We’re going to need your help to make the transition, and we’re going to compensate you for that.”

 

And then we’re also going to compensate you with a good severance. So, we’re going to support you with an endorsement to help you get that next role. It may not be in this organization, but if it’s in a different organization, we’re still here to support. I think that that people experience is what needs to be the focus. We’ve gone through this legacy way of doing M&A that was very finance focused.

 

Now it’s shifting to focus on the people, the customers, ensuring that we’re creating a net positive experience for them as we go through this transition and the employees that are going to be needed to create all this change and allow the business to continue to grow and thrive.

 

Well, that makes a lot of sense. And it’s certainly an important step to be focused on the people and not just the numbers and hard assets, as you said, which is the way a lot of people looked at in the beginning, but it seems to me that there’s a little bit more than change management involved because there are the intangibles, not just the people, but the culture and the way they’ve been doing things that haven’t necessarily been reduced to policies. How can people address that?

 

Values. Early as possible, have executive leadership aligned on values so they understand what’s uniquely different about their respective companies, where they have commonalities, understanding values helps you understand culture. It helps you understand leadership approach. If you have an organization that’s very much top-down management and another organization that’s very much bottoms-up, they tend not to just fit as perfect pieces together.

 

They may want to change the plan and maybe not integrate fully, maybe do partial integration or a lighter integration to help preserve the distinct differences between culture. And that’s another area when we look at how M&A is evolving to be more of a people-focused process, there’s far greater consideration around culture early in the process and being able to be not afraid to walk away from deals if it’s that much of an issue with cultures, which could very well be.

 

Absolutely. And you mentioned some common mistakes or one common mistake that that happens in people not selecting an attorney that has experience with M&A work. What other types of common mistakes do newbies make? Because somebody that’s poured their life’s work into a business and wants to retire, they’re not doing a dozen deals a year like someone in the industry. They have one shot and they really can’t afford to make any major mistakes. What advice do you have for them?

 

One is ask questions and ask a lot of questions to understand the buyer. Understand early what it’s like to work with them. Try to see if you can talk to other CEOs of companies that they’ve acquired. See if they’re secretive about it. Maybe there’s a reason why. If they’re really open and transparent about it, maybe that can help build some trust and confidence. Understanding what are their post-goal plans, do they open about how they see the companies coming together?

 

Can they articulate it, or is it, “Hey, we’re just doing a deal just to make our balance sheet look prettier?” You know what? Well, understanding what are the drivers for them, the why and pursuing the transaction. I think that’s the biggest thing is it’s not for the buyer obviously has to do diligence. You’re going to ask a lot of questions to cutting the check, but for the seller to do as much diligence as well to be certain that they’re making the decision and especially if more and more people are putting consideration for the company people that you want to see them in a good home with opportunities to progress.

 

And sometimes that doesn’t always happen. You can have the cultural issues or maybe the intention was there to kill off the product or things of that sort. So, really asking questions, understanding the buyers’ perspectives, motives, or drivers is important. I think the other one was often first-time sellers will underestimate how taxing it is to sell a company. Buyers vary by sophistication.

 

You could be running an auction process and have to entertain multiple buyers and then the variance of highly sophisticated buyers that could send a little army in there to due diligence, to very unsophisticated buyers, which could have their own dangers because they’re not asking for the right stuff or doing the real diligence and planning that they should be.

 

And then when you do have that sophisticated buyer, they’re going to put a lot of work to your team. They’re going to be requesting for a lot of information review. They’re going to want to understand all the various risks involved. They want to see the legal agreements with their employees, your customers. They’re going to want to review your financials in detail, maybe even do a deeper dive, have a third party, do a quality of earnings or a Q of E report to really understand the quality of the financials that were reported and understand the risks involved with them.

 

They could do various operational diligence and really, it just takes time and resources away from your company. It’s highly distracting for your leadership teams and would essentially distract them from their goals. So keeping in mind that this is where working at a good investment bank could be helpful, that they can take a first pass to some of those initial requests for information and answer clarification questions that tend to follow those requests for information and to help to minimize the distraction.

 

But ultimately, regardless, it’s still an incredibly taxing process. It’s going to lead to some late nights, a lot of extra work for everybody. And depending on the process, if you’re dealing with a compressed timeline, it could be very intense.

 

I think that’s a bit of an understatement. I think you’re being generous because especially for the entrepreneur that built their business from scratch, where they’re still very hands on in all aspects of their business, they only have so many hours in a day and now they have this other really full-time job of getting this information to the other side, and it’s just really, really difficult.

 

And so I’m wondering in those types of situations, how can they get a team together that they can trust because the employees don’t necessarily know about a transaction in the works. It’s not final until it’s final, and they don’t want to be lame ducks in the process. How do you handle that?

 

Usually, you want to identify the key people that you can trust with confidence to work on the transaction, but maintain the confidentiality. And it’s typically going to be one person finance, CFO, somebody finance oriented, depending on the size of the transaction. He may want to pull another controller or type of person in and then usually, some of the operational components that you would bring in a resource as well.

 

Anybody that’s going to be key to speak on the company, because what will happen is buyers are going to want to do an interview with the management team and they want to understand their confidence and how they feel about moving forward with the current management team, the competency capability and that those management presentations, they’re going to look for that.

 

They want to get a sense of that leadership. So, you may have your head of sales. You may have your functional leaders that are also going to be involved with the process as well. Again, everybody’s got to commit to a high level of confidentiality to sort of keep these under wraps.

 

It’s a big juggling act, but it can be done.

 

Yeah, it happens every day.

 

Yes, indeed. Well, thank you, Kison, and I appreciate you’re sharing your experience and some tips about what entrepreneurs need to know about M&A. And if you’re listening and thinking about buying or selling a business, Kison’s contact information can be found in the show notes at BusinessConfidentialRadio.com, along with links to his podcast, M&A Science and links to his two books.

 

And you may want to be checking them out. Agile M&A: Proven Techniques to Close Deals Faster and Maximize Value, and the other one is M&A Tactics Handbook: Advice from Corporate Development Practitioners for Each Stage of the Deal Cycle. And if you know someone who’s looking to increase the value of their business or accelerate its growth through M&A, but is new to the process, tell them about Kison Patel and this podcast episode.

 

Share the link. Leave a positive review so others can find out about his amazing advice too. You can do that on your podcast app or come on over to lovethepodcast.com/businessconfidential because this is Business Confidential Now with Hanna Hasl-Kelchner. Thank you for listening. Have a great day and an even better tomorrow.