Price Isn’t Everything in Mergers and Acquisitions
Whether you are a buyer or a seller in the high stakes game of mergers & acquisitions, you are going to spend an inordinate amount of time thinking and talking about what price you pay (or receive) for the deal. Rightfully so. Price is tangible; you can touch it and feel it. There’s also the ego component of price, the proverbial scorecard in M&A. It is not uncommon to hear a buyer, seller or even advisor pound their chest about a valuation that they attained. Don’t get me wrong, I engage in this wildly fun and intellectually stimulating banter all day, every day—and love it. But the truth is, price isn’t everything.
Those of us who do this for a living know that beyond valuation, structure and terms are other areas which define a deal, and where you can make or lose a lot of money. The right question is not, how much did the deal go for? Rather, we should be asking: Was it a good deal?
As an owner, CEO, President, etc. of a LBM business, we need to spend as much time and energy managing our balance sheet as we do our P&L if we want great results. The same theory applies to deal making: To get a great deal, we must spend as much time and energy on deal structure and terms as we do on price.
On closing day, you will be focused on the money in your bank account or the business you have acquired. It will feel good. Really good.
From closing day forward, in some cases in perpetuity, you get to live with the structure and terms you have agreed to. Once the deal is done, all you can count on will be the words inside the corners of your purchase agreement. For example, non-compete agreements can hold you back from making a living, liability from representations and warranties you’ve agreed to can claw back monies from you or your estate, or an earn out can turn out to be worthless for an unforeseen issue. This would not feel good, at all.
Coming to agreement on issues like this is yet another reason why it takes so much time, money and effort to complete a transaction. When you are going through the process and debating them all, it will be painful. Take it from us: You’ll be happy you did.
Here’s a list of common battleground items which your advisors and you should consider, and have an opinion on:
• All cash deals
• Equity rollover
• Earn outs
• Purchase price adjustment/ mechanism
• Form and timing of consideration
• Seller financing
• Caps and baskets
• Employment Agreements
• Escrow and Holdbacks
• Exclusivity milestones
• Representations and warranties
• Covenants not to compete
• Working capital adjustments
• Real Estate/Operating leases
• Equity incentives
How Do You Deal with this as a Buyer or Seller?
• Bring on transaction advisors with experience in your industry to help you negotiate these issues, whether buyer or seller, in order to get you the best deal. Industry advisors use their proprietary market knowledge and history in prior transactions to help with the terms and structure of yours, information you will benefit from long after the transaction has closed. This is why you hire them. Not only will they get you the best price via an auction, and allow you to run your business while they do their work, they have access to information even your attorney might not know.
• Hire an attorney with transaction experience, one who knows what is generally acceptable and fair for the terms listed above, and who has the demeanor/personality to fight for you in a way, which is assertive and effective.
• If you’re a seller, create competition for the deal. Use this leverage to drive not just valuation—but structure and terms. As a buyer, get informed on what is market and what is not.
• Don’t spend all of your energy on valuation or be cavalier in the way you treat the rest of the negotiation.
• Pick an advisor who is willing to negotiate as much of these issues as early on as possible. As a firm we try to define as much of these negotiating points in the Letter of Intent (LOI) as possible, so that there is less to argue about down the road in the transaction. It might be painful and time consuming to create a LOI which is excessively detailed and many pages long, but it’s worth it.