Look at things outside of your control, like market dynamics. How will sales opportunities change for your combined business in an economic downturn?

So far in this series, we’ve heard from experienced growth company leaders who represent finance, corporate development and legal perspectives on M&A, sharing their advice for developing an acquisition strategy and effectively sourcing deals.

Once an opportunity is sourced that looks and feels like a “fit,” due diligence and M&A negotiation tactics will make or break the transaction.

While the techniques and to-do lists haven’t changed much over the years, our three experts had a lot of advice to share during our conversations about how to carefully and strategically manage diligence and negotiations so that everyone is pleased with the outcome.

Our panel of experts:

  • Jesse Gray, Vice President, Industrial Tech, LLR Partners
  • Joe Luceri, former CFO/COO at Numotion; former Chief Development Officer, Schweiger Dermatology Group
  • Ed Spaniel, former legal and corporate development lead at SDI Health (sold to IQVIA in 2011), SICOM Systems (sold to Global Payments in 2018) and Edmunds GovTech

Here’s what Jesse, Joe and Ed shared about where to prioritize efforts during diligence, how to balance both parties’ interests while negotiating, and what principles should guide you during the process.

 

Jesse Gray: Don’t sweat the small stuff, focus on the big picture

Focus on the big picture first. Determine the items that will have the greatest impact on your combined business, financials and reputation. Don’t sweat the small stuff. It’s easy to get wrapped up in the positives – all the ways that you’ll be able to expand services, integrate new clients and enter new markets. But don’t forget to consider the downside scenario, too. Look at things outside of your control, like market dynamics. How will sales opportunities change for your combined business in an economic downturn? What are the risks for technology disintermediation and product liability? Even if you do everything right, you need to consider what happens if things go wrong.

Diligence should be a collaborative effort across the business. Finance, HR, IT, operations and sales should all be involved. Some people want to keep it to a smaller group; I am in favor of broadening the diligence team to make sure we’re considering an acquisition from all angles. This is also the time to start discussing how to integrate the business, so perspectives from all impacted departments can be valuable to collect now.

Not everyone you work with on the seller’s side will have experience selling a company and you may not be able to get the data in the format you prefer. Adapt your methods to get the answers you need without creating seller fatigue.

Negotiation should be handled by executives, attorneys and financial sponsors, if you and/or the other party have one. Successful negotiation is all about being fair and honest. You must look at the other person as if they are your future partner. You should both get and give some things, and both feel good about the deal when it’s done.

Adapt your methods to get the answers you need without creating seller fatigue.

 

Joe Luceri: Commit your energy to what matters to your business model

First and foremost, during due diligence you must make sure the seller’s financial information is complete and accurate, and that the goals of the seller and the way they operate their business align with your growth plan. If you don’t have transparency into these areas, you’re setting yourself up for major headaches – if not failure – down the road.

Start to address people issues early on and think about structure as well. Obviously if you’re buying stock as opposed to assets, you have more risk, so align your diligence plan to that. Make sure you’re really getting what the seller said they’re selling you, with no surprises.

During due diligence, focus the majority of your effort on what matters most to your business model. Know what the key success drivers are across the acquired company and what is most important in generating returns. These are the processes and people you want to retain and engage for the long term. In dermatology, we look at a practice’s providers, the location capacity and dynamics, and the economics around that to make sure they are aligned with where we want to go. We also commit time to understanding the staffing model used at a practice. Once these factors are understood and aligned, we can have confidence in what we are acquiring.

Everyone has his or her own principles for M&A negotiation; there is no one right way to do it. Some values that have served me well include:

  1. Transparency and frankness: This is the most important way to establish trust. Be honest about what similar companies trade for and explain how all the things you learned during diligence fit into your valuation and strategy. Share those results with the seller. Never appear to hide anything from a seller. And get all your important issues on the table at one time so you can negotiate trade-offs equitably.
  2. Partnership mentality: Keep in mind the seller will be your future partner, so treating people with respect is very important. Making someone feel like they got a fair deal, and got the most out of it, is good if you want them to work with you for the long term.
  3. Know when to walk away: Now is not always the right time for a deal. Let things play out. It may surface that what the other party wants isn’t what you want, and it will be better to walk away than strike a deal no one is happy with. Reconvene in the future in case circumstances change.
  4. Set the bar but be realistic: Instead of asking what the seller wants, be the first to offer a realistic starting point. Set the bar at a place you’re comfortable with and you can coherently justify knowing you may raise that bar from there. Often this can move the seller down from unrealistic expectations without feeling tied to their number.
  5. Listen: You can’t give the seller what they want, and ask for something in return, unless you listen closely to their perspective. Then you can think creatively about ways to make both parties satisfied with the outcome.

Lastly, try not to negotiate in a piecemeal fashion. Some sellers make ongoing requests for what individually seem like little things. It’s easy to get caught up in addressing each one as they arise, but by the time you get to the end, you’ll have given more than you intended to. Try to negotiate matters when all the information available is on the table. Only then can you look at the big picture and decide where to make compromises. This is also why having a person who is not the decision maker lead negotiations is helpful. He or she can defer answering requests until all the key points are made and then formulate a strategy around how to respond.

Raise concerns directly as they come up – don’t allow issues to make their way over through lawyers or in document revisions or in email communications.

 

Ed Spaniel: Call balls and strikes early and respectfully

Every deal has unique priorities, but there are a few important questions to consider during any due diligence process: Do any of the findings suggest a different fit than what we thought? Do we see anything in the financial or performance data that changes the company’s anticipated trajectory over the next 3-5 years? Is it still absolutely clear that buying is the right decision, versus partnering or building our own solution?

Legal and finance will drive deal diligence and it’s incumbent on them to be thoughtful about who else needs to weigh in. There should be a single project lead working with your financial sponsor to make sure everything they need to see is provided. Create one comprehensive due diligence list and work off of it together, incorporating whatever request lists your divisions, units or advisors may require. Too often the various parties involved operate with siloed lists and create unnecessary duplication, complication or miscommunication, all of which reflect poorly on the buyer.

I believe that the way you approach your negotiation strategy from the beginning goes a long way to making integration and the longer-term partnership a success. Call balls and strikes in a way that is respectful and allows the sellers and their advisors to be heard. Raise concerns directly as they come up – don’t allow commercial, business or deal issues to make their way over through lawyers or in document revisions or in email communications. The goal of negotiation is to make sure everyone feels good about the process and the outcome. Beyond the critical facts and figures, the way you go about it from the beginning is essential to reaching the desired outcome.

Our final post in this GrowthBits #M&A series will share Jesse, Joe and Ed’s advice on acquisition integration.