The majority of sellers within the lower middle market only go through the sale process once in their lifetimes. Sellers often hire an M&A expert to help guide them through the sale process and advocate on their behalf. While M&A experts have a wealth of experience, they do not have a crystal ball.
One question we often get after the exciting moment of signing the letter of intent is, 'What could go wrong during due diligence?' We cannot predict exactly what will complicate a client's due diligence process, but we do know there will often be hurdles that an experienced deal team can tackle. The buyer and seller are still on opposite sides of the table, and a lot of work remains to get the deal across the line.
One issue that occurs during due diligence is a deal taking too long to complete. We have a saying in the M&A business: Time kills deals. Unfortunately, the longer the negotiations, due diligence, and other deal-related items take, the more fatigued all parties become. When a deal is dragged out, fatigue sets in for buyers, sellers, and advisories. If the finish line continues to be pushed to a later date, people have a natural tendency to move on to something more exciting because they lose interest in the task at hand, and the deal can fall apart. Benchmark International has experience with keeping deals on track and reigniting the excitement while bringing all parties back to the table.
As time progresses, other risks can surface, such as economic risk or unforeseen changes within the business, like losing a major customer. After the signing of a letter of intent, we have seen the first rights of refusal surface as a major issue. Unfortunately, most sellers are not aware that some of their typical business agreements might have first rights of refusals, also known as ROFRs. ROFRs can derail a transaction quickly: The clause gives another party the right to purchase the company from under the bidder. We have come across parties with the ROFR who drug out the process in hopes of benefiting from the transaction. In some cases, a lump sum payment took care of the issue, and in other cases, time passed, and the ROFR expired, which allowed the ultimate acquirer to move forward with completing the deal. We have seen these tricky clauses included in supply agreements and buying groups. Most sellers do not think the party with the ROFR will cause an issue, but in our experience, sellers often misinterpret the party's motivation, and it can be a very stressful experience. An experienced M&A team can help navigate the issues while helping to keep emotions at bay.
My personal deal experience has allowed me to see many unexpected hurdles along the way. I tend to educate my clients on the fact that, statistically speaking, they are probably going to endure a few challenges during the due diligence process. Unfortunately, without a crystal ball, we may not see some of the hurdles approaching, but with an experienced M&A team and with all parties desiring a completed transaction, we can overcome the obstacles that arise.
Another item that can affect deals is macro-economic changes. Last year, we saw a flurry of deals due to anticipated tax changes. We have also seen lenders changing their positions, such as forgoing loans in a specific industry, because of anticipated changes in the economy. The current economy and economic threats can change in just one day and sometimes even in a matter of hours. The sooner a transaction can take place, the less likely something will change during due diligence. If you are considering going to market, it is priceless to have an experienced deal team on your side to help overcome the challenges ahead.
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Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntI.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL:
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.