The Ticking Clock of M&A: How Delays Can Kill The Sale of Your Business
It is said that "time kills deals"... and as the critical factor influencing all aspects of an M&A transaction, time may be the most overlooked element of selling a business. When buyers and sellers are prepared and organized, time can be utilized efficiently to close deals on schedule. When mismanaged, it can be the literal time bomb that detonates a deal, wasting everyone's valuable resources and money. As entrepreneurs venture into an M&A process, they must be aware of the risks created by self-imposed delays and take proactive steps to avoid them.
In this article, we address the most pressing concerns and frequently asked questions entrepreneurs have about time as it relates to an M&A transaction. By providing insights and actionable tips, we hope to arm business owners with the knowledge necessary to ensure the smooth progression toward a successful exit. From understanding the root causes of timing delays to implementing strategies that prevent them, we aim to equip entrepreneurs with the tools to defuse the M&A time bomb and greatly increase the likelihood of a successful exit.
To get started, let’s look at the significance of time and how it influences M&A deals.
How Time Affects The M&A Deal Process
It's fairly straightforward, the more time it takes to sell your business, the more likely a deal will fail. The Harvard Business Review recently found that up to 90% of M&A deals fail, and while each deal is different, time certainly influenced every missed M&A opportunity. From the very first moment a founder initiates an M&A process until the day that the purchase agreement is signed, infinite variables can alter the details of the transaction.
Let's look at the most common causes of founder-imposed delays that put well-intentioned acquisitions at risk.
The Most Common Causes of M&A Time Delays (And How To Fix Them)
To keep your sale process on schedule, it helps to know the areas that commonly slow down the transaction so that you can work to correct address them before they occur. Here are the top four time-related areas that may put your deal at risk (and what you can do to fix each of them):
Time Risk #1: Lack Of Preparation
If you wait to get your house in order until it's time to sell the company, it's too late. It's no different than selling your house, if you are scrambling to address leaks in your roof, patch holes in the drywall, and replace carpeting until the day of your open house, there are bound to be issues and delays that put your sale at risk.
Solution: "Run Your Business Like You're Going To Sell It Tomorrow"
As discussed with Greg Lopez on Episode 28 of the Cashing Out podcast, one of the biggest risk factors of an entrepreneur considering a business transaction is not being prepared beforehand. Greg's advice: "Run your business today like you're going to sell it tomorrow." What does that mean?
Get your financial house in order. Your goal should be to always have clean and accurate financial statements and balance sheets, as well as a clear understanding of your company's financial strengths and weaknesses. This can come in many different forms - upgrading your finance team, getting your financials professionally audited every year, or pre-emptively initiating a sell-side Quality of Earnings analysis done.
Get organized. Keep all of your company's essential documents in one place, such as contracts, employee agreements, and legal details covering corporate intellectual property. This may seem obvious, but so many businesses struggle to track down key documents during the diligence phase. Make sure you start early and get your business documents and agreements organized, secured, and easily accessible.
Document your critical Standard Operating Procedures ("SOP"). Clearly map your company's operations and processes that are easily transferable, as well as maintain a system for tracking and managing your company's key information and processes. This organization will likely help your business today, but will also build future credibility for potential acquirers, and reduce the risk of missteps and misunderstandings during due diligence.
Build relationships. This includes developing relationships with potential buyers and the corporate development leads of current customers and large clients. Should these relationships ever materialize into a potential merger, it will helpful (and save time) to have pre-existing personal and historical relationships to lean on when it comes time to negotiate deal terms.
Begin delegating responsibilities. The more day-to-day responsibilities a founder manages in his or her business, the more difficult it will be for potential buyers to develop a plan for integrating your responsibilities into their own platform. This can lead to drawn-out negotiations, lengthy earn-outs, and an increased risk of the founder getting top dollar for their company when it comes time to exit.
Time Risk #2: Not Having The Right People On Your M&A Team
Expertise in M&A matters. Whether it's your first time selling a company or your tenth, running a sale process yourself or with an internal team will slow you down and increase the risk of failure. It can be tempting to tackle M&A on your own in an effort to save money, but even with transaction experience under your belt there are common speed bumps than many founders don't understand until it's too late:
Selling your business and running your business are two full time jobs. Something is bound to slip at the wrong time if you're trying to balance both.
Utilizing an in-house corporate attorney to manage the legal aspects of a transaction can create delays in responses, and unintended mistakes or omissions on important deal terms.
Inexperience at the executive level can lead to the mismanagement of the M&A process - instead of leaning on experienced advisors to manage project plans and adhere to mergers and acquisition best practices, team members will be "building the airplane in flight", invariably slowing down the process. M&A isn't an area that you should be trying to learn on the fly.
Having a team of mergers and acquisitions experts to not only shoulder the burden of preparation and organization prior to marketing your deal, but also streamline the sale process throughout, and build confidence with the potential acquirer. With external advisors reviewing your materials, leaning into M&A best practices, stay on task, reduce the likelihood of making critical mistakes, and requests for additional information will be streamlined.
Time Risk #3: Not Knowing Your Exit "Why"
Many founders tell us that they realize their greatest professional achievement on the day they sell their business... and subsequently experience the worst day of their life shortly after. This internal conflict, and the perception of lost identity is one of the biggest wildcards of any M&A process.
If a founder doesn't know what comes next, it becomes very easy to unintentionally stall a transaction midstream.
Before starting an M&A process, try to answer each of the following questions, and come to terms with how each answer makes you feel. Talk to other founders and business owners, and seek out answers to these questions before spending valuable time and resources on a potentially lucrative, yet emotional sale process:
Do you know why you're selling your business?
What do you plan to do after the transaction closes?
If you have an earnout, how will you deal with becoming an "employee" of the acquiring business?
What are your post-exit goals for your team and the employees within your company?
Do you need to protect the "legacy" of the business and brand you've created?
What will bring you purpose post-transaction?
Better understanding of your reason for selling, and coming to your post-exit purpose will help define your strategy moving forward. It can help you to discuss your plans with your team, major stakeholders, and external advisors. And most importantly, having already dealt with the emotions of selling your business, will put you in a better position to objectively focus on the relevant deal terms specific to the sale.
Time Risk #4: Not Understanding What Your Business Is Worth
Without a clear view of what your company is worth (financially and strategically), it will take longer for you to build internal consensus and conviction around any sale and deal structure with your team and investors. The resulting delays will send the wrong message to buyers, and increase failure risk.
Work closely with your team to organize all your financial information and determine a realistic, industry-specific valuation. Having a valuation prepared by a mergers and acquisitions expert enables you to focus on potential bidders with an aligned perspective of value.
In addition, you may want to consider how your company will strategically benefit potential bidders. This awareness can be invaluable in the early stages of a deal, and reduce the time of the deal negotiation.
Mergers & Acquisitions Explained: Q&A
How Long Should It Take To Sell A Business?
The industry average amount of time it takes to close an M&A transaction is seven months. However, depending on the complexity of the deal and the diligence process, the length of time can take as little as two months or as long as a year.
Larger companies or cross-border acquisitions may take even longer.
What Are The Different Phases Of An M&A Transaction?
On the sell side, there are typically six stages that privately held companies go through when selling their business:
Pre-Process Preparation - This project phase should happen well before you formally start an M&A process and is ongoing. During this stage, the executive team should focus on organizing their financial statements and agreements, documenting operational processes and procedures, formalizing valuable business development relationships with clients and partners, and maintaining a pulse on valuation ranges for the business, industry, and look-alike sectors.
Assemble your M&A Dream Team - Whether you've received inbound interest from a potential acquirer or you're formalizing your own exit process, building out a team of industry-specific M&A experts (such as investment bankers, advisors, board members, attorneys, and wealth advisors) is one of the most important aspects of deal preparation.
Strategy and Planning - In this phase, the M&A team will fill holes in any strategic, organizational, and financial documentation that is required to build out a proper Confidential Information Memorandum ("CIM"). The team will also finalize the initial target list of acquiring companies for review and approval.
Marketing The Deal- At this point, under the coverage of a Non-Disclosure Agreement, your team will begin to contact potential buyers and investors with a teaser and CIM in an attempt to formalize Indication Of Interest ("IoI") agreements.
Buyer Selection and Negotiation - If an interested acquiring firm is identified, the next step of the M&A process is for deal terms to be negotiated and the Letter of Intent ("LOI") Agreement is signed.
Due Diligence and Purchase Agreement - The due diligence phase ("DD") begins in earnest. In the final phase of the sale process, all aspects of the acquired company are investigated to validate deal terms and valuation. A sound due diligence process will set the path for the full integration of the two companies.
Typically, the most time-consuming phase of an M&A process is the due diligence phase, which should take between 8 and 10 weeks.
The acquiring company (or buy-side) of an M&A deal goes through a similar process. However, an acquiring company must focus more on efficiently evaluating potential targets, understanding acceptable industry valuation ranges, and preparing and managing for the potential of post-transaction integration.
Why Does Due Diligence Take So Long?
Easily the longest step in the M&A process is the due diligence stage. Due diligence is crucial and must be done thoroughly, not only to avoid costly and time-consuming mistakes, but to build trust between the target company and its potential acquirer. Proper due diligence ensures that the buyer deeply understands what they are purchasing and gives them near-complete access to all aspects of the target company's inner workings to ensure a fair and equitable deal can be confidently reached.
It makes sense that due diligence takes the most time. As a seller, you need to assemble and answer to a long list of critical information about your company:
Company origination and registration documents
Audited financial statements
Net working capital calculation
Proprietary technology or patents
Target customer profiles and current customer base
Expected synergies (also known as the "investment thesis")
Company management structure
Employee benefits, incentives, and policies
Permits and licenses
Past or current litigation
Disaster recovery plans
Software, equipment, and other essential operational assets
Subcontractors, suppliers, and other third-party vendors
Marketing strategy and assets
The key to reducing time in due diligence is preparation, and response time to buyer questions. Coordination with your M&A team, ensuring support from all company stakeholders, and maintaining a centralized location for all documentation can speed up the process or, at a minimum, not slow it down. The longer it takes to respond to buyer questions with accurate answers, the more risk you introduce into the process.
How Can a Business Owner Mitigate The Risks of M&A Time Delays?
There are a few best practices a business owner can leverage to mitigate potential deal delays:
Focus on an organized record-keeping system - keep documents and agreements in one place
Understand your "why" - what is the reason you want to sell the company?
Form strategic relationships with key players ahead of time
Select an experienced M&A expert to quarterback the deal (investment banker, M&A advisor, or business broker)
Educate yourself on a reasonable, industry-specific valuation for your company
Work with a wealth advisor and tax attorney to understand your post-transaction "take home" and if it aligns with your financial goals
Manage a realistic timeline
Ensure alignment among stakeholders and set expectations
Define roles for the members of your M&A team
Understand what will be expected of you and your team during due diligence process and plan for it