Successful M&A events require planning and careful execution. There are plenty of opportunities for entrepreneurs to stub their toes (sometimes disastrously) on the way to the bank. Any attempt to list all the potholes expands rapidly, but here are ten situations with the potential to radically reduce shareholder value if handled improperly.
- Wait until your business is in trouble
Watch the market and pay attention if your competitors are acquired. Little harm is done if you test the market early, but if you wait too long it may be too late. The tech world evolves rapidly. - Miss your numbers
Buyers expect you to be able to predict your business and to be able to make credible financial projections, at least for the near term. But dont make your projections so optimistic that you miss the numbers. If you do, the buyer will have good reason to disbelieve other rosy claims you make. And make sure your accounting records are clean, accurate and current. - Broadcast the news that youre considering a merger/acquisition
Wait until the transaction is well in hand. Telling employees too early can spread fear, uncertainty and doubt and cause your employees to be less effective in their jobs. Or you might begin to lose key staff as they grow concerned about their own futures. - Accept the first offer you get
If you are approached, test the market to see if there is a better suitor. Working with one buyer limits your negotiating leverage and probably reduces your companys potential value. Following a disciplined go to market strategy is best for your company. It gives you the chance to involve many potential buyers, gauge the real market value of your company, and negotiate to get the best terms. - Have unrealistic value expectations
Grossly unrealistic price expectations will undermine your credibility. Greed is the single most common deal killer. Use objective, market-based metrics along with your companys actual growth rate and profitability levels to test your valuation objective. Understand the buyers valuation perspectives and their ability to pay your asking price. - Talk too much
Instead, listen as much as you talk. Ask the buyer questions about why they are interested in your company and how you fit with their future strategy. Youll gain valuable insights that can strengthen your negotiating position. Just as important, youll get a better understanding about the buyer as a prospective place for your employees to work. And document in writing key points that you discuss with the buyer. A quick email memorializing a conversation can be critical to support detailed negotiations later on. - Let your ego run wild
At its core, negotiating is adversarial. Successful outcome requires the parties to focus on the important business issues and to know when their ego needs to take a back seat to the real goals. Don't permit your emotions to drive your actions during negotiations. Know your deal bedrock and the terms that you really must have. Don't arbitrarily insist on points but take time to explain your position to the buyer and why the points are important to you. This creates the framework for compromise. If negotiations begin to break down, refocus the buyer on the key business reasons to do the deal and make sure they have a way back to the bargaining table before you walk away. - Take your eye off the ball
Focus on running your core business even during the M&A process. Thats what the buyer is really interested in. Letting business performance suffer for lack of management focus during the M&A process gives buyers the opportunity to drive the price down or even walk from the deal. - Be unprepared for due diligence
Get organized for the buyer's due diligence investigation long before it actually happens. Delivering clear, complete and organized due diligence binders quickly when the information is requested gives the buyer confidence in your company and team. Manage the delivery of bad news carefully and early in the process; dont hide it or let it come out late and surprise the buyer. - Refuse to stand behind your company
Expect the buyer to ask for reasonable representations and warranties, and be prepared to stand behind your company and the claims you make about it. If youre unwilling to accept responsibility for the historical operation of your business, youll send the wrong signals to the buyer. Negotiating the reps, warranties, and indemnification is often far more difficult than negotiating the price and is another key contributor to failed transactions. Rely on your advisors for their expertise but recognize that you are negotiating for the best balance of risk and reward and will have to make sound business judgments about the risks you can accept.
A version of this article originally appeared in Softletter and Software Success.