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War Stories from the Front Lines of Deal-Making

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

By far, the biggest reason why deals blow up is that the seller’s results do not meet expectations. Deals still get done in these cases, but if often causes the valuation and terms to be re-negotiated, and other aspects of the deal to be more scrutinized. The other main causes of deal explosion are previously undisclosed issues that come up in due diligence, slow responses by either side, or outside forces such as the economy or overall market. This article deals more with the more unusual situations that are difficult to prepare and adjust for, and some of the lessons learned.

Pre-Letter of Intent Blowups:

The Ranter: One seller, when asked at the beginning of a meeting, “How are you?” went on a five-minute rant about how the president of the United States is messing up the economy and the world. It was obvious that the buyers checked out after the first minute. Lesson learned: keep politics and religion out of it.

Feats of Strength: Our client, when asked politely if he had any medical issues, challenged the buyer to an arm-wrestling match. The seller was going to stay with the business for 3-5 years, and he was about 70, so it was natural to ask. We’ve seen other sellers cringe at this or other personal questions. Lesson learned: Do not take it personal, it’s just business. Buyers have the right to ask a variety of questions, so be prepared and stay calm.

Never-ending Gab: We’ve had several clients who were talkers, and as much as we have coached them, they could not help themselves. Keep it short and to the point.

The Gifter: Some sellers believe that buyers want to see endless papers, brochures, press releases, etc. When a seller reaches into a bag and pulls out an armload of papers, buyers start to think of excuses to leave. A few handouts are fine, especially if of high quality, but most buyers would prefer to be sent things electronically.

We try hard to prepare our clients for the initial meetings with buyers, but it is tough to prepare for all cases. We also do work for buyers, so it is outside of the scope of our project sometimes to coach the seller. It is often surprising to us that owners can be great at selling their products or services, but highly unprepared to sell their business.

Due-Diligence Disasters:

After a letter of intent (LOI) is signed and we move into due diligence, the effect of a deal disaster is all the more painful and expensive. Here are some of the issues we have encountered:

Death of the Owner: Two weeks after signing an LOI our client passed away. In this case, unfortunately the buyer was not able to move forward. We eventually completed the deal with a backup buyer, and fortunately the owner had a trust that clarified the decision-making process.

Shareholder Disputes: We have seen this several times, where everyone is happy and easygoing until we are talking about real money, and then all the old disputes come out. Having a buy-sell agreement is helpful, and making sure everyone is on the same page through all steps of the process is critical. It is especially hard to keep everyone together if the deal changes due to missed forecasts or other events. Proper and timely communication with all shareholders can help.

Family Matters: Often a spouse, sibling, child, or other relative can get involved, usually at the last moment, and throw a monkey wrench into the process. Sellers may have wanted a child to take over the business, then put it on the market when the child decided to go in a different direction. Once, a son changed his mind and wanted to take over the business, just a few days before closing. Dad asked him if he could get $10 million by Friday…we closed the deal as planned.

Endless Negotiations: Sellers and buyers can sometimes over-negotiate and kill the deal. Our client once called the buyer directly the night before a closing and tried to change the deal (increase value, improve terms). Fortunately, the buyer told them to call me, and I convinced the seller that it was time to stop negotiating. Buyers also can keep moving the goal posts and cause problems. At some point, negotiations have to stop, unless new information comes up that is material to the deal. Don’t negotiate over pennies when you are about to receive millions.

M&A Gets in the Way of M&A:  We’ve had strategic buyers get acquired themselves, or major customers get acquired. If there is major customer concentration, and that customer gets acquired, it can make a major issue an even more difficult issue. Usually, the buyer must talk to the acquirer of that customer, and that deal may be on-going while we are trying to complete our own deal.

Diving for Dollars: One major reason why deals do not get completed is that the buyer’s financing falls apart. We usually like to work with buyers who have enough cash in the bank to do a deal, but that is not always the case, and private equity buyers almost always utilize leverage. We recently had a case where the buyer’s bank changed their lending policy mid-deal. Another time, we were working with a PE Group whose investors decided to change their acquisition criteria after signing an LOI. Keeping several backup buyers and maintaining a solid timeline are ways to keep the deal moving forward.

Lawsuits, Harassment, Environmental, Patent: Legal and employee issues have come up that derailed deals. Often, these were issues that the owner did not even know about. Proper legal pre-due diligence can help expose these issues and risks, but it is tough to prepare for the unknown.

Post-Closing Problems: 

Fortunately, we have not had any deals so far (knock on wood) that experienced a major disaster soon after closing. I have seen a few outside deals blow up within a year of closing. Often, that can be the result of mismanaged expectations, executive or owner departures, neglect from the buyer, and cultural issues. I have seen deals that were completed by top executives, then thrown in the laps of middle management after closing. Buyers have changed compensation packages or other policies soon after closing, and have caused major issues. It is important to try to get all issues on the table early in the process, and to keep the important stakeholders involved.

In many cases, preparation, quick disclosure, and openness can help deals survive even the worst disasters. The longer the deal takes, the more likely that some outside issue will come up, so it is important to keep the deal moving quickly. If both parties are committed to completing a deal, we can usually get through anything. And if not, having a few backup buyers and a few aspirin nearby is helpful.