THIS WEEK IN BROKEN DEALS

Here’s what’s in store for this week:

• Announcement: Reply to this email to get a free copy of our new ebook, The 10 Commandments of a Sellable Business

• Best Link: How a $7,450,000 deal to buy a government contracting co died this week in due diligence

• The Graveyard: Inexperienced attorneys kill deals. This week we’ll teach you how to navigate it when it happens to you.

• Work With Us: Get Wall Street level analyst help with your deal on a success-fee basis. Book a call with us below to learn more.

ANNOUNCEMENT

Join the waitlist for our new ebook, The 10 Commandments of a Sellable Business!

This ebook contains the main principles we’ve uncovered analyzing hundreds of broken deals. If you’d like to receive a free copy, simply reply “Commandments” to this email and you’ll be added to the list when we launch. 

In this new ebook, we’ll describe the 10 things you must avoid to close more deals, including:

• Why focusing on price is often a mistake and how to use it to your advantage to speed your deal to a closing

• How to manage your team through closing so your sales stay strong

• The mindset every seller must have to guarantee a successful exit (and why avoiding it can cost you millions)

• And more…

Reply now to this email with the word “Commandments” and we’ll put you on the priority list to receive a copy as soon as it launches.

BEST LINKS

Matt’s Favorites

• Very simple, highly effective business strategy explained in one LinkedIn post (LinkedIn)

• Jeff Bezos had a mentor and I’m blown away from his advice (Twitter)

Finance & Capital

• Most business owners don’t understand working capital and what that means for you (Twitter)

• Great post that roll-up hold cos almost always exit to a financial buyer (LinkedIn)

Salability

• How a $7,450,000 deal died this week in due diligence (Twitter)

• Interesting post about timing the market for an exit (LinkedIn)

THE GRAVEYARD

How to Avoid Deal-Killing Attorneys

Introduction

Business owners increase the chance their deal won’t close by working with an inexperienced deal attorney. This article is designed to convince you to stop allowing your clients to make this mistake and give you the tools to do it.

We’re going to cover:

• A true story about a transaction that almost fell apart because an owner didn’t want to use an experienced deal attorney,

• The correct mindset that everyone involved in M&A needs to adopt about building a deal team, and

• 4 methods you can use to help your client choose better deal team members.

The Story of Grey

Grey was the long-time owner of an agriculture business located in Southern Missouri and he was ready to exit.  After a long successful career, he was feeling older and dreamed of more time at the lake and extended road trips to national parks with his 3 grandchildren.  It was finally time to enjoy the fruits of his labors.

Grey had never sold a business before and knew little about the process, but he had drive, commitment, and a local attorney & long-time friend he liked and trusted. Armed with these, he set out to find a buyer and, in short order, he had made contact and convinced one of our clients to buy his business.  

Although he was a great negotiator and savvy businessman, it was immediately when talking with Grey that he was inexperienced as a seller and his attorney was not equipped to handle the speed and complexity of an exit. 

Turnaround times on documents took weeks.

We got pushback on unusual items like "We know you’re using a bank to finance the deal, but we need a 1st mortgage on the real estate for my client’s Seller Note.”

And it wasn’t unusual for negotiation sessions to end in yelling.

It was excruciating.

After months of back & forth, the deal nearly fell through when we discovered that the real estate title and survey work Grey’s attorney had provided us were inaccurate and excluded two small, but critical parcels of land. We were shocked, but not altogether surprised, given the level of skill we’d seen from the attorney. 

We were very concerned this deal would not close. And that’s when something changed. 

Grey reached out to me to complain about how slow the deal was going. Realizing this was an opportunity to help both parties win, I started to guide him through how to handle the next steps of the deal. I even recommended we get our attorney involved to help lay out a sequence of events Grey’s attorney should follow.  Although it made the load heavier for us, we believed it was the only way to close the deal. 

At the end of that phone call with Grey, the next step was clear.  “Grey, you have to talk to your attorney and get him back on track or this deal is just going to drag on forever.” I told him.

Grey went back to his attorney, had the conversation and, although things remained clunky, it moved much faster and the work was much more constructive. With Grey’s help, we set out to resolve the problems with the real estate title and survey. 

The extra work paid off.

Nearly every day for 2 weeks I was on the phone with the title company and we hounded the surveyor to update their records based on the new information we’d pulled together.  But, within a few weeks we had finally finished a PA that each party could sign and had our bank ready to fund the deal. 

Despite nearly falling apart multiple times, we closed on the deal successfully.

The Right Mindset Matters

Grey’s experience is not unique. Many business owners believe they’ll be better off using their existing, local/trusted attorney, not realizing how specialized and different M&A legal work is. But they’re rarely right.

For example, local general counsel lawyers typically don’t:

• Negotiate purchase agreement terms on a regular basis

• Have practices that allow them to drop everything to work on one deal for 2 weeks and close quickly

• Regularly work with contingent liabilities and understand which are real risks and which are not

• Understand the nuances of closing bank financing and securing collateral

All of these factors are critical to completing a transaction. When you factor in the increased probability of not closing a deal, using inexperienced counsel/deal teams reduces risk-adjusted valuation… often by 10% or more.

For many companies, this can equal millions in value.

Sellers MUST have a different mindset to be successful. And M&A professionals must educate their clients about these consequences.

What is that mindset?

Sellers must view their exit is another sale, and it just so happens to be the biggest sale of their life.  Once this realization is made, managing the process starts to become much clearer.

For example, you wouldn’t hand over your sales force to an inexperienced sales manager.  In the same way, you shouldn’t hand over the sale of your company to an inexperienced deal team. 

If you were really interested in “winning big” in your exit, you’d pick your deal team with the same level of thought and rigor as a professional sports team picks quarterbacks. It’s that important.

4 Methods to Help Clients Build Better Deal Teams

If you’re an M&A professional, helping your clients choose the right deal team can be difficult. Trust in a client’s long-established service provider can be hard to overcome, even when your greater M&A experience tells you the service provider is ill-equipped to help. Managing these moments of tension can be awkward, but — if we’re going to manage deals based on constraints theory (i.e. removing as many obstacles to a closing as possible) — we must implement business processes that address foreseeable constraints.

The following 4 Methods help move clients towards a better deal team:

1. The Attorney/Deal Team Interview Template: Giving clients a set of questions to help them determine for themselves if their deal attorney or other M&A service provider is equipped for the work ahead allows you to steer clear of awkward conversations and keeps your client focused on going through a process that leads to success. Questionnaires often include questions regarding the number of transactions a provider has completed, the size of transaction, methods used to negotiate terms, etc. and can be customized to suite your personal style & preferences.

2. The Advisor Interview: Interview and approve members of the deal team as part of the client kick-off process. M&A professionals that go through a heavy screening process for new clients often have certain standards they like deal team members to meet, in addition to just experience. The logic of this approach is that, if the M&A team leader is to be successful as the driver of the deal, they should feel comfortable with their team members.

3. Discounted Fee: Provide discounted fees for using an experienced deal attorney. Clients often insist on using their own people. For these clients, saying no is not always an option. Instead of losing the business, some advisors may be better off raising their standard fee and then allowing clients to choose between the normal fee and a discounted fee if you’re able to use your preferred deal team. The logic of this arrangement is simple. A well-oiled deal team works better together and increases the likelihood of closing, which de-risks the M&A teams fees.

4. The Survey of What Good Looks Like: Provide clients with 2-3 preferred options and require they meet with them prior to starting the sale process. This serves to educate the client on what good attorneys look like and helps them realize the gaps they may have in their current attorney. Coupled with the other methods, this can be a powerful way to persuade the client to follow your lead.

Summary

In today’s newsletter you learned about:

• The story of Grey, whose deal nearly fell through due to mistakes that could have been prevented from a competent deal attorney,

• Why sellers need to treat an exit like the biggest sale of their lives and trust it to someone no less competent at deals as anyone they’d allow to lead their own sales department, and

• 4 powerful methods to help sellers make better decisions about their deal team

The simple truth is, M&A is its own sport and requires practice, just like any other. Attorneys and other deal professionals who don’t have this experience can reduce the chances that your deal will close, so managing the people on your deal team is critical to closing more deals and helping buyers & sellers both win.

THAT’S A WRAP

Before you go: Here are 2 ways we can help

Is your deal stuck? We may be able to help. Get a free 30-minute deal assessment here — LINK TO SCHEDULE ASSESSMENT CALL

Are you an M&A Advisor or Broker looking for Wall Street-level financial analysis support for your CIMs and client financial info? If so, we offer a success fee-based program to help you close more deals with less overhead. To learn more, schedule a call here — LINK TO LEARN ABOUT SUCCESS-BASED FINANCIAL ANALYSIS