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Prevent Surprises in Financing and M&A Deals

Do yourself a big favor before opening up to third parties to complete a deal.

Picture2smallerIs this your year to raise capital or sell your business? The opportunity may be by your design or in response to an approach that you really shouldn’t refuse. Either way, the process will require looking at your business from the perspective of the investor or buyer.

Tackling the issues which come to the forefront in deal making is often deferred until serious discussions with interested parties are underway. By that time, it may be difficult to turn to other options or call things off. It is better to anticipate and deal with the obstacles in advance.

We ask clients to think like an investor and buyer when they are a borrower or seller of some or the majority ownership of their business. We encourage them to be tough-minded about the risks their business faces and to formulate a management strategy to mitigate those risks.

Without realizing it, many entrepreneurs and family owners of independent private companies are insulated (from the host of issues specific to third party investment and transferability) until they set out to do a material corporate financial transaction.

The transaction may be to sell a minority equity interest, to do some out-of-the-ordinary borrowing from a bank or investment fund, or sell the business to a strategic buyer or financial sponsor. Too often hurdles to closing the deal are not addressed until the necessary third party forces the issue.

Then in hindsight, it’s almost always clear that it would have been better to face the issue before opening up to the investor or buyer who will require a resolution as a condition to completing a deal.

Most often, the issues are not clear until after a preliminary agreement is accepted and intensive due diligence begins. At that point, the onus is on the business owner more so than the investor or buyer. The leverage shifts after you select a particular party to work with exclusively and others become aware that they will only be called back if there is a problem.

The investor or buyer doesn’t really have the flexibility business owners might think. The buy-side almost always has a fiduciary duty to uncover potential problems and walk away from a deal rather than gamble. They will usually work with the business owner to resolve the problem, but the dynamic will have been altered and be reflected in less favorable terms.

The issues often surface during the preparation of a data room, but many negotiated deals don’t involve a data room until a preliminary agreement has been reached. This is in contrast to a full auction involving access to a data room and mark-up of a purchase agreement prior to selection of the buyer.

You can address the issues before setting out on a campaign or responding to a prospective investor or buyer. Some of the items that could become issues may not be obvious to senior managers tasked with steering the transaction to a close. Those of us who have been down this path before can be very useful in preventing surprises.

We recommend a careful review to identify and examine what might trip-up a deal or result in a stalemate with the investor, lender or buyer. This should be done before setting out on a financing or an ownership transaction and most definitely be done if there is an unsolicited approach.

Areas to probe include license/title to critical intellectual property, customer contracts and trend data, compliance and regulatory developments, competitive overlap, positive and negative synergies, adjustments to earnings, carve-outs, any activities not consistent with the longer term strategic plan, and any other reason that could stall or nix your deal.

Entrepreneurs and family owners of independent private companies have more options than ever for raising capital and creating liquidity for shareholders. We can help you to know your alternatives and achieve your objectives.

We hope this is your year and we’d love to help you make it a great year.