Considering an exit strategy after years of building a business is no mean feat. From getting an accurate valuation to identifying and connecting with suitable buyers, it can be overwhelming to know where to start.
The last thing you need when selling your business is to stumble upon a deal breaker during the process.
What is a Deal Breaker?
Simply put, a deal breaker is an issue that causes sale negotiations to stop. Whether it’s the buyer, the seller or even an advisor, someone decides that a risk has become an irreconcilable problem. If this isn’t overcome appropriately, the deal is likely to fall through.
Sometimes dealbreakers are used as a dramatic tactic to achieve a particular outcome, however, it can be a genuine reason for one party to decide that the deal is not right for them.
It’s not impossible to overcome a deal breaker that arises during a merger and acquisition (M&A) transaction, but generally, the best course of action is to try to avoid them in the first place.
Reducing the risk of deal breakers in M&A transactions
IDEX has years of experience in helping business owners navigate the lengthy and potentially confusing process of selling their business. For this blog, we’ve partnered with Legal experts Vialex to share 6 top tips to avoid these speed bumps along the way.
Honesty, trust and consistency
First and foremost, the key to gaining a buyer’s confidence and preventing disagreements or problems down the line is to build a good relationship by being honest, upfront and consistent from the start.
This means preparing necessary documents with close attention to detail. If your sales documents are full of errors or inconsistencies, then buyers are more likely to discount your company valuation or apply terms and conditions to protect them from potential loss.
Ask yourself these three questions:
● If I were acquiring my company, what would I want to know about past (and pending) events?
● Does that issue that we handled three years ago represent an area that I would be concerned with if I were the buyer?
● What would keep me up at night if I learned about an event at the last minute as the buyer?
Answering these questions honestly and fairly from the start will avoid any hidden surprises popping up during further negotiations.
Preparation is key
The worst cases of deal breakdown happen when businesses fail to tie up all the loose ends regarding bank accounts, suppliers, customers, staff, accounting and other small or big-ticket items.
You can avoid this by preparing adequately ahead of going into sales negotiations. Ensure you have your accounts audited, collect any overdue debts, and get general housekeeping tasks in order.
It’s unnecessary and avoidable to have an M&A transaction stopped due to minor items not being taken care of. As a business owner, it’s your responsibility to ensure that your team has the appropriate time and support to handle this.
Know your audience
This is perhaps one of the trickier aspects of selling your business. If you don’t know your industry and its current state well, you might find yourself going after the wrong buyers.
A good M&A advisor can help you to make connections beyond your network to find the most suitable buyer and achieve the highest price.
Once you’ve identified suitable buyers, it’s also important to know how social aspects of negotiations could impact the deal and become dealbreakers.
It’s important to understand what’s important to your buyer and consider how these ‘soft’ aspects could impact the sale:
Lack of chemistry between seller and buyer
Misunderstanding between personal expectations or backgrounds
Lack of understanding of the position on both sides
No openness in communication
Take steps to address any of these issues upfront to earn your buyer’s trust and respect.
Realistic expectations and pricing
Valuations and price expectations are one of the main deal breakers. Many business owners have a strong emotional attachment to their companies which can lead them to expect a higher valuation than is realistic.
Conversely, a strategic buyer may see the value of a business higher than a seller might expect. These types of buyers normally pay more than a manager who wants to acquire the company via a management buyout.
Matching the actual price and expectations is critical to success. Working with an unbiased and objective third party to fairly evaluate your business helps to avoid disappointment further down the line.
Equally, it's vital to set realistic expectations for the buyer when it comes to financial forecasting. Your projections need to be accurate, and achievable! If your company has been growing at a 10% rate annually for 20 years but you suddenly forecast growth of 30% annually over the next five years, red flags will go up. Especially if you can’t document why this change will happen.
Regulatory compliance is essential. If your business’s legal structure is not well set up or too complicated with no understandable rationale, the buyer may simply walk away.
Issues with complicated regulations are not always deal breakers as long as you’re able to quantify and address any risks or issues and provide clear and understandable evidence for your actions.
When it comes to factoring tax into your sale, tailoring the sale to take advantage of the current tax reliefs is part of good planning, but changing mid-way is not. Complex tax structures are a turn-off when it comes to buyers so understand and agree on tax before entering into sales discussions, stick to it, and aim to communicate it as clearly as possible.
Finally, and most importantly, remember that at the end of the day, buyers and sellers are just people and should be treated with empathy, respect and understanding.
Selling your business can be an intense and emotional journey. It’s time-consuming, overwhelming, and can put a heavy burden on a business owner and their team. Deals can fall through due to stress and burnout on either the buyer's or the seller’s side. Combat this by ensuring your team has the support they need to carry out sales preparations and set realistic deadlines for yourself and your employees.
Negotiation behaviour can be a risk of failure as well. Of course, in an M&A transaction, it is good to be tough on major items. It’s vital to show that you care and will defend your interests well, but not every point needs to be won. Making stands on minor items with limited relevance is not wise as you risk losing the whole deal over something unimportant.
Negotiation strategies can be difficult to get right. Avoid being too bullish in your tactics and remember to extend grace, empathy and understanding to everyone involved to ensure a smoother sale.
Ready to sell your insurance brokerage?
For more advice on how to avoid deal breakers and find the right buyer for your brokerage, book a confidential conversation with our Client Solutions Director, Colin Mckenna.