This is the second installment of the advice we find ourselves giving owners again and again. Part One covered Phase I. Here is the counsel we share as a deal moves through Phases II to IV.
Do not use every add-back; keep some dry powder
Add-backs are expenses unique to the seller that will not carry into the buyer's cost structure: above-market owner compensation, personal expenses, charitable giving, or one-time items like an unusual bad debt. Inevitably the buyer's accountants will find something in diligence that reduces the seller's proposed EBITDA. Hold a few add-backs in reserve so you have something to counter the buyer's view of the quality of earnings.
It only takes one buyer
Owners often fixate on a single best buyer and feel let down if that deal does not materialize, or if they receive only two or three serious offers. Remember that it takes just one serious, motivated, knowledgeable, and financed buyer to close.
The LOI is the high water mark
Deals rarely improve for the owner after the letter of intent. Diligence findings or a dip in performance can surface, and even LOIs signed with the best intentions can give the buyer reasons to revisit terms. Negotiate hard before you sign.
You cannot over-disclose
Present the company in its best light, but do not create a false or incomplete picture by withholding important facts. Letting a buyer discover something rattles their trust and sends them hunting for the next undisclosed item. When in doubt, disclose, disclose, disclose.
Close when you are ready, not when it is convenient
Timing is more often a seller's foe than friend. Closing at a tidy month, quarter, or year end may be convenient, but only bad things tend to happen while the parties wait. Close when the deal is done.
It is not the issue, it is how you handle it
Complex issues, environmental, accounting, customer, employee, inevitably arise. What separates a successful deal from one that stalls or busts is how the seller handles and discloses them. Directness and complete transparency win.
Sometimes the seller does not know the deal they want until they see it
Part of the banker's job is to show the seller options and different looks. Strategic buyer or private equity group? Which type of group? Does the owner want to be an employee afterward, or keep an ownership stake? Ongoing ownership comes in many forms. By casting a wide net, a banker helps an unsure owner find the buyer and structure that meet their objectives.
Part of an investment banker's job is to dispense thoughtful, useful advice and, on occasion, to serve as a sounding board, helping sellers think through every aspect of a transaction to maximize the odds of a successful close. Part Three continues with more advice for Phases II through IV.
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