Buyers & Sellers, Avoid These M&A Pitfalls
In our world, when completing a transaction, every day is living on the edge.
No transaction is complete until the wire of funds has been received. Every step along the process is fraught with potentially scary scenarios that must be managed to avoid an unacceptable outcome.
The following is but a glimpse into a few of the items that a company should avoid when buying, selling and/or refinancing their business.
Do you owe money to the IRS or state? Do you have too much credit card debt? Late payments? Contesting bad debts? Eventually, your lenders will run a credit report and it is usually at the last minute. So, manage this process weeks before you attempt to close.
Be up front with the bank at the start of the process and prepare a written explanation as to why these items are on your credit report and what you have done or are doing to correct them.
Remember lenders are in business to make as much money as the market will provide, at the lowest risk — just like you. When dealing with lenders:
- Make sure you understand your bank covenants. Limit those covenants to just the parts of your business that you are looking to finance. Avoid global covenants that give your lenders control over your total business.
- Avoid personal guarantees. If they are necessary, at least understand why and what steps are needed to remove them.
- Avoid limitations on distributions. If they are necessary, at least understand why and what steps are needed to remove them.
- Avoid syndication risk. You only want to answer to one lender.
- If going directly from a letter of intent (LOI) to loan documents, make sure you cover the fine details as much as possible. Remember those loan documents are hundreds of pages for a reason.
- If you have more than one lender working together, they will need to work out an inter-creditor agreement. The lenders always wait until the very end to work on this agreement. Avoid waiting until the end. Take an active role in discussing the primary points in these documents with both lenders because it is your closing and they might not share this agreement with your company.
For all advisors — financial, legal, environmental, insurance, etc. — make sure you are working with advisors who have experience within your sector/industry, even if those advisors have been working with your company and especially if it is a significantly larger transaction.
Avoid professionals that only talk about the problems, but not how to solve them. And focus on the important issues that are going to materially impact your company. Realize that all items will not get resolved to your complete satisfaction.
It is all about controlling the message you send to your lenders and investors. Hire an advisor to be the buffer between the buyer, seller and/or lenders. An advisor will give you more control over the process.
Present your best and most polished presentation, which demonstrates that you have thought through the process and have an executable strategy. Get your story straight the first time. It is all about credibility. Avoid changing your presentation and your business model. Although business involves thousands of variables each day, you must stay on point by focusing on the same strategy.
Only bring in staff members who present well. An abundance of caution by an employee can be great in the real world, but not in front of your lenders.
Again, have and/or hire qualified people who have closed deals. Don’t forget about sites that may be in a flood plain. If obtaining Pollution Legal Liability (PLL) policies, understand that if the assets in the deal change, the policy needs to be renegotiated.
Finally, know that closing always takes longer than expected. Although we have closed large, multimillion-dollar deals within 45 days, most transactions — from interested parties to closing time — take typically six months to approximately one year.
Editor's note: The opinions expressed in this column are the authors' and do not necessarily reflect the views of Convenience Store News.