The hard yards


Financier Worldwide Magazine

June 2013 Issue

June 2013 Issue

Despite evidence of confidence growing across M&A markets, strategic acquirers and private equity investors remain highly selective about the acquisitions that they are willing to commit substantial resources to. In the mid-market, this has manifested itself in a reluctance to participate in a highly competitive ‘auction’ sale process for all but the most strategic of targets. 

Many advisers have recognised this and have designed more flexible processes to ensure that buyer and seller have the necessary level of interaction – often simply time together – in order to get comfortable with closing a transaction. This increased need to bring buyer and seller together – rather than keeping them well apart through the traditional auction process – is particularly acute with people-focused businesses. 

More flexible processes enable a buyer to become more comfortable with the ‘soft’ aspects of a deal – seller aspirations, strength of middle management and cultural compatibility – which frequently make or break a deal should intractable ‘hard’ issues emerge. 

The opportunity for principals to build trust and then ‘bank’ it should never be overlooked. The strength of personal relationships – even if only at the level of mutual respect – should not be underestimated as they often create the will to find creative solutions when difficult legal or commercial issues arise, as they invariably do. 

Advisers should embrace every opportunity for principals to build this trust rather than act as the impermeable buffer which advisers often regard as a primary ‘value add’. This does not mean that principals should have unfettered access to each other and it creates a burden on the adviser to tutor clients on what they should be doing and saying. 

Managing expectations

When anticipating a sale, emphasis should be placed on the need to take a business to market with a set of well-thought out and credible financial forecasts. In too many cases sellers succumb to the irresistible temptation to inflate their projections to create the most positive impression of the company’s growth potential. 

While this may result in attractive first round offers, in the pressure cooker scenario of a due diligence process the most important barometer for any buyer will be to see the company delivering against those projections, week-by-week, month-by-month. Woe betides the company that underperforms those targets, as buyers will be quick to take the moral high ground as they reduce their original price. 

In the run-up to a sale process, careful tactical consideration should be given to budgeting for the monthly phasing of revenues and profitability. A balance needs to be found between making earlier months readily achievable without delaying growth later in the year and creating a less believable, ‘hockey stick’ growth profile. 

The goal should be for the company to be achieving every monthly budget target as the process progresses. With processes taking up to eight months from inception – two or three months longer than is the case in a more benign M&A environment – acquirers will have the inevitable opportunity to witness the company’s performance unfolding. 

Nothing undermines buyer confidence quicker than a business that consistently underperforms during a process; nothing enhances a process like a business that is consistently meeting expectations. It would be unrealistic to think that a company’s customers and market do not have the final say in whether the budget is being met. This should simply remind sellers that the best time to plan a sale is when there is a high degree of confidence – if not complete certainty – in the outlook for the next 12 months. 

Unearth your dead

Every business has its skeletons – some innocuous, some fundamental. Some are well known; others are as unexpected and as surprising to the current owners as to the prospective buyer. Whatever their severity, due diligence is sufficiently proctological that it would be naive for a vendor that is aware of such skeletons to assume that an acquirer will not unearth them. An acquirer that uncovers a material issue that it feels should have been disclosed may feel that it has been intentionally misled – a breach of trust from which many transactions do not recover. 

If skeletons exist that are fundamental, the seller must share them with his advisers so that they can consider the impact they will have and whether or not they can realistically be mitigated through deal structure or price adjustment. With time, there are relatively few issues that cannot be resolved and much better that this happen prior to initiating the sale process. 

For more mundane issues, the tactical decisions are how and when to disclose them to a potential buyer. This will be a function of the level of goodwill that exists between principals (which if strong may lead to an earlier disclosure) and the need to disclose ahead of the definitive price negotiations. Bad news is best delivered when the seller has the competitive leverage of having several interested buyers, each eager to secure the prize.

Close-in to close

Acquirer due diligence has become more drawn-out and invasive. The four to six week period of exclusivity between agreeing a deal and legal completion common in easier times has become eight to ten weeks for all but the most sought-after assets. The longer these processes take, the more likely it is that issues will emerge and the more significance that risk-averse acquirers will attach to them. 

This is no environment for a passive seller. Vendors and their advisers must maintain momentum and not allow the process to become mired in the minutiae of due process. This is best achieved by vendors anticipating the likely due diligence issues in the preparatory stages of the sale process. If bidders are required to share their due diligence requirements at initial and final offer stages, the seller can tailor its data room to address the areas of greatest purchaser focus. 

While it is common in large transactions for acquirers to be asked to submit a detailed mark-up of a draft legal contract supplied by the seller’s lawyers alongside their final written offer, in reality few acquirers are inclined to do so on smaller deals where it is still a competitive process. If they do, the mark-up is invariably cursory. However, securing a clear understanding of how accommodating a buyer is likely to be at the legal stage is hugely helpful for a seller in deciding which buyer to back. Rather than confront acquirers with a 140 page legal contract and get short shrift, better to present to the purchaser a ‘key legal terms’ schedule which sets out the seller’s distilled ‘non-negotiable’ positions and points of principle. You will achieve a much more meaningful level of engagement with multiple buyers through using this 10 or 12 page tool, understanding each of their positions on the issues that really matter to you before selecting your preferred purchaser and granting exclusivity.


Jeremy Furniss is a partner at Livingstone Partners. He can be contacted on +44 (0)20 7484 4700 or by email:

© Financier Worldwide


Jeremy Furniss

Livingstone Partners

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