Common Seller’s Mistakes In M&A Deal

Selling a business or involving a financial partner is often a life-changing, one-time transaction for many sellers. It is important to prepare competently and thoroughly for the transaction to increase the value of the company and avoid discounting the price. We take a look at the common mistakes that sellers often make in M&A transactions:

1. Unpreparedness for the deal.

Any transaction requires thorough preparation.  At this stage, it is important to analyze the market, conduct an extensive audit of the target company, assess and work through the potential risks in order to close the agreement on the most favorable terms. The preparatory stage usually takes several months, but can take longer if restructuring is involved.

2. Failure to understand the real terms of the agreement.

Failure to understand the actual timing of the agreement can harm the seller. If the seller rushes to sell their asset, they risk getting a lower price for it or making mistakes that will take even longer to correct. Conversely, if the seller delays the process, there is an increased likelihood that the agreement will fail. A good and tightly managed schedule is paramount to a successful execution.

3. Lack of good communication between the parties.

The seller should research his acquirer thoroughly and have a realistic idea of the price for the asset being sold and arguments as to why his company should be priced that way. The seller’s position should be based on credible financial projections and realistic expectations.

4. Incompetently drafted NDAs.

When an investor enters into negotiations, he asks for information about the business, the disclosure of which without a non-disclosure agreement may cause a loss of competitive advantage or lead to losses. Especially if the buyer of the company is a strategic competitor.

5. Incorrect attitudes to human resources issues.

Even rumors of an impending sale can provoke the departure of top employees. Depending on the size of the company, such departures can lead to a significant loss in value and can even lead to the cancellation of the deal.

6. Financial advisor rejection or inconsistency in terms of their terms of service.

A financial adviser takes on a huge amount of responsibility – from finding buyers to assessing the synergies achieved after the deal is completed. An experienced financial advisor not only acts as a mediator in the transaction and coordinates the work of all parties involved, but also makes the sale competitive. The advisor’s job is to find multiple potential buyers. Healthy competition always benefits the seller and adds value to his asset.

7. Superficial discussion of provisions for additional payments subject to future earnings.

Shareholders of the selling company can collect additional payment(s) (so called earn-outs) after the transaction closes, depending on financial performance or the achievement of certain milestones. This is one method of dealing competently with a dispute over valuation differences between the seller and the buyer. But for the process of obtaining such payments to be painless, the key points of the agreement must be carefully drafted.