Sergey Goncharevich, the managing partner of Capital Times Investment Advisory, shared with Mind.ua how to get the deal done and reach an agreement with the buyer or seller in M&A transactions.
Any deal has its unique challenges, but nearly every successful agreement has three key principles that reduce the risk of failure. Arranging M&A deals is like a roller coaster drive: the terms and conditions change many times, the parties often put forward unfeasible or excessive requirements, and negotiations often come to a dead-end, which seems with no way out. Nevertheless, referring to many years of my experience, I can say with confidence that there are practically no unmanageable conflicts and confrontations when it comes to business transfer deals. I have so often walked the path from "all is lost" to the successful outcome that I found a certain constant: three consistent and logical principles that contribute to successful deal closing. Let me disclose these three principles below.
1. The principle of building trust
Cases when a buyer chooses the "tease and cheat" tactic are not rare. Sometimes, an investor offers a high bid with no intention to pay for the asset. The buyer wants to start negotiations, to get exclusive conditions, and to lower the price after identifying problems during the audit (Due Diligence). This tactic provokes the seller’s distrust and resistance, significantly extending the deal completion period and leading to unnecessary costs for additional paperwork. If the parties aim at a quick and high-quality deal closing, their relationship should be developed on the principles of honesty and openness. The first step in this direction is the fair valuation for the asset, that (in the best scenario) would not change during the transaction. In this case, the buyer needs to perform a comprehensive audit of the asset, prepare the market analysis, determine the counterpart’s competitive advantage on the market, in order to offer a fair price. Meanwhile, the seller should carry out the Vendor Due Diligence, which will give a rational objective assessment of the current state of the company and its upside. All these steps are necessary to make it possible to determine and fix the price without significant adjustments later on the course of the deal. Another component of trust is the competent advisory team for the transaction. If the qualification of the team is in question, then the parties will spend a lot of time and effort on double-checking documents, that will certainly entail suspicions and disputes. If you don't trust the counterparty, don't enter into a deal or even start a deal.
2. The principle of personal connection
The smooth conversation is another key for successful and quick deal closure. My main advice is open communication! My experience confirms that if negotiations are held solely between advisors, the failure rate of the whole transaction is higher as talks turn into a Broken Phone game. One of the important tasks of an M&A expert is not just to provide advice on negotiations, but also to convince business executives to participate in talks personally.
Communication "at the highest level" allows to identify problematic issues that put the deal at risk timely and immediately solve them. Each project usually has three or four "sharp corners" which it is necessary to discuss and resolve at the early stage of negotiations.
Also, the counterparties should not be afraid to ask about all the issues that make them alert. In particular, there should be disclosure between the sides about any issues that may impact the progress of the deal. Early identification of problems will help to cope with them as soon as possible. And in case of a deadlock, an advisor has the experience to give recommendations on how to get out of such deadlock. To accept or decline the advisor's recommendation is, of course, entirely on the counterparts involved in the deal.
3. The principle of risk distribution
Negotiations should not only be about winning and defending your point of view. The main goal is to achieve the result, taking into account a reasonable level of risk. In a successful transaction, both the buyer and the seller understand that both parties must take certain risk burdens under M&A transactions. The buyer accepts standard business risks: a possible loss of customers, a potential seizure of the market share by competitors, the leaving of long-standing experienced employees, etc. Sellers need to understand that exit from the business is not always eliminate all risks associated with it in the future. Sellers get paid for a business that promises the projected cash flow generation. The actual future cash flows can sometimes differ significantly from those declared in the valuation. Therefore, such mechanisms as financial milestones, operational process confirmation, and guarantees are reasonable requests from investors.
The practice of identifying, assessing, minimizing, and constantly monitoring risks cannot be neglected. This work is most often performed by investment advisors to reduce the degree of possible problems. In some cases, the costs of risk mitigation can be so high that the deal is no longer attractive. There is no single scenario for an M&A transaction. Every project has unique features and issues related to the parties involved in the process. All of them need to be addressed properly, but following those three principles described above will significantly improve the transaction timing and reduce the risk of a deal failure.