Those of us who negotiate M&A transactions for, and with, small- to mid-sized businesses know a few hallmarks of the process:
- For any company, there is a limited universe of buyers.
- Each buyer’s interest is unique, so average valuations are not reliable indicators of value, except as guideposts.
- The negotiation process is long, with six points when terms can change materially:
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- Initial interest. Was everyone who should know about the opportunity aware?
- Initial bids. Has the seller put its best foot forward?
- Letters of intent. Have the seller and buyer come to agreement on all relevant business terms, based on what they had each known/shared to this point?
- Conclusion of due diligence. After the opportunity to investigate the seller’s business in detail, was the buyer able to validate its assumptions?
- Conclusion of the buyer’s financing. Was the buyer able to convince its financing sources of the deal?
- Presentation of legal documents. When added to the business terms of the deal, were the legal terms and details still agreeable to all parties?
- The further a deal progresses, the harder it gets to walk away.
Practitioners know these things by intuition and experience, which leads to a feel for the market. There are few publicly disclosed details about small- to mid-sized business transaction terms to observe. So any validation of experts’ pattern recognition can be quite valuable. That’s why we appreciate market participants who find ways to create data-supported insights.
Axial, the lower middle-market deal sourcing platform, is one of our favorites because of the data their platform generates and the curiosity with which they dig into trends.
Some market data has shown that small- to mid-sized M&A deal volume stayed high in 2021 and 2022, but the number and value of closed deals fell.
In a recently published piece, Axial tried to determine the reasons why, examining data from its platform related to deals that failed post-LOI (see steps 4-6 above). As part of its approach, Axial also surveyed members about what happened with individual deals. It received 48 responses with telling answers:
- Macro trends were occasionally the cause, but MOSTLY NOT.
- Interest rates and the availability of capital were occasionally the cause, but MOSTLY NOT.
- Choices about information disclosure (i.e. the deal process) were MOSTLY the cause. Half of the time, one party learned something in due diligence that changed their vision of opportunity (see step 4 above).
- Real life is persistently a factor — one-third of the time, the parties backed away from the agreement for unspecified reasons, presumably because they simply had better alternatives than closing the deal. For example, “Seller said he didn’t appreciate how much he and his family benefited from the business until going through the sale process.”
Why does this matter right now? First, the macro news has been bad, with rising interest rates, M&A deal values down, a possible looming recession and bank failures. But if you’re wavering on whether to move forward on a deal, don’t let those events be your excuse. There is ample capital to complete strategically relevant M&A transactions, so you can get deals done.
Second, good times or bad, preparation makes a difference. The seller can do a lot to manage the risk of broken deals by being ready, understanding what buyers need to know and candidly providing the information. If you’re an entrepreneur-owner-manager or investor and are unsure whether it’s the right time to sell, or how to go about doing that, an experienced advisor can help provide guidance.
