Hi Reader

I'm closing my 50th M&A deal this month.

To celebrate this milestone, I'm going to take a deep dive into my deal notes to share some of the raw reality of Entrepreneurship Through Acquisition (ETA) with you. In this three-part series, I’m unraveling vital lessons learned.

Acquiring businesses is a high-stakes, intricate dance where operational, legal, and financial challenges converge. It's a game that only unveils its intricacies after you've navigated a few rounds.

Yet, most can't afford the costly learning curve that comes with ETA. The expenses are simply too steep, the price in time, reputation, and even credit, too high. Hence, I'm dissecting my closed deals, extracting key insights, tips, and street-savvy techniques. Let’s bypass the pitfalls and amplify your ETA journey together.

Ready?

Let's do this!

50 Deals, Lessons Learned - Part 1

1. Navigating Solo Sellers (without advisors)

Why would sellers try to go it alone? Who knows.

• I've had two sellers try to handle everything themselves - financial and legal. They literally read the agreements themselves and pretended to be an account and a lawyer!!
• Solo sellers without legal counsel can be a dual-edged sword, either presenting significant challenges (often) or making negotiations surprisingly smooth (less common)
• One seller reviewed our proposed agreements, made a few grammatical edits and was good with signing. Great!
• Another decided to put on his “lawyer hat” and wrote in a slew of illogical and confusing edits. Lots of extra angst, buyer to seller midnight calls, and eventually some informal help from bank counsel was needed to get this deal across the finish line.
• Ultimate lesson: do everything you can to encourage seller to retain competent M&A counsel. I even write this in to every LOI I write (as a non-binding requirement).

2. Transition Gone Wrong

Broken promises can torpedo your acquisition

• No matter how profitable, well-run, and reputable a business is before you buy it, it’s a whole new ballgame after you take over. It’s like moving into a well-stages house after all the staging furniture has been removed and you’re now on the hook for the mortgage. Things get real! That’s when the seller’s help in transitioning becomes critical.
• Luckily almost all of the sellers in my deals were happy to help transition the businesses they sold. But in at least a couple of instances there were lots of broken promises and in one case even outright sabotage!!
• What to do? Have a Plan B so you know how you can transition if the seller disappears; have a seller note; draft a clear, enforceable transition services agreement with defined deliverables; and for particularly seller dependent businesses (or just large deals) consider a transition escrow

3. Brokers: the good, the competent, and the ugly

Know who you’re working with

• Brokers seem to fall into three categories: horrible, competent, and rockstars. My experience is that about 80% fall in the competent category with 10% each to the other extremes.
• Thing is, regardless of which category they fall in, they still play a massive gate-keeping role in your deal and almost always will be the seller’s most trusted advisor.
• So it’s incumbent upon you to figure out who you’re dealing with as early as possible.
• Category 1 (horrible)? Your job is to keep the broker from breaking anything. Keep them out of communication chains (if possible) definitely keep them out of critical discussions. Just make sure they get paid their (not very well earned) commission.
• Category 2 (competent)? Keep them in the loop. Sometimes they can help you with logjams and they can usually be counted upon to have properly coached the seller on deal process, agreements, and the like. Talk to your advisors about whether to include them when it comes time to deal with the tough stuff. Remember that even though they are ultimately motivated by closing, they do ultimately represent the seller.
• Category 3 (rockstars)? These are the ones that are gold. I’ve had brokers be the only person who could break through deal gridlock with brilliant recommendations (that only they can sell to their clients). Others have been instrumental in resurrecting what were surely dead deals. Keep a good line of communication open with the rockstars and be ready to bring them in when needed. Sometimes they are almost a quasi-member of your deal team at critical times.

4. Seller vs Seller

When one partner hates the other, DO pick sides

• I’ve had a surprising number of deals where the business is being sold because the partners who own it hate each other. Sometimes it’s obvious at the outset, other times it takes some reading between the lines to figure this out.
• Every single time it’s been messy.
• The key with getting the deal done was this: figure out who really wants to sell (and they’ll be the one who will be more friendly to you for sure) and work hard and early to build a strong level of trust and a cooperative relationship through back channels with this partner. If permitted by funding rules (for example probably not possible if SBA funded) you might even consider sweetening the deal for this partner.
• When the going gets tough (and it will) your relationship with this partner will be the thing that saves the deal. Plus, they will probably be the only one willing to help you transition if you’re able to close.

5. Prospect Theory Says: Call the Seller’s Bluff

No, they aren’t likely to “just keep running the business” or see what other offers are out there

• Sometimes frustrated sellers (or less scrupulous ones) or their brokers might try to get some leverage on you when they don’t get their way by suggesting that they might just “keep running the business” or “just go sell to someone else.”
• Unless you made a low-ball offer on a goldmine this probably isn't likely. Why? Prospect theory.
• Prospect theory = people are generally risk averse and more likely to take steps to avoid loss than to achieve gain (even if gain is much more likely). That's why lots of marketers like to give you a free trial. Once you've got something of value, you're less likely to give it up, even if it's illogical to hang on to it.
• So, it's usually going to take lots of mental effort for a seller to walk away from your relative certain good deal into the uncertainty of continuing to operate the business or seeking another buyer especially when dynamics like the end of the year or a bad economy are looming.
• Lesson for you? Don't let seller's bluff or pressure you into caving on deal points by threatening to walk away. Instead, stick to your necessary deal parameters and you should be prepared to walk away.

6. Deal Fatigue is Real. Avoid it at All Costs.

The longer your deal drags out, the less likely it will close.

• No matter how well you get along with the seller and how great everyone thinks the deal is, 6 months later it will look MUCH different.
• Regardless of whose fault it is, as the deal drags into extra innings (ie past a good deal timeline of 90-100 days) the rose colored glasses will come off, people get tired and grumpy, and the chances of things falling apart are sky-high.
• Of course the longer your deal drags out the more expenses you have probably incurred, so lose-lose here!
• The solution? Recognize the three biggest culprits. a) Re-trading; b) Lending woes; c) Bad sell-side advisors including counsel.
  • Minimize retrading by front-loading all deal expectations (including what would change the price, desired escrows, note offsets, etc) in your LOI
  • Work with a good lender (I recommend working with a top-20 national SBA lender instead of locals who barely do any volume) to minimize lending delays
  • Do everything you can to encourage seller to get decent counsel. Again, I write that requirement into every LOI I draft!!
• Finally, make sure you keep perspective and don't get dragged into the emotional much of dragged out deals. Get a good deal team, take time away from the deal (a vacation or two - a "deal babymoon" certainly does hurt), and be prepared to walk away if it doesn't end up right.

I hope you've enjoyed these deal insights and they've helped you up your acquisition game.

Stay tuned for more parts 2 and 3 to this series for more actionable tips to bolster your success in the world of acquisition entrepreneurship.

To your success (and Happy Thanksgiving)!

Eric Hsu, M&A lawyer

Editor, Freedom through Acquisition Newsletter

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