We often write about M&A from the prospective of the selling company. But the opposing side to those conundrums are the issues facing even the most astute buyers. The risks of making a bad purchase are often magnified, especially in this highly competitive environment with much fewer quality deals. Since 25% of our investment banking services are advisory to buyers, we are acutely tuned to the adage “Buyer Beware.”
Some of the most critical dilemmas for buyers are the following:
- Does the “Buffet Rule” apply? Do I really like, respect and trust the seller’s key management and owners? If not, forget the deal terms. Just pass!
- Does the company CFO or lead financial person clearly and concisely present the financial statements, working capital (including inventory), and seasonality or customer fluctuations during a fiscal year?
- How well do I really understand the business? Whom do I retain from the seller and what personnel resources can I bring to shore up the deficiencies?
- What due diligence do I conduct or hire out, such as Q of E (Quality of Earnings)? Can this team of experts uncover the “hidden flaws” of the seller?
- Am I certain what intellectual property is owned, free and clear of potential infringement and litigation? Should I get a legal opinion to cover this potential exigency, in addition to insurance coverage on the IP?
- How much should I propose to pay in cash, stock or an earnout?
- What are the tax ramifications of various purchase structures, and which is best for me?
- If my most reasonable price is overbid, how much more am I willing to pay to chase this particular deal?
- Will there be issues getting necessary licenses and/or governmental approvals for current and future customer contracts?
- Will this transaction be accretive and really replace organic internal growth and profitability?