Build Trust and Mitigate Risk in a Transaction
Acquisitions and other business combinations don’t happen overnight. Securing and completing a transaction can be a lengthy process taking months for searching a partner, conducting due diligence, and managing the activities to close. Moreover, misunderstandings and poor communications can weaken trust and create tensions between the parties even when they are aligned on the business rationale and deal structure.
Deal sponsors tend to focus on business, management, and financial risks as well as strategic fit, capturable synergies and organizational integration. Rightly so! However, getting the deal done often depends on “softer” skills. Especially in middle market transactions, sellers may be individuals or families with strong emotional investment in their company that may extend back for two or more generations. When a large company is the counterparty to the transaction, the deal team driving to complete a non-binding offer and those who are engaged afterwards to provide transaction support are likely to face a distinct set of social, cultural, and even psychological issues. These may be nuanced and hard to pick up for people who are accustomed to working primarily with more straightforward deal-making such as with corporate divestitures.
Trust through effective communication
The soft side of deal-making concerns establishing rapport with all key parties involved in a transaction along with building and maintaining trust through effective coordination and frequent, direct, and candid communication. When a deal falters, it is often because a key stakeholder in the transaction has lost trust in the other party.
This can happen before the buyer and seller agree to proceed with due diligence. For example, information exchange, site visits, and face-to face meetings may be cordial and general discussions about valuation and deal structure can create certain expectations with the seller. If the buyer subsequently presents a written letter of intent with nonbinding offer that has elements significantly different than what the seller was led to believe would be included, the goodwill built to that point can be shattered. The seller may conclude the buyer is not acting in good faith and cannot be trusted to negotiate fairly in reaching a definitive purchase agreement. The cause of this kind of misunderstanding can be debated by buyer and seller, but the result is the same. The goodwill and trust built up to that point will be lost.
This kind of problem can occur during due diligence. Often, the risks are even greater because the people involved in negotiating and presenting a letter of intent/nonbinding offer step back as a new and much larger team of the buyer’s functional managers engage in the detailed activities that make up due diligence. These people tend to be very task oriented as they work through their checklists of due diligence items. Moreover, buyers often engage third-party accounting, tax, legal, environmental, and other functional specialists as part of their due diligence teams. The larger the number of people involved the greater the opportunity for problems with coordination and communication.
At the same time, private sellers may carry mixed emotions about the transaction into due diligence as they work to sustain business momentum and employee morale with the inevitable demands, distractions, and disruption from due diligence. If the functional team members are not sensitive and responsive to the to the anxiety and frustrations within the seller organization, a major gaffe or a series of concerns can inflate into a crisis of confidence and trust between the buyer and seller.
Building and maintaining trust between buyers and sellers is critical for successful dealmaking. For that reason, growth strategies predicated on successful business combinations require working with an experienced advisory firm with the right skills for addressing the “soft side” of successful dealmaking from contacting prospective targets through the final working capital adjustments in a closing process.
CDI Global is a trusted international middle-market advisory firm, specializing in strategic cross-border transactions.
Whether you are interested in mergers and acquisitions, divestitures, capital raising, or joint ventures, CDI Global is committed to delivering our services with excellence and integrity. Rather than a primary focus on financial transactions, this firm was founded on providing strategic advice to industrial and commercial companies to help effectively grow their businesses through acquisitions and other forms of business combinations. We continue to take this client-focused approach, cultivating long-term relationships so we can help meet our clients’ strategic goals with lasting success. Our teams provide project management throughout our engagement so our clients can continue to focus on running their business.
CDI Global’s commitment to partnering with the best people means you can trust we conduct all of our business activity with respect and honesty. Our international reach is a celebration in diversity and comes with a deep knowledge of local customs and business practices so we can find the best opportunities in any region. We look forward to our continued growth as we form new relationships and provide world-class client service.
By Jeff Schmidt, CDI Global Executive Managing Director and Chief Executive Officer