Successful Deal Making Requires More Than Mechanics
Deals that, on paper, make perfect business sense may disrupt before completion. Sometimes, considerable time and expense have gone into searching for business partners with the right fit, promoting the possibility of a transaction, making an attractive offer, and even starting the confirmatory due diligence. Expectations may be high for a successful outcome. The synergies are abundant and capturable. The competitive advantages and growth prospects of the integrated business are compelling.
And then, something happens to break the deal: the would-be business combination lies in pieces and cannot be put back together again. The perfect deal has failed. The buyer and seller are left to wonder why. What could have been done differently? Why could the deal-breaker not have been anticipated and addressed early in the process?
Sometimes, the answer is obvious: deals fall through because the two sides are far apart in their idea of what reasonable valuation looks like. Disagreements in price frequently morph into more competitive negotiations with both sides feeling like they need to ‘win’ the transaction.
But where there is a winner, there must be a loser, so it is a death sentence when a negotiation gets to this point. Neither a buyer nor a seller is willing to lose when they can very easily walk away from the negotiating table. There is also a danger of fatigue that occurs on both sides in a lengthy negotiation. But even when valuations are within range, companies have distinct operating cultures that can complicate a transaction. It is important to understand these dynamics and adjust expectations accordingly.
Strong dealmakers understand the incentive structures at play for ALL individuals involved in a transaction. Everyone, from corporate development folks all the way up to the C-suite, has specific career objectives that may influence the result of the transaction. Many people involved in deals tend to be risk-averse because the margin for error is exceptionally slim in organizations with competitive internal cultures.
They desire to include other parts of their organization in the dealmaking process so that the onus of individual responsibility is lessened in the case of an underperforming acquisition. Experienced dealmakers understand early on that this dynamic may pose challenges to a deal’s completion, so they take steps to prepare for inevitable hurdles that will arise.
In the case of a company with one individual owner, dealmakers must be empathetic and understanding. Even if a deal makes sense financially, there will always be psychological hurdles to clear up before an owner is ready to sell. For many owners, their business is their baby: they have built it, grown it, and spent a lifetime devoted to it. No amount of money can buy a business owner’s pride. Experienced dealmakers deal with such situations using deft touch. They build a personal rapport with the owner, empathetically listening to the owner’s needs throughout the entire process. They can take words that are said and use interpersonal skills to understand psychological drivers influencing the owner’s thought processes.
Differences in corporate culture between negotiating parties are a major factor that has the potential to influence a deal’s likelihood of completion. Some businesses take a top-down corporate approach to their inorganic growth, choosing to centralize power in the organization. Others may allow individual business units more autonomy in decisions on M&A matters.
Over time, organizational dynamics shift back and forth between centralized and decentralized decision-making. In times of economic downturn, power tends to be centralized at the corporate level because the corporate folks are focused on cutting costs and bringing the business back to health.
In times of prosperity, however, decision-making abilities tend to be spread out among individual business units because growth and expansion are the primary focus.
Management changes can affect this dynamic. Following a series of underperforming acquisitions, new management must be cautious about straying too far away from the business’ core. In a case like this, an experienced dealmaker understands who holds the power on the other side of the table. Who needs to be convinced that the business combination makes sense?
An excellent dealmaker is someone who understands these subtle organizational dynamics and possesses the soft skills and emotional intelligence to help all parties through difficult negotiations. The value these individuals bring to client deals cannot be understated, which is why picking the right advisor is crucial for a successful transaction.
By Josh Miller, CDI Chicago