M & A 101: Lessons Learned from Decades of Deals – Mar/April 2022

Anatomy of a Perfect Deal

Loren Smith – Blue Valley Capital

I was recently asked an intriguing question: “What does a perfect deal look like?” I started to respond that perfection might not exist, but then I recalled a deal a number of years ago that seemed to click on all cylinders––from the time the letter of intent (LOI) was signed right through the closing.

I described how the buyer had conducted a financial audit, thoroughly reviewed everything in the confidential information memorandum (CIM), evaluated all the company’s systems and procedures, and drafted all the legal documents––accomplishing everything in less than 60 days. “From LOI to closing in 60 days for a $25 million deal is exceptional,” I said.

But then I got another question: “How did that happen? What were the factors that enabled the buyer to achieve so much so quickly?”

That excellent question I was unable to answer on one foot, but I did answer it the next day. Here are the six characteristics I identified that had allowed that long-ago deal to proceed so seamlessly:

  1. Financial clarity

The company’s books and records were impeccable. They did not require a lot of interpretation, and the financial review conducted by an independent auditor confirmed EBITDA and did not uncover any red flags. 

  1. Urgency

The seller was highly motivated because he wanted to retire. And the buyer had a sense of urgency because he was very experienced at acquiring companies and understood that a drawn-out process is not your friend in getting a deal done.

  1. Effective time management

Both the buyer and the seller had mastered the elusive art of managing their time. For the seller that was essential because it is quite challenging to run a business while tending to the myriad issues required to get a deal closed. Likewise, the experienced buyer recognized that he would need to stay on top of his time management game throughout the back and forth with the seller. As a result of both parties’ dedication to timeliness, they were available when required––sometimes daily.

  1. Experienced attorneys

It is vital that the attorneys on both sides of a transaction are seasoned in the M&A arena. When a seller uses his family’s general practice attorney, a lack of specialized knowledge can slow or even jeopardize the deal.

  1. Due consideration of market valuation

Sellers can have an inflated idea of their company’s worth, which is certainly understandable, but fixating on an unrealistic number can create a formidable hurdle. Understanding that the market is the key determinant of a company’s value is vital to reaching the goal line.

  1. Single point person

Giving one individual full decision-making authority on all aspects of the deal, on the seller side and on the buyer side, expedites the entire process. A seller might have several partners or a buyer might have a number of individuals in his decision matrix, but in this case the seller’s CEO served as our solo point person, and the VP of Acquisitions for the buyer had parallel decision-making authority on all issues.

Often, only one or two of these crucial factors exists, leading to any number of snags or worse. But in this instance we were blessed with the rare advantage of having all six prime ingredients. So maybe I have experienced a perfect deal.