Bad Company – Five Characters (On Your Own Side) That Can Ruin Your Deal

Death from within is as much a threat in an M&A transaction as in a Bond movie, except instead of a silenced PP7 or a poisoned blow dart, these dastardly devils’ greatest weapons are usually incompetence and inexperience. The importance of having a well-rounded team of professionals on your side is key to the success of any middle market deal, but even the best-intentioned sellers will occasionally find themselves with an unexpected fly in the ointment in the form of an underqualified or ill-intentioned employee or advisor. So, in the spirit of helping sellers be more prepared to identify these unwitting double agents, here are five common characters that can ruin a deal from the inside.

1. The Habitual Lane-Stepper

Whether it’s an accountant who likes to play lawyer, a salesperson who suddenly acquired a Ph.D. in environmental sciences, or a CEO who fancies themselves a shrewd negotiator and tries to step into the role of investment banker, any member of the deal team that doesn’t know how to stay in their own lane can cause a problem. There is a reason a good deal team involves multiple experienced professionals, and it is because each is an expert in their respective field. While there is certainly a bit of knowledge overlap, the most effective deal team is one that leverages the knowledge and strengths of all of its members. A team member who thinks of themselves as an all-knowing one-man rock band will be at best an annoying disruption and at worst a potential threat to the success of the transaction. Some ways to avoid this challenge include:

• Ensure each team member’s role and area of expertise is well-defined and understood
• In the case of outside advisors, ensure advisors are well-vetted and have significant transaction experience; experienced deal advisors across professions should understand the importance of staying in their lane
• If a team member begins to overstep, nip it in the bud early

2. The Deal Lawyer With No Deal Experience

Out of all these potentially damaging deal team members, probably the most commonly seen is the attorney that is attempting to act as a seller’s transaction counsel despite little-to-no transaction experience. Like doctors, lawyers have specialties. And just like you would not want a podiatrist performing your open-heart surgery, you also may not want your estate attorney negotiating the legal aspects of your transaction. Businesses, particularly privately held middle market businesses, will often have an existing relationship with a corporate attorney who may or may not be experienced in M&A transactions. The lawyer who drafted your articles of incorporation may not have the right skill set to draft your stock purchase agreement, and it is important to recognize this. Trying to navigate a transaction with an inexperienced deal attorney is exceedingly difficult and can open a seller up to undue risks or potentially risk completely derailing the transaction. To avoid these issues:

• Vet your existing attorney’s transaction experience prior to launching a sale process
• If you do not feel your existing attorney is qualified to be your deal counsel, be honest with yourself and with them; we are not saying they are a BAD lawyer, just not the RIGHT lawyer
• Ask other members of your deal team for feedback and recommendations; your investment banker can usually help evaluate whether the company’s business attorney is qualified to undertake the transaction and can often recommend experienced deal attorneys that can step in if needed

3. The Overpowered Employee

Having a rock star manager or salesperson on your team is generally a major positive in a sale process and can add tremendous value. However, having too many eggs in one key employee’s basket can create challenges, particularly if that employee recognizes how critical they are to a transaction’s success and seeks to leverage this for personal gain. Retaining a key employee that is perceived as critical and difficult to replace can become a make-or-break issue for a buyer. A key employee that tries to leverage this position of strength to push unreasonable last-minute changes to their employment agreement or compensation package can potentially jeopardize the entire transaction. While this is certainly a nuanced issue, some things to keep in mind to potentially avoid escalating challenges include:

• Create a succession plan that addresses how key employees’ relationships and responsibilities would be reallocated should they leave
• Find a balance when in discussions with a buyer between highlighting the talent of key personnel while also illustrating that the company has bench strength
• Do not wait until late in the transaction to negotiate a compensation/incentive package for key personnel
• Consider funding a “stay bonus” for key personnel, with portions paid at various milestones post-close
• Be positive and transparent about key employees’ ongoing opportunities with a new owner, including potential opportunities for equity ownership

4. The Unengaged Manager or Advisor

Throughout the course of a transaction, a seller will come to rely heavily on certain key members of their team, which is made up of both employees of the company and outside advisors. Occasionally however, a person in a key role will end up becoming unengaged in, or worse, opposed to, the transaction’s success. This can take a variety of forms, but whether it is a CEO that spends too much time on the golf course, an attorney that views the transaction as potentially costing them a longtime client, or a controller that is simply opposed to the added workload, it almost always creates challenges. M&A transactions are highly complex undertakings with countless moving parts, and in almost all cases, time is not on a seller’s side. Speed, accuracy, and responsiveness, which are all crucial to a deal’s smooth execution, are maximized when all team members are working hard and pulling in the same direction. Some ways to help achieve this include:

• Certain employees will need to shoulder substantial added workload to navigate the transaction and its due diligence requirements; consider offering these employees a bonus or other incentive that is tied to the transaction’s close
• Utilize an outsourced resource (i.e. accounting firm, consulting firm) or an existing advisor’s junior staff to provide an extra set of hands to assist in diligence/data collection
• Stress the importance of urgency and speed to any staff or advisors that are assisting in the transaction process

5. The Inexperienced or Underqualified Investment Banker

Your investment banker is a crucial member of your transaction team, acting as both coach and quarterback at various points in the deal process. Since the investment banker is typically responsible for structuring the process and “making a market” for the business, the quality of talent and level of experience your banker brings to the table can have drastic impacts on the overall outcome of the deal. There are two pitfalls that many middle market sellers find themselves falling into when it comes to choosing the wrong investment banker. The first is hiring an advisor or business broker that is focused on smaller, more local deals. These advisors often focus on selling sub-$10 million businesses, mostly to individual investors. While these advisors are often highly competent in this role, a middle market sale is a different animal with different challenges, different buyers, and different skill sets required. The second pitfall is hiring a big-name firm, one that typically focuses on selling $500+ million businesses. These firms are extremely talented and have names that are no stranger to the front page of the Wall Street Journal, so it is easy to see why a middle market seller might choose them as their advisor. The issue is that while these firms will occasionally take on sub-$200 million deals, these transactions are low priority (read: small fee) engagements, and therefore usually relegated to inexperienced junior staff for day-to-day execution. In any middle market sale, experience matters, so to ensure you are choosing the right investment banker for your particular deal, a few things to remember include:

• Look closely at a prospective banker’s past transactions and evaluate whether their previous client businesses are a similar profile to yours in terms of size and situation
• Ask to talk to some of the prospective banker’s past clients; most good investment bankers would be happy to arrange this
• Make sure you know exactly who will be working on your deal day-to-day and what each team member’s role in the transaction will be; just because the Managing Director with 30 years of transaction experience was the person leading the initial pitch does not mean that this is the person who will lead your transaction day-to-day