In the market today, there's been a change in availability of debt and the cost of that debt, says Mereo Capital Partners Managing Partner John O'Hare. There's also an issue of meeting seller expectations, which have not fully adjusted to the new market dynamic. That's created an additional incentive to avoid risks in deals.
"Busted transactions are always a terrible and expensive outcome. In any environment, you need to be careful about mitigating the risk of that," O'Hare said during the Philadelphia Smart Business Dealmakers Conference. "In this environment, you have to be extra careful."
The substantial and rapid increase in interest rates plus the failures of SVB, First Republic Bank and Signature Bank have created a much different environment for selling a company than in the recent past. During the credit bubble, many lenders and equity sponsors rushed their due diligence process. Currently, very few people are taking short cuts on due diligence. As a result, seller preparation is much more important to ensure a successful transaction.
An important part of getting ready for a deal is addressing a company's problems and issues.
"Sellers are often tempted to provide as little information as possible about their company's issues and to delay providing that info to later in the transaction process thinking that the buyer is just going to gloss over those complexities," O'Hare says. "So, the usual result is that the issue is inevitably identified by the potential buyer. The seller is unprepared at that point to provide the information necessary to analyze that issue. The issue then becomes a roadblock in the transaction process where work on all the other components of the deal either stop or slow down dramatically. And most important, the credibility of the seller and his or her advisors is impaired. And that really jeopardizes the overall deal."
A much more effective strategy, he says, is for the seller to describe the problems and complexities early in the transaction process. In advance of the launch of the sale process, they should prepare credible data upfront that enables buyers to calculate the probability-weighted financial impact of the issue. Creating a roadmap for potential buyers, he says, is a viable strategy for mitigating such issues.
Hiding problems is never a good strategy. He says in one deal he worked on, the sellers did not disclose an environmental issue, which was broad reaching, spanned across multiple sites, and was complex. The seller also failed to disclose an impending near-term decline in revenues. The end result was that the seller didn't close.
O'Hare says those who are looking to sell their company and have private equity firms identified as likely buyers should talk to their existing lender about potentially participating in a transaction. They should also talk to a couple lenders that they have a relationship with so that potential buyers aren't starting from scratch. Those lenders can give the seller a debt read, which will be helpful for the investment banker working the deal.