Looking at blindside risks in an M&A deal, Jim Nickel, Pennsylvania Region Head of National Commercial Banking at CIBC Bank USA, says its natural in diligence to scrutinize things that threaten the sustainability of margins. While most would identify customer concentration as the suspect, he says there are other concentrations, such as dependencies on key relationships and key vendors.
Contingent liabilities are huge in almost every transaction, even asset acquisitions where employment-related things may still be funded by the buyer rather than indemnified by the seller in an effective basis. The Wayfair decision a couple of years ago, for example, dealt with the sale and tax nexus, has become a huge area of focus for contingent liabilities.
However, there are sometimes risks that can be overlooked. In one deal, he says there was a salesperson who, it was discovered deep into a process, was responsible for 90 of the company’s sales volume.
“That, in and of itself, is a risk,” Nickel says. “And then we determined that this particular sales person was over 70 years old, so that was a major concern for a buyer. That causes a pretty quick focus on what to do about that, how to mitigate that, how to transfer those relationships, how to quantify the risks.”
In another example, he says when going through vendor concentrations there can be an item that looks very replaceable as there is lots of supply available. But these shouldn’t be overlooked. Instead, dig deeper by asking “Why?” He says in once case they discovered a small rubber grommet was responsible for the premium performance and excellent tolerances of a product, and therefore its premium margin. That meant the sustainability of this tiny item became critical to the purchase thesis.
“You're looking at the margins, you're asking why — ask why again,” he says. “Then check and then corroborate because you never know where those blindside risks might lurk.”
Employee involvement is really what makes a company worth the price being paid — not just at the time the check is signed, but going forward. Steve Bigari, chairman and CEO of Synq3, says his company had a good post-deal experience after it acquired Novo Labs, a Dallas-based provider of conversational AI for restaurants, because they left the acquired company alone as much as possible.
“So, simple things like allowing them to keep their benefits, giving them a pay raise — leave them alone for a year,” Bigari says.
To that end, he instructed his team to resist over-managing the newly acquired employees. Additionally, he says he tries to eliminate things that get in their new employees’ way.
“Instead of trying to take over and run things, we ask them what's frustrating for them and then we get that out of their way,” he says. “Things that come to mind are payroll and AP — just get them out of their hair and allow them to focus on what they're great at, which is AI.”
He says he also allows Synq3 to leverage Novo Labs’ expertise.
“And what happens there is each team becomes the other's hero,” Bigari says. “I can't tell you how many times that we've been in meetings together now where the Novo team has helped my team look great and vice versa. So the learning gets rapidly accelerated.”
Nickel and Bigari, along with Grossman Yanak & Ford LLP Partner Jeffrey Ford, Stone Pier Capital Advisors Co-Founder and Managing Director Dale Killmeyer, and CIBC Cleary Gull Managing Director Ryan Olsta spoke at the recent Pittsburgh Smart Business Dealmakers Conference about how acquirers can avoid the blindside risks in a deal. Hit play on the video above to catch the full panel discussion.