Selling a business is, for many, ultimately about the transaction — a value-and-price equation based on data scrutinized through the diligence process. However, PWP Growth Equity Managing Director John McKee sees something more than that.
“It’s a relationship business, buying and selling companies, so definitely take advantage of that,” he says.
He said the M&A process is essentially just a dialogue, one that involves give and take.
“You’re building a relationship through diligence,” he says, adding that there’s no such thing as a perfect company, so the more open and honest a seller is, and the more willing that person is to bring up issues early and discuss them, the better the outcome for everyone involved.
At the Dealmakers Conference earlier this year in Philadelphia, McKee talked about the give and take in deal negotiations, and the importance of understanding how the other side sees a deal.
Creating a dialogue
McKee says it’s possible for two parties in a deal to get hung up in diligence if the seller is too defensive about the business. Instead of digging in to defend a perceived flaw, he suggests bringing it to light and discussing it.
“Look, there is an issue,” McKee says, “but if we're going to be partners going forward, we're going to have issues, too. So use the diligence process as a way to vet the person you’re going to partner with.”
Creating a dialogue means avoiding blanket statements, while showing an openness to give and take.
“Having that open-mindedness is probably our biggest challenge,” he says. “Sometimes we’ll get in diligence, and if people take too firm of a stance one way or another, you’re not building that relationship that you’re going to need to be successful partners going forward.”
Controlling the narrative
McKee says it’s a good idea for sellers to be prepared ahead of diligence, if for no other reason than to avoid surprises.
“We're seeing more and more buy-side assignments,” he says. “What that means is you hire an accounting firm, and they would come in and do accounting diligence as if they were the buyer to help you identify issues.”
He says that helps expose weaknesses in the business, areas of concern that are sure to come up in a diligence process. It helps sellers see their businesses as buyers will see them, while also giving them a chance to put the issue in a more meaningful context.
As an example, he cites customer concentration. It might look like a business has a large percentage of its sales with a particular company. By completing a buy-side report and understanding that would be a buyer’s thought, the seller can point out that there are actually seven distribution centers and 18 different relationships. The seller can explain to the potential buyer, ‘You're going to see high customer concentration. Here’s why I'm not worried.’’
The alternative is that potential buyers, through diligence, discover the issue on their own. They might already have a perception, based on prior deals, of what they think of the issue — and how they treat it in negotiations — that could create a negative perception of the opportunity. By having a buy-side report, sellers are able to identify what buyers are likely to find in diligence and take control of the narrative.
“It’s a helpful way to maximize value, and you can move on to more important things,” says McKee.
For business owners, selling their business is one of the biggest deals they’ll ever do. It’s an opportunity to potentially create generational wealth. To capitalize on this once-in-a-lifetime deal, McKee says it’s critical to hire high-priced lawyers and accountants, and do it early.
“They pay dividends,” McKee said. “They just have a different experience than you have.”
He said the sooner a business owner can create relationships and dialogue with people who are experienced in M&A, the better.
“This is a relationship business, and if you have good relationships with your advisers, you can then have a good relationship with your eventual partner, whomever that might be,” he says.