In the aftermath of a business transaction, parties on either side have regrets. They also have moments looking back where they’re glad they made certain decisions about the deal.
Chuck Morton, a partner at Venable LLP, has been recognized for decades as one of best middle-market deal lawyers in the United States. During his time as an M&A attorney, he’s seen some excellent choices and some not-so-brilliant decisions.
The most common mistake people make when looking to sell their company is waiting too long to get their ducks in a row.
“Like the old adage: you should start with the end in mind,” Morton says. “There are only going to be three ways you're going to leave a business: either you’re going to leave it by selling it, you're going to leave it at the time of your death, or you're going to leave it because it doesn't survive. And of those three, clearly selling it is probably the best way to leave a business. You need to build a business with an exit in mind. You need to think about things that can add value to buyers.”
In addition to waiting too long to sell, getting too greedy is a common problem.
“Hogs get fed and pigs get slaughtered, which is a shorthand way of saying that if you try to be too aggressive it can, in fact, come back and bite you and ultimately destroy deals,” Morton says. “You need to have a sober assessment of the value of the business. If not, you're going to end up in trouble.”'
Once you’re prepared to sell and have a realistic asking price, Morton says it’s vital to lock down employees, be certain they are supportive of the sale and are in a position where if the business is sold, they can continue to help the business thrive.
On the buy side, Morton says, people can sometimes be too cavalier about proper due diligence.
“There are times where buyers can be wearing rose-colored glasses and it can come back and bite them on the buy side,” Morton says.
As often as he’s seen mistakes, he’s also witnessed quite a few brilliant decisions. For example, Morton says he worked with a service-oriented business that developed software that helped them deliver their consulting services. When it came time to sell, there were distinct buyers; some were interested in the company, while others simply had their eyes on the software.
“It was a situation where selling them together would not maximize the return,” Morton says. “What they decided to do, with the help of an investment banker, was first to sell the software business and then subsequently sell the consulting business. And in doing that, they probably got an 80- to 90-percent premium over what they would have been able to achieve had they sold them together.”
Morton went back 20 years for another example of a shrewd business decision that ended well for the business and its owners. That company, now a household name, was young and looking for outside investors. The issue they wrestled with at the time was whether to take equity or debt. They chose debt.
“At the time, it was relatively expensive debt — measured by the interest rate — but with the benefit of a couple of decades of hindsight, if they had sold a piece of equity in the company at that point, it would have been a horrible deal,” Morton says. “Their decision to take debt at interest rates in the teens, although it was painful at the minute or at that moment, was brilliant.”
The pandemic threw the M&A world for a loop and it changed how people did things. Due diligence was rarely in person, capital was in large supply and valuations were off the charts. During his decades of M&A, Morton has seen many things, but nothing quite like the last few years. Does he think something similar could happen again?
“Can we anticipate other seismic shifts?” Morton asks. “I think the answer to that is probably yes. Can I tell you what they are? No.”
Morton spoke on the Smart Business Dealmakers Podcast about his firm’s history, some best practices in M&A, as well as common mistakes buyers and sellers make in the M&A world.