February 21, 2023 HMA Website

Transaction Lessons and Reflections

We receive similar questions from every business owner that contacts us:

  • How long does it take to sell a business?
  • How can I best prepare?
  • Is due diligence really that challenging?
  • What happens when things don’t go to plan?

Each transaction is as unique as a fingerprint, but there are similar traits among all successful transactions. To attempt to answer these questions with a concrete example, we reviewed a recent transaction with both the seller and buyer and compiled the lessons learned.

In mid-2021, Hart Marx Advisors (HMA) was approached by a business owner wishing to sell their family-owned heavy duty parts distribution business. The company was owned by a husband-and-wife pair and the husband’s brother. The company had over four decades of history, stable customers and suppliers and a reputation for quality across all aspects of the business.

HMA initiated its process, beginning with understanding the business and what makes it unique. We wrote and refined the Confidential Information Memorandum (CIM), the teaser that we send to a list of interested parties to drive  awareness without sharing the company’s name, filled our secure online dataroom with information and build a lengthy list of potential buyers. All these actions required significant collaboration with the client and their team. In approximately 60 days, we were ready to go to market.

The client is a loyal and important member of a large buying group, and their perfect scenario was to sell their business to another member of that network. This was achieved as another member company had a strategic need for our client’s unique capabilities and geographic coverage. After 120 days of discussions over the holidays with numerous potential new owners, the buyer submitted an offer that was negotiated by HMA and accepted by our client.

Due diligence began in early February. Due diligence is a difficult process that must be experienced to fully understand. The objective is for the buyer and seller to agree on how the business works, what its true earnings are and the stability of the company. Every area of the business is inspected, analyzed, questioned and confirmed through research and data supplied by the seller. It is long, difficult and stressful for even the best-managed businesses.

In June of 2022, the transaction was completed, and our client had a new owner for the first time in the history of the company. Both the buyer and seller were pleased with the results.

After taking some time to reflect, we went back to the buyer and the seller for their thoughts on the process and the lessons they learned.

Deciding to Sell: The owners smartly decided to sell their business while sales were strong and the business was operating well. However, it is a difficult decision to sell a family business and the effects are far reaching across the family.

Selling your family business can be difficult under the best of circumstances, and even more so when the process reaches delays or changes direction.  -The Seller

Prepare for Success:  Both buyer and seller stressed the need to prepare for the process. It is a difficult, lengthy and stressful route to a successful transaction, but much of the difficulty can be addressed early on.

We invest a significant portion of time upfront getting to know history of the company, it’s customers and it’s people so that we can custom design an integration plan to honor the seller’s legacy and prepare for future growth. It is most helpful if sellers plan and work with an M&A consultancy that knows this industry. Planning is having clean and accurate income statements and balance sheets, clean inventory, and a physically clean operation that increases interest and reduces the number of requests. – The Buyer

Deal Fatigue: There’s a saying in the M&A industry that every deal dies three times before it closes. In many cases, deals can have more lives than a cat. This rollercoaster of on-then-off-then-on uncertainty takes its toll on everyone involved, escalating emotions and anxiety.  It’s important to remember that all sides want the same result, and both sides are spending a lot of time and money to reach that result.

Remain solutions-oriented. No matter how smooth the process goes, ‘deal fatigue’ happens, and we all must remember everyone is human, and that can lead to upsets and concerns… all of which need to be patiently handled.  – The Buyer

Our accounting manager has many other roles in the business as well as her private life. It was difficult to handle all the requests that sometimes came in hourly!  – The Seller

While due diligence is very time consuming, we especially had difficulty relating to what the financing bankers wanted. We are a small business that doesn’t operate to GAAP standards and was challenging and exhausting to provide certain information.  – The Seller

All-Star Team: Advisors like HMA are only one piece of a seller’s team. It is important to get accounting and legal advice from experienced professionals with experience in these types of transactions. These experts can anticipate or mitigate problems that inevitably surface.

Involve the seller’s CPA early into the process, as the CPA plays an important role in the seller  understanding the tax consequences of the sale, as well as managing working capital expectations, inventory valuation and allocation of the sales price between assets and goodwill.  – The Buyer

We got a lot of value by using Hart Marx as our partner; having their financial and negotiating skills working on our behalf made a big difference.   – The Seller

While protecting their client is paramount, it’s important that lawyers and CPAs remember they work for their client’s satisfaction.  – HMA

Communication: The transaction process is about managing people and expectations. Making sure there is good communication and mutual understanding is critical to achieving success and minimizing strain on the people involved.

We learned to never assume that all terms are interpreted the same way. Again, take the time up front to explain the language and timeline.  – The Buyer

A valuable lesson by all was to not assume that everyone is on the same page when it came to the due diligence process, timeline, and roles. While we provide our clients with an outline, each buyer has their unique process.  – HMA

Focus On the Results: While time-consuming and often frustrating, a successful result is achievable.

The key to a successful transaction is the connection forged between buyer and seller and the people that will work together. Focusing on the culture and finding the right roles for key people is imperative for future success.  – The Buyer

The process can be grueling, but patience is important. Our role often ranges from financier to psychologist. Working with both the buyer and seller to get a good transaction completed was a satisfying experience.  -HMA

Our goal was to build on their 45-year legacy and grow their business. This goal was accomplished while all parties remained professional and connected during the process.  – The Buyer

We’re glad we could find the right buyer within the buying group network, and we like the people on the buyer’s team.  – The Seller

Both the buyer and seller worked together to achieve a result that satisfied all sides.  Every transaction is different with unique challenges and concerns brought by both parties. However, with commitment to the process, preparation, a strong team of advisors and professionals, good communication and a focus on the end result, a deal can be reached and deal fatigue can be overcome.

The frustration over yet another due diligence request doesn’t last. What lasts is the good business that continues to grow into a new era or the retirement that was worked towards for decades, and the people that were brought together to achieve the result.

 

About Hart Marx Advisors

Hart Marx Advisors is the premier boutique consulting firm that assists buyers and sellers exclusively within the automotive and heavy-duty industries with mergers and acquisitions (M&A), divestitures, and strategic planning. A highly experienced team of specialists provide buyers and/or sellers with a full range of services, including M&A strategy, planning, investigation, buyer/seller identification, negotiations, due diligence support and integration. With locations in San Rafael, CA; Eagle, ID; Kansas City, MO, Bloomfield Hills, MI; Jacksonville, FL; Naples, FL: and London, UK, Hart Marx Advisors specializes in lower to middle market business transactions. For more information on Hart Marx Advisors, visit www.hartmarxadvisors.com.