FAIR DEALING IN M&A NEGOTIATIONS: HOW TO FIND THE WIN/WIN
CAREER MANAGEMENT ADVISORS | CMA CONSULTING
April 7, 2020
With a crowded financial services marketplace of RIA buyers and fewer sellers, one would think the sellers are in the driver’s seat when it comes to negotiating favorable deal terms. Not so much! Buyers often propose structures which entirely benefit the buyer. Terms, for example, that are heavily weighted toward seller financing over a term of years (5-10) with 0 percent interest paid by the buyer and a claw back for lost assets/clients. Buyers are reticent to put money down often wanting to finance 100% of the deal while asking sellers to assume 100% of the risk in the transaction. You’d think there was a scarcity of buyers based on some of the deals being proposed.
By the same token, sellers also should be cognizant that risk flows both ways on acquisition deals. Financial services practices and businesses, unlike manufacturing companies with products, inventory and through-put, are a people business in which the assets being acquired have free choice and can walk out the door at any time and are subject to market fluctuations as evidenced by our current market climate. Both buyers and sellers need to work to find a fair balance of risk. Buyers requesting high percentages upfront (some asking as much as 100%) have lost sight of the balance in the trade.
Ultimately, both sides need to bring acknowledgment and understanding of the perspective of their negotiating partner and find fair balance. The best and most successful deals align buyer and seller synergies and balance needs with feasibility for both parties. There is no one size fits all when it comes to structuring a transaction. If both sides are willing to work collaboratively to find common ground where the risk is balanced and not assumed wholly by one side, the likelihood for consummating a successful deal with all parties feeling like it’s a win are high.
Before you get to the table having an understanding of both buyer and seller needs and capabilities (i.e. financing/funding) are key. Deals often fail from lack of understanding and lack of creative structuring. Ahead of entering the marketplace, buyers should have command of what is and is not feasible from a structure and financing/funding perspective. Sellers should also have a well thought out list of needs and wants tempered by a large dose of realistic expectation of the market value and options available. Many times, it is the unrealistic expectations of both sellers (ex: a sales price of 5x topline revenue) and buyers (ex: 100% seller financing over a 10-year term with no interest paid and 100% of revenue to the buyer). Expectations and perspective give fair dealing a fighting chance.