A common concern among founders exploring M&A or raising capital is the way to maintain their relationships with buyers/investors.
These relationships tend to fall into two categories:
Longstanding relationships with other founders and CEOs in their industry who are potential acquirers
Recently developed relationships with interested investors who reached out
In the initial stages of discussing M&A or investment with buyers/investors, the conversations tend to be very high-level and focused on all good things—existing synergies, future growth opportunities, unlocking new verticals, etc.—and seem to signal smooth sailing during a future transaction.
However, as positive as your existing relationships are, they need never been tested under the strain of negotiating a sales transaction. What many founders don’t consider is that the circumstances of the connection will change once the important negotiation begins.
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Buyers and sellers have different objectives
When selling your business, your interests as a founder (the seller) are often diametrically against those of a buyer or investor. While conversations up to the present point are all about how 1 + 1 = 3, now they’ve became a game where each party’s priorities become clear:
Sellers need a high valuation, ideally paid in cash, in full, at the time of sale
Buyers need a low valuation, with a payment structure built on stock, earnouts, and escrow opened up over time and contingent upon performance
When these two parties close to transact, difficult conversations ensue and previously strong relationships become strained.
If you are feeling your relationship is that the exception and these uncomfortable conversations won’t happen, consider that you simply can’t successfully yield the simplest outcome for your business without being a touch tough. If you’re not having difficult, uncomfortable, sometimes even heated conversations/negotiations with the customer , then you’re likely leaving money on the table and not maximizing your outcome.
You should also consider that buyers also are professionals whose job is to maximise their own outcomes. Because they’ve repeated the M&A/investment process over and once again , they skills to orient the transaction to maximise their outcomes.
Differing objectives create future challenges
All this conversation about maximizing outcomes might leave a nasty taste in your mouth. You don’t want conflict, you don’t want to return across as greedy, and you especially don’t want to sour relationships—especially because you’ll likely spend time post-transaction engaging with or maybe working with buyers/investors, sometimes for years to return .
If you finish up selling to a strategic buyer, then bitter feelings will present the subsequent challenges:
Strained long-term partnerships. If you continue on with the customer during a transitional period or take an edge at the acquiring company, then conflict within the transaction process can make long-term partnerships uncomfortable for everybody .
Difficulty in obtaining financial consideration. You’ll likely have some kind of finances engaged within the purchasing business following the close, whether within the sort of escrow, stock, or earnouts. With escrow, 5-20% of the transaction price won’t be available to you for 12-24 months, and if something goes wrong with the M&A integration, then those funds could be placed in danger . an honest relationship can minimize this risk. within the case of earnouts, hitting the earnout milestones is far easier when you’re on good terms with the people running the business.
Misalignment for future product vision or employee retention/culture. If you because the leader of the corporate upset a future partner, that distaste may carry over to how the customer treats your product roadmap or personnel.
If you sell to a financial buyer (i.e. a personal equity firm), the challenges are often even more pronounced. Relationships with financial buyers can last 4-6 years, during which the buyers are going to be sitting on your board and influencing decision-making for the business. You don’t want bitter feelings within the boardroom.
Under these conditions, the prospect of selling your business may have just gone from exciting to bleak. But the transaction doesn’t need to go that way. That’s where a talented underwriter comes in.
Investment bankers assist you achieve great outcomes and still maintain relationships
As a founder, the sole conversations you ought to be having with buyers are the positive ones—about strategy, synergies, and therefore the go-forward vision of the corporate .
These positive buyer/founder conversations are important during a transaction process because they:
Drive the deal toward the simplest outcome, as buyers will ascribe more value to a business that they’re excited about and see you as an eager and motivated partner
Minimize deal fatigue and keep overall morale positive (especially during the diligence stage)
To avoid polluting the air between you and buyers, you’ll got to believe an underwriter to act as an intermediary and have the tough conversations. a number of those conversations include calling buyers out when they’re:
Providing a coffee valuation compared to other buyers
Proposing a structure (cash vs. stock, upfront payment vs. earnout) that’s disadvantageous
Delaying the timeline for closing a transaction
Introducing new terms that are unfavorable
Changing existing terms (a re-trade)
And others
Having an underwriter be the “bad guy” are often an enormous asset because it keeps buyers accountable while also preserving the founder’s relationship with the customer . additionally , as a disinterested party with no emotional attachments to any specific buyer, an underwriter can specialise in maximizing valuations and terms for founders.
What if a buyer won’t undergo the transaction with an investment banker?
Founders are often concerned that hiring an underwriter will strain the rapport they’ve started building with buyers.
Buyers will stoke this fear by saying they won’t participate during a transaction if the founder hires a banker. This threat may be a common scare tactic employed by buyers to eliminate the involvement of an underwriter , knowing bankers will create a competitive buying process that drives valuations up and provides more favorable terms to sellers.
Almost all our clients have experienced the threat of a buyer not participating during a formal, bank-driven M&A/investment process. the reality is that those self same buyers who say they won’t participate during a formal process nearly always do. If they don’t, their valuation was probably so low they knew there was no chance of prevailing unless they might circumvent a competitive process.
Consider this: if a buyer sees the synergies during a transaction and values your business appropriately, why would they worry about you working with an investment banker?
Bankers can assist you attract the simplest buyers
In many cases, sophisticated and experienced buyers (who tend to pay premium valuations) will consider a bank-driven process as positive, as this action signals serious bent the a part of the corporate pursuing a transaction.
Especially in situations where a corporation doesn’t have a proper or sophisticated board, hiring a banker helps buyers see that founders (sellers) aren’t kicking tires or simply having M&A conversations to run a market check.
Competition creates urgency for classy buyers
Running a proper , banker-led process creates an urgency for buyers to act and to steer with their best offer. once you hire an underwriter to make a competitive process, you send the message to buyers/investors that if they don’t acquire or invest in your business then another will, which other buyer/investor will either turn your company into a robust competitor or into a costlier acquisition afterward .
Close your transaction on good terms with the customer
If you don’t involve an underwriter within the transaction process, then you’re left with the dilemma of whether to burn bridges now for a far better outcome or sacrifice the result for the sake of excellent relationships going forward with a valued partner. Neither option is right , and you shouldn’t need to choose from them.
If done correctly, investment bankers can shoulder the responsibility of hard conversations in order that when the transaction is over and done, neither side of the table is shouldering resentment.
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