As I write this there are two fascinating M&A stories in the news, and they provide good lessons for buyers and sellers of lower middle market businesses. First let’s look at the public market deal stories, realizing we don’t know how they will unfold (which isn’t the point of this article).
Jet Blue joined the hunt, along with Frontier Airlines, to purchase Spirit Airlines. There was a tentative deal in place between Frontier and Spirit when Jet Blue wandered into the mix. I see three things worth mentioning so we can learn from them.
- Jet Blue has buyer fever. No other way to explain it. They love the deal and disrupted what was going on to make their bid.
- Frontier doesn’t seem to have buyer fever. They appear to be a buyer who likes but doesn’t love the target company and only if they can get it at their price. At the time of this writing, they are saying they don’t think they have enough votes of Spirit shareholders to get the deal closed (and they aren’t upping their offer).
- Terms matter (not just price). Jet Blue’s offer is all cash. Frontier’s offer is some cash and mostly stock. As in almost all situations, cash is king. And getting stock could be a windfall or a disaster
The other deal in the news is the Twitter-Elon Musk saga. What’s interesting, if this is really true, which Musk says it is, is Twitter didn’t want to sell (to him anyway), his unsolicited offer was said to be unwanted, when it appeared to be dead, they sued to force it to close. And maybe, just maybe, the lawsuit could be because Twitter stock is way down, well below the offer price. What we do know is:
- The truth seems to be a moving target, from both sides.
- Due diligence is open kimono time for both sides and especially the seller. Musk claims the kimono wasn’t open all the way regarding how many users are bots (who don’t respond to advertising), and Twitter says he has what he needs.
- There’s a $1 billion breakup fee Musk will pay and I’ll bet the lawyer fees over whether he backed out or Twitter misled him will be astronomical.
So, what can buyers and sellers of small businesses learn from this? A lot, and I’ll keep it to three lessons for each.
Sellers:
- If you have a hot (desirable) product, you’re profitable, and growing then you control the deal. The buyer only controls the deal when it’s a struggling business.
- As my friend Brian Quint said after selling Aqua Quip, his third-generation family business, “Be ready for a financial colonoscopy.” So true and be ready to the same type of exam on your non-financial factors, especially customers, employees, and supply chain.
- Be serious when you say you’re going to sell. Don’t do just to see what the market says about your value. It’s a lot of work for your team and you, more work than you think.
Buyers:
- Your due diligence needs to be thorough and not only with the numbers. You can’t be like the buyer whom a seller nicknamed Columbo because he always had “one more question.” And you definitely don’t want to be like a gentleman who hired me to see if he got misled by the seller. My conclusion was, he did a really sloppy job of diligence. There were clues everywhere and he didn’t follow them.
- Don’t get buyer fever. Don’t be like the caller who told me he was six months into his new business and hated it. The company’s products are beautiful, and he fell for the shiny object. A cure for this is to cast a wide net. Play the whole market not just what’s advertised online.
- Be able to answer these three questions:
- Can I see myself going into this business every day?
- Do I like and trust the seller (the same goes for the seller feelings about a buyer)?
- Do I know where I’ll add value?
Look in more detail at the Twitter and Spirit Airlines (potential) deals and you’ll see all the tips herein for buyers and sellers. There’s a reason there are celebrations when a buy-sell deal closes. It takes a lot of work and some good fortune to get a deal done. Just don’t fall for the abovementioned traps or the myriad of other ones.
