In a seller’s market, accelerating the deal close is critical—and risky
INSIGHT ARTICLE |
These days, it’s not uncommon for private equity firms to close deals within 30 days of letters of intent (LOIs). Competition is intense—and sellers know it. But closing a deal too quickly—before truly understanding the business, its people and systems—can hold back growth potential, lead to unexpected costs and destroy value in the long term.
Below are three situations in which striking the right balance between speed and thoroughness is especially challenging, and may require investing in additional resources to close the deal on time and according to plan.
Transparency is a critical contributor to an accelerated close. When everyone is aligned on priorities, closing the deal and jump-starting value creation is a straightforward process. When that transparency is lacking, private equity firms sometimes assume that the sellers are just being difficult or unfocused, and the situation will improve. Unfortunately, that’s rarely the case.
Family-owned companies might not know how to be transparent. They’re not used to sharing data, and might not have it or might not even have the ability to pull it together. Unless the buyer is willing to place additional resources on-site during the transition and invest in standardized reporting systems, these issues will almost certainly continue.
Focus on facilitating the pre-close data collection process and keeping the lines of communication open. If investing in external resources, make sure they can provide strategic thinking about post-close opportunities to cut costs and streamline the reporting process.
First foray into a new industry
An industry-agnostic firm faces greater risks in closing a deal quickly—and in setting up an acquired company for financial transformation—than one that’s sector-specific.
Take, for example, a financial sponsor that’s interested in a $100 million carve-out of an aerospace company. It’s a great opportunity, and on paper everything makes sense, though the sponsor has never invested in this industry. They close the deal, and subsequently learn of all the regulatory requirements that they signed on for when the check cleared. In this case, the company remained stagnant in its portfolio for over seven years as it struggled to capture value and realize the synergies originally envisioned.
Having in-house industry experts, or investing in external ones, can prevent this scenario. Consider enlisting them before the LOI, as they can provide critical insights designed to extract value and set a strategic vision for how a company will fit within the firm’s portfolio.
With carve-outs, the priority is to get off the transition services agreement (TSA) as quickly as possible. But far too often, we see companies that picked the fast, cheap option forced to invest millions in a system upgrade or overhaul within the first year because the chosen solution wasn’t aligned with their business needs.
When closing the deal, it’s important to assess the level of customization in the current IT systems and the level of documentation. A lot of customization and negligible documentation almost always leads to trouble.
Again, bringing in advisors early to assess the situation can result in significant savings down the line. And an advisor can help negotiate the TSA agreement if the timeline is overly aggressive and then facilitate an efficient exit off the TSA.
Having the right information at the right time ensures a successful close and faster financial transformation. But when investing in a family-owned business, a new industry or a carve-out, knowing what the right information is, getting access to it and verifying its accuracy can be daunting. Additional resources are often necessary to expedite the process, highlight any blind spots and set the company up for success.