Trust and truth form the bedrock of every successful merger and acquisition. Faith and respect between the buyer and the seller are fundamental to creating a deal that works – at the time it’s signed and down the line.
Serial entrepreneur Jerry Jao, co-founder of marketing AI firm Retention Science, recently sat down with Inc. magazine to discuss the bankers’ adage, “Companies aren’t sold; they are bought.” He explained why entrepreneurs who are used to being in charge often find they have little to no control over the M&A process – and what to do about it.
While Jao and my company, Cogent Growth Partners, agree on many points, we don’t see eye-to-eye on everything.
We agree that truth is essential to the process and that the driving force behind any transaction is the answer to the seminal question: “Why do this at all?”
The buyer’s and seller’s answers to that question may come from different points of view but they have one element in common: an understanding of the opportunity standing in front of them. Opportunity first and money last is a mantra that Cogent embraces. It is far easier to get the money part of the deal worked out if both sides agree on the opportunity they are chasing. Truthfulness helps to reveal the opportunity or opportunities hiding in the transaction.
Human beings, naturally reluctant to say too much too soon, will hold their cards too close to the chest during the early days of a considered transaction. Using an intermediary such as Cogent helps ensure the buyer and seller move toward a reciprocal openness. We coach the buyer and seller on how to overcome their reticence without “giving away the store” and we require both parties to sign NDAs with Cogent and each other. In our experience, no one we have dealt with has ever broken one of these confidentiality agreements, so we think it’s paramount to share openly.
A Merger is More Marriage Than Transaction
One great way to build a trust-based relationship is for the buyer and seller to meet for an initial call where “money” and “price” and “financials” are not on the agenda at all. Meeting in person early can be a plus, but not always possible nowadays. Teams/Zoom is a great alternative. Then, after good conversation about anything but “the money,” both parties can decide if that “first date” should lead to a “second date” to go a little deeper. This is an opportunity for the buyer and prospective seller to explore how each do business, solve problems, serve customers, manage employees, etc., and allows each party a medium to discover common ground early, and start building goodwill. Understanding each other’s culture is as important as knowing each other’s business priorities, all of which the two parties can discuss during the “dating period,” before any real due diligence happens.
When it comes to determining cultural fit between the two parties, we agree with Jao that this process is more art than science. Ongoing conversations between the buyer and seller can reveal overlapping market strategies and new business opportunities they can pursue together. (One Cogent caveat: In our experience, we believe these early conversations are not the place to raise the issue of price. That discussion is better left until later when both sides are more confident that there are good reasons to move the discussions forward.)
Additionally, sharing these philosophical and operational perspectives openly can take nascent trust to the next level. Have a meal, attend a sporting event or engage socially to get to know the people on the other side or keep having Teams/Zoom calls, and you might just find someone worthy of a marriage proposal.
Importance of Understanding ‘Why’
At Cogent, we agree with Jao that knowing your driving reason for the transaction is a good rule to follow. Sellers need to understand what the buyer is seeking: talent, products, service suites, particular technologies, management, customer verticals or specialties, etc., or all of the above? Often, talent drives the transaction more than just a book of business.
The whole point of “courting” is to uncover whatever issues there are for both sides, talk through them and resolve those sticking points to prevent last-minute surprises. In M&A work, there is rarely such a thing as a “good” surprise.
Despite all this dating, business owners sometimes get “cold feet” about giving up control and taking on a new role in an organization they do not control. Sellers are often bombarded with questions from friends and family about why they are “giving up.” However, Cogent’s Transaction TherapyTM can show sellers how giving up “control” can create new challenges and help them grow professionally.
If the deal is a “go” in both owners’ minds, they need to keep their attention focused on their respective companies and let a trusted intermediary take care of the voluminous paperwork and supporting the due diligence work product needed to execute the transaction through to closing. Cogent strives to handle the bulk of all the paperwork and due diligence on both sides, specifically to allow both business owners to stay focused on running their respective business, while all of the M&A work is happening. When Cogent leads the M&A process, the two business owners act as document reviewers and approvers - they don’t need to be document creators. As Jao shared in the Inc. article, he was the point person when one of his companies was acquired and he would never do that again. (We agree.)
Role of the Trusted Intermediary
At Cogent, the reciprocal discovery due diligence for both sides reveals potential issues that might need to be resolved before a Letter of Intent (LOI) is presented. We strive to present an LOI once only after we are confident that both sides will agree to sign it based on the facts at hand. (Sort of like not asking someone to marry you unless you’re pretty certain they’ll say yes!) Cogent then project manages the entire transaction for both sides, to ensure that details are not overlooked and that it can be closed on time. In doing that, we can move from LOI to close in six to ten weeks, which is a much a shorter timeframe than the industry standard of three to four months.
Finally, we concur with Jao that nothing is ever final until the deal is signed, and the money is in the seller’s bank account. That is a win for all parties and the starting point for our continuing buy-side relationship with everyone involved.