Build Trust and Mitigate Risk in a M&A Transaction

In the previous article on Building trust in an M&A deal, I explored the wants that both parties need to achieve to ensure that the deal goes through. I now want to delve into some of the pitfalls, how to avoid them with some practical hints and tips to ensure an amicable solution.

With as many as 80% of small and middle market businesses that go up for sale that never close the deal, achieving trust allows each party to go in with eyes wide open. Building trust takes time but can be destroyed in an instant – with the wrong wording, phrasing, lack of awareness of cultural differences or simply not understanding the other parties needs and wants.

How to destroy trust - by both parties

• Having unreasonable price expectations that may be influenced by competitors, or by exciting stories about similar businesses, or others simply don’t know how to assess value.
• Having limited conversations with each to clarify/reiterate the process through to not having enough time socially to get to know each other.
• Hidden agendas which in turn drive a behavioural stance to the deal. I win – you lose mindset. While win-win is almost an ideological goal, a strategy could be to lose small on certain points to win big (get the deal done).
• Seller failing to communicate the strength of their management team which can undermine perceptions and then trust.
• Focusing on the wrong people by not knowing who the real decision makers are versus say influencers, users, approvers or gatekeepers.
• Focusing on the wrong things - ie specific granular details and not looking at the bigger picture.
• Material changes in the circumstances of the business out of a seller’s control, but that are not notified promptly to the buyer nor supported by any relevant information.
• Changes with significant clients and suppliers which are not disclosed.
• Trying to renegotiate any part of the deal will kill momentum and probably make other deal components subject to review, further slowing the process.
• Trying to impose "home country" values as they can be perceived differently to the seller.

Related: Acquirers of recruitment agencies have an aversion to risk

How to build trust and mitigate risk

• Trust is a mindset that needs to be adopted by both parties and not given a token cursory nod or tick in the box. Honesty, transparency, personal relationship early on helps accelerate this.
• Understand each other’s real motivation as much as possible for the deal. So understand and know the family, history, and culture. This personal and emotional connection adds real ‘weight’ to the seemingly logical reason for the transaction.
• Remember – like an iceberg, only 20% is visible (logical reasons for sale) – what you see – but you need to understand the 80% that is not visible (emotional reasons).
• Setting a clear growth strategy on your approach to short term wins or loses versus long term goals, is essential to help navigate the process, but you need to be flexible for unforeseen items.
• Set out a clear timeline with expectations on what is needed and by when.
• Agree on a fair price early and address key issues – can they be met?
• Focus on key staff and involve as much as possible. They can destroy or build the trust.
• Identify the roles of key people and their influence on the deal.
• Create Diligence and Integration workshops, with a bias at least 50/50, with the buyer being willing to spend a great deal of time validating the culture and business fit and conveying that information to the seller.
• Communicate, communicate, communicate - concerns/areas that could derail a deal.
• Once the deal is signed reassure key staff – keep them close with clear timelines and workbooks with statements – Q&A which may arise from staff. In Asia whilst there may be a bit of hype of being acquired by an overseas company – ie more opportunity – there will undoubtedly be concerns about the owner’s involvement post deal. Their alignment and how it is communicated is critical to support the change.

Key Points

Competitiveness is human nature, having a winning mentality is hardwired in most of us, so when negotiating do have a clear strategy on your approach involving not just the technical and financial aspects of the deal but the emotive ones too.

Overcoming differences on the way takes courage as trust can be destroyed in an instant – so recognising a strong relationship is built on trust will help you to achieve the desired outcome.

Manton Townend – Independent Business Consultant – Singapore.  A senior executive with success achieving revenue, profits, and business growth objectives within start-up, turnaround and rapid-change environments across different geographies and cultures. Last 18 years in APAC, focus areas have been in the staffing sector – in particular, sharpening strategy, alignment to stakeholders, development of teams and streamlining execution through to Executive coaching and facilitating Leadership Development.