There are many aspects to M&A dealmaking, says Ralph Della Ratta, a Partner at Kirtland Capital Partners. They include financial considerations, legal affairs and the business case for selling or buying. But, he says, there’s also a social aspect.
“The social aspect of a deal is how the two parties — buyer and seller — come together, get along and achieve common goals,” Della Ratta says. “The most instrumental part of any M&A transaction is the relationship between the two parties that are partnering together. It will dictate the success or failure of the deal.”
Smart Business spoke with Della Ratta about the social aspects of the sale of a closely held business to private equity.
What are the social aspects of a sale?
Some of the social aspects involved in an M&A deal include the personality of the management team and owners, as well as their vision, management and work style, and compensation philosophy.
Once private equity has an ownership position with a company, the company’s founder and management team can expect to spend a great deal of time with the private equity sponsor. As both teams are working toward realizing a return on the recent investment, there’s no time for arguing, fighting or personal agendas. That time, instead, should be used for building value. While disagreements will happen, it’s important for each side to try to understand what the other side is trying to accomplish.
The cornerstone is always trust. It takes a while to build up that trust, so it’s important not to violate it. Be very honest and straightforward with each other. The personalities and work styles can be different as long as each side trusts that the other is trying to do good for the company and wouldn’t do anything in front of the greater employee group to undermine the other party.
The degree of risk, if there is animosity between the two parties, goes up exponentially and it becomes hard to get things done. It’s also unsettling for others in situations such as management, committee and strategy meetings. Not many deals work out when parties just can’t get along.
How does a seller get to know the potential buyers?
Sellers should get into social situations with potential buyers. This could mean dinner the night before a management presentation where ideas and views can be exchanged in between conversations about everyday life. It’s a chance to understand the buyers, their family, their values and backgrounds. It’s also a good idea to touch base socially on occasion as the deal progresses to continue to get to know them better.
Professionally, sellers should ask buyers for a list of references of other entities that may have worked closely with them, such as lawyers, accounting firms or investment bankers. They should talk with those who have done deals with them to ask how it went. Of course, the buyers are going to put their best deals forward, so sellers should also do their own research and contact companies they’ve worked with that the buyer doesn’t mention to check their history.
Sellers should keep in mind that the buyer who leads the deal might not be the person the seller will work with day to day once the transaction closes. Sellers, then, should ask who is going to be involved with the company, in what capacity and for how long. Who will be on the board and who will the seller have the most contact with after the sale? It’s also good to meet those people personally, if possible.
The best offer a seller receives isn’t necessarily the one made by the highest bidder. Instead, it is often the one made by the people an owner and their team feels better about working with. It’s about what a deal means for their employees, vendors and stakeholders. For all parties, a strong relationship is key. How well they get along together will ultimately dictate the success of the company and their investment. ●
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