M&A Mistake #9: No Negotiating Leverage
Colette Anderson is the former CEO and managing partner of NT Brands, the parent company of a portfolio of premium consumer brands in several active lifestyle categories. One of the biggest successes of her twenty-year career at NT Brands was the lucrative sale of one of the company’s fastest-growing divisions, McIntire Industries. In this excerpt from Chapter 5, we see how the lack of negotiating leverage from Colette’s not using an M&A advisor led to back-to-back failed transactions.
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Colette personally championed the idea of selling McIntire to her Board of Directors, who were initially wary of divesting one of NT Brands’ most profitable and fast-growing divisions. Colette convinced the Board that given some preliminary interest that several potential buyers had expressed, it was at least worth seeing what offers might be out there. With the Board’s tentative blessing, Colette set about entertaining offers for McIntire. Yet it took two failed attempts on Colette’s part over several wasted months before a new approach yielded what was ultimately a successful outcome. Like many business owners, Colette believed that she could sell McIntire on her own, without wasting money on hiring an investment bank. After all, she knew McIntire better than anyone, and she had been approached at industry trade shows over the past few years by several well-known private equity groups interested in buying McIntire. In addition, she didn’t want to unnecessarily alarm McIntire’s executives or other employees by telling them about a potential sale until it was certain to close. So why not put together some high-level information about the company, approach the groups that had already expressed interest, and see what they had to say? With this thought in mind, Colette enlisted the help of NT Brands’ COO, and without including anyone from within the McIntire division, began pulling together the information needed to draft a Confidential Information Memorandum (CIM), the descriptive document that Colette would share with potential buyers. When the CIM was complete, Colette scheduled meetings to present the McIntire opportunity in-person to Lamda Capital and Omega Partners, the two most aggressive private equity firms who had approached them several times in the past about selling. Both potential buyers were interested in the opportunity, and shortly after the meetings with Colette, each submitted similar preliminary offers for McIntire at attractive valuation ranges. The NT Brands Board was thrilled with the response from the potential buyers and fully supported Colette’s recommendation to proceed with Lamda Capital, which based on the two initial meetings, she believed represented the best fit for McIntire. After more than a month of due diligence work, though, the deal hit a serious roadblock. Having only spent time with Colette, Lamda Capital made their offer contingent on her leaving NT Brands to run McIntire for them post-closing, which had never been part of Colette’s plan. On the contrary, she saw a significant opportunity for her to continue leading NT Brands after selling the McIntire division and had plans to use the proceeds from the sale to expand NT Brands’ international presence. When Colette told the buyer that, while the current leadership team at McIntire would remain with the business post-closing, she herself would be staying with the parent, Lamda Capital rescinded their offer and dropped out of the process. Undeterred, Colette approached Omega Partners and restarted the closing diligence process with them. Unfortunately, the same issue arose several weeks into diligence. Like the first buyer, Omega Partners also wanted Colette to run the business, and when they learned she would remain with NT Brands post-closing, they too rescinded their offer and dropped out. Colette and the NT Brands Board members were excited about the valuation levels that both buyers had provided but knew that approaching additional buyers in the same way would not be productive. They needed an M&A expert to help them navigate the overall process, including having a plan to proactively address Colette’s remaining with NT Brands after the divestiture. So they invited three well-respected investment banks with experience selling consumer products companies to submit proposals to represent McIntire in an M&A process. While each of the investment banks made compelling cases for their respective firms to be selected, a clear favorite emerged based on fit with the team, and NT Brands retained Dexter Stephens & Co. to sell McIntire. During the project’s kick-off meeting with the DS&Co. team, Colette shared the CIM she had drafted and relayed to them the failed experience with the two previous buyers. The DS&Co. Managing Director on the deal team responded, “The reason your processes failed wasn’t the CIM that you drafted, and it wasn’t the business itself. It was because private equity firms aren’t going to run the business. They want to back a team, and you’re not presenting a team. You’re only presenting you.” In other words, by keeping the process under wraps and not including the senior McIntire team, Colette was unintentionally putting herself forward as the leader of the division in the eyes of potential buyers. When buyers learned that she was never planning to remain with McIntire, the PE firms dropped out because they had not met the team that would lead the company under their ownership. The DS&Co. bankers set to work creating a more fulsome CIM using the one Colette created as a starting point, and she confidentially enlisted the involvement of the top four executives at McIntire: its President, CFO, Head of Sales, and Head of Product Development. With their additional expertise, the new CIM provided a much more detailed view of McIntire than the previous one had. And when the time came to have initial meetings with buyers after first-round bids were received, the four McIntire executives delivered the presentations to the potential suitors, with Colette in the background only to answer questions from the parent company’s perspective. This approach yielded dramatically better results. DS&Co. received multiple final offers for McIntire that were higher than those from the earlier failed process, and with DS&Co.’s four-person team of investment bankers’ providing significant bandwidth to handle buyers’ requests for detailed information, McIntire moved forward from a position of strength with multiple competing bidders simultaneously. This strategy ensured that if one buyer stumbled in the process and tried to lower the price, other buyers were still in play. The transaction ultimately closed in a sale to a large international PE firm at a purchase price that represented a significant premium to the initial offers and the Board’s expectations. As she reflects on the overall sales process, including the two false starts, Colette learned a valuable lesson. “Selling McIntire was the hardest thing I ever did. Building the business from zero to roughly $100 million was far easier than selling it. I should never have tried to go it alone.” She experienced firsthand how difficult it is to try to sell your business on your own. Only through engaging an M&A adviser and running a competitive auction process could the successful outcome be achieved.
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In this article series, I share excerpts and stories from my book, The $100 Million Exit. I hope you enjoyed this post — if you did and want to connect, you can reach me via email at email@example.com or connect with me at https://www.linkedin.com/in/jbrabrand/. Also, you can find my book on Amazon here: https://www.amazon.com/dp/1641375175