Could you imagine buying a house and the seller asks to review your financial analysis showing how much money you’re going to make from the investment? Residential real estate practice would consider this an absurd request, instantly denied. The buyer is paying the agreed-upon price in full with cash at closing and the seller has no reason to pry into the buyer’s affairs.
But in the crazy world of strategic M&A among privately-owned print, mail and graphics communications companies, seller due diligence into the buyer is hardly an exception. In fact, right now the NAPL M&A advisory team is handling three client matters each of which involves full disclosure by the buyer of the analysis that supports the transaction. One involves a $20 million annual revenue sheet-fed and web printer, another relates to a $1.2 million annual revenue direct mail shop, and the third has to do with a $5 million annual revenue packaging company.
Why would a buyer need/want to open the window on their internal evaluation of the opportunity? The answer primarily lies in the buyer’s choice of currency.
If the seller and buyer agree on a price, and if the buyer agrees to pay 100 percent of the price in cash at closing, then arguably there’s no cause for disclosure. The seller is not asked to become a stakeholder in the buyer’s future success. Landlord-tenant and employment relationships may affect this dynamic, too.
But NAPL clients among strategic acquirers know that it’s never so simple. Rarely does the seller have a realistic, firm price expressed in black and white dollars. More often than not, the buyer (and advisors) has to work though layers of Q&A and issues to get to point where there’s clarity on “price” and “structure.” And “structure” usually involves some form of risk-based consideration such as royalties, earn-outs, contingent notes, etc.
It is the choice of buyer’s currency, therefore, that causes the seller to ask for verification or comfort or assurance that the buyer is a viable entity and the M&A plan is feasible, and, therefore, the risk inherent with the structure is tolerable.
An example occurred this week when the NAPL strategic acquirer client e mailed me upon receiving the seller’s information request. He asked, “Huh, aren’t WE the buyer?” Of course, the buyer’s advisor can push back on the seller’s request, which I did. And the buyer can express willingness to use more cash, which reduces the seller’s push for disclosure (“why do you care, our client is just going to write a check and be done with it?”).
I could only imagine if the client was buying a house and the seller asked for his household budget and copies of credit card statements to verify the debt. Not happening at home; not uncommon at the office.