Multi-Unit Franchisee Magazine Issue I, 2016 | Page 80

ExitStrategies
BY DEAN ZUCCARELLO

Dealing in Reality
Why do some deals fall apart?

T

he M&A marketplace has seen
some impressive activity over
the past few years. Theoretically, this should have created
a positive environment for all people
looking to execute an M&A transaction. In spite of these favorable conditions, there are groups that can’t seem
to get a deal done. In many cases, these
are people who care more about “winning” than consummating a transaction.
Let’s examine how to engage in industry standard business practices that can
improve the likelihood of transaction
success, while still getting the most for
both buyer and seller.
When an investor divests 100 shares
of stock each worth $10, they go forward
with a sale for $1,000 without question,
because that is what the market has
deemed fair and acceptable. There are
constant sources of information readily
available to validate transaction norms
and fair market value. This dynamic
can change when it concerns private,
entrepreneurial-based M&A transactions.
There is certainly more of an emotional charge to consider when someone
is selling their own business rather than
shares of Microsoft. However, the fact
doesn’t change that a very established
market still ultimately dictates the pricing
and terms deemed most accurate given
the quality of the assets and the current
industry climate. Yet, regardless of this
reality, some buyers and sellers fail to
position themselves to execute a transaction because they feel the need to win
at someone else’s expense.
We truly appreciate the spirit of
entrepreneurship and understand the
competitive nature inherent in business
owners, so we are not suggesting that a
party shouldn’t seek to obtain the best
deal possible. However, it’s important
to realize and accept the fact that the
majority of successful transactions happen in market-bandwidth terms, and the
marketplace is well-informed.
First and foremost, it is crucial to un-

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derstand market valuation parameters.
The most frequent source of transaction
failure is the lack of realistic understanding regarding transaction value versus
transaction multiples. Some of this is the
sincere result of misinformation in the
market that sellers and buyers are relying upon. Every day we encounter parties
who are hearing about transaction values
that are just plain wrong. This provides
the basis of a faulty valuation perception
that is hard to overcome. However, in
some cases, parties deliberately want to

Some buyers
and sellers fail to
position themselves
to execute a
transaction because
they feel the need
to win at someone
else’s expense.
incorrectly apply unrelated attributes
or circumstances to their own situation,
whether that is comparing different
brands, geographies, growth potential,
or otherwise. We have had more than
one industry participant try to justify
why their franchise business should trade
at the same valuation multiple as their
publicly traded franchisor.
Then there are those clients who just
want an “off-market” transaction. While
these deals do happen occasionally, they
are by no means the norm. If this is the
only kind of transaction you are interested
in, it is imperative that you communicate
this early and openly; the market will take
you more seriously if you concede the
position that you are interested only in
an opportunistic valuation. However, it
is also necessary to recognize that even
opportunistic valuations must be based

in legitimate market realities. Parties
that want to buy at a 4x multiple but sell
at 8x need to realize that although this
situation is entirely appealing, it is also
completely impractical. Not only will
chasing after such outlandish valuations
never result in transactional success, it
will also do you a reputational disservice.
Again, the marketplace is well-informed
and does not overlook or accept nonsensical valuations.
The second greatest source of failure
is the lack of understanding of fairly accepted commercial purchase agreement
terms and standards. Successful buyers and
sellers engage knowledgeable M&A advisors and attorneys to help them through
this part of the process. Others attempt
to “go it alone” or engage a familiar attorney used for general business activities
versus one that specializes in transaction
work. Failing to use credible advisors in
an M&A process will not only cost you
time, it will almost certainly cost you
treasure and potentially the deal itself.
These advisors use a relatively standardized set of documents to provide
consistency and reduce the recurring
need to over-negotiate each transaction
from the ground up, while simultaneously
helping to eliminate some unnecessary
brain [XY