How To Avoid M&A “Quicksand” As A Buyer Or Seller

Stefan Palios

Whether buying or selling a company, you will have a lot of work on your plate. You’ll also have a lot of pitfalls you’ll need to navigate. In his 20-plus years of banking experience, David Rozin, now the Head of Technology and Innovation Banking at Roynat Capital | Scotiabank, has seen every kind of M&A deal and knows the opportunities and risks. Speaking with ahead of his conference talk, David shared more about how founders can avoid the “quicksand” of M&A deals.

Key takeaways:

  • M&A activity is likely to pick up in the next few quarters as stronger companies look to further strengthen their positions through acquisition and weaker companies look for a way out.
  • As a seller, you have to make sure you’re set up internally for due diligence and run a formal, structured process to get the best possible outcome.
  • As a buyer, you need to make sure you’ve set a strategic framework in place to help guide decision making before going to market.
  • Equally, if not more important for buyers; conceptualize how you would integrate the acquisition across operations, technology and culture.

Despite a steep decline in M&A activity at the beginning of 2023, David Rozin is optimistic the pace of deal flow will materially improve over the near term. As Head of Technology and Innovation Banking at Scotiabank, he’s already seeing activity begin to trickle back up and has noticed that buyer and seller incentives are more closely aligned.

This all bodes well, but the reality is that selling (or buying) a startup is still a huge time commitment—and there are pitfalls that can easily not just derail an acquisition but damage your business in the process.

Speaking with ahead of his conference talk, David shared more about how founders can avoid “quicksand” during M&A transactions. 

For when you want to sell your startup…

Whether you’ve realized you no longer want to be involved, known that selling was your intention all along, or another reason entirely, selling a startup will take a lot of effort.

But even for those founders willing to commit the time, there are still many things that can go wrong.

1. Not getting internally set up: If you want to sell your company, it needs to be ready for the acquisition due diligence process. In particular, that means documenting your key person risk, your tech stack, customer cohort analysis, management bench strength, and base level legal documentation (e.g. standard employee and customer contracts).

“Entrepreneurs often underestimate the amount of time and thought that needs to be put into preparing their company to go to market,” said David.

2. Not running a formal sales process: While there’s some truth to the adage that “great companies are bought, not sold,” founders need to be careful—simply having conversations without a plan is a recipe for issues.

“When an entrepreneur enters into these discussions, they’re often not in the position of strength they believe they are,” said David. “Acquirers are constantly running processes and are practiced at shaping negotiations, armed with a good sense of market prices and terms. Entrepreneurs having one-off conversations may be at a disadvantage regarding price and not always clear on the type of outcome they’re seeking.”

To avoid this issue, David advises founders to be honest with the level of involvement they want after the exit, what type of buyout they want (cash now versus stock or contingency), and the overall type of exit they are hoping for (full or partial). Further, entrepreneurs need to spend time understanding the current market and what the value of their company is likely to be. One additional benefit of preparation is being able to defend market value and terms, being clear on what is an acceptable deal.

3. Not prioritizing your business: Founders also need to run their businesses, not just to be attractive acquisition targets but to continue building in case the deal doesn’t go through.

“What often happens is the deeper you get into a process, the more you've taken your eye off of running the business, expecting you're going to transact,” said David. “If that transaction falls through, getting momentum to return again to the enterprise is often quite challenging.”

4. Not being realistic compared to market conditions: Valuations are changing—for 2023, that direction has primarily been downward compared to 2021 and 2022.

That doesn’t mean this will happen forever, though. David is already seeing more predatory buyers being rejected in the market for unfair offers. Further, David said companies might have a better chance at getting “the right type of valuation” by working with a strategic M&A advisor who can help you create a buyer list and do internal preparation for a sale.

The point is to be realistic about what you have and what the market will bear in whatever conditions are when you start your process.

For when you want to grow through M&A…

M&A-fueled growth is a massive opportunity to acquire talented individuals, a customer base, and a new product… but only if you do it right.

Here are the pitfalls that David sees most often for companies looking to be the acquirer.

1. Not having a strategy: Founders need to have clear objectives regarding M&A; for example, launching in a new geography.

Once you have an idea of what you want from an acquisition, you need to continually scan the marketplace and further, understand what these types of assets are trading for.

“[Founders] need to educate themselves on similar transactions that are taking place so they really understand how much what they're looking to buy is worth,” said David. “They also need to understand how to evaluate a potential target and under what conditions that process should be halted or continue forward.”

2. Not having the right infrastructure in place: If you find a great deal, you want to move quickly and decisively. But you can’t do that if you don’t have M&A infrastructure in place, including both your M&A team, key leadership, and the right financing.

From here, you need an idea of what deal structures you want—asset sales, share purchases, cash up front, stock offering, contingencies, and other considerations around founder involvement post-sale. The final consideration is tax implications, which David said is typically forgotten about but can derail the profitability of a deal.

3. Not having an integration plan: After the contracts are signed, you have to start acting on your M&A goals—that requires integration. According to Justin Ouyang at OMERS Ventures, you’ll need to have a plan for business performance, operational integrations, and various employee metrics.

“The real work happens after the purchase is made,” said David. “That's where value creation happens.”

The M&A thesis is evolving

During turbulent economic times, the “M&A thesis,” as David calls it, comes into full swing. Many companies took measures to weather the storm, stronger businesses are emerging with better metrics, growth and capital to deploy. Of those remaining, some will be facing challenges; unfortunately for some, those challenges are existential, whether that means barely surviving or staring down a fire sale.

This is one of many reasons why David thinks M&A activity will pick up in the next few quarters.

“Strong businesses recognize there are benefits combining with or acquiring someone else,” said David. “Others need to be practical and honest about whether now is the time for them to exit; they need to be open to offers and realistic about what they can command in terms of valuation. For both groups, they need to be properly prepared for those discussions, have access to the right advisors and be ready to act.”