Keep your eye on the big picture during negotiations
Recently, we represented a multi-unit operator in the sale of a tier-one franchise business that had to overcome numerous hurdles to achieve a successful outcome. The company had suffered as a result of the recession, challenges in the local economy, and some operational challenges on the part of the existing operator. The company was underperforming the brand and lacked the resources needed to pull itself out of its downward spiral. Many units were old and tired, and in desperate need of remodeling. Several units needed to close. Operations had suffered and turnover and employee morale were a continuing challenge.
To arrive at a successful transfer, concessions were required from landlords, lenders, and the franchisor. During the process, and afterward, we were able to reflect on the unwavering commitment and perseverance of the buyer, which were paramount in reaching the finish line. The character, tenacity, and insight we observed by the buyer were so compelling and refreshing that we just had to share the story.
In our more than 30 years of doing transactions, we've seen a lot of different types of buyers: strategic buyers, financial buyers, consolidators, opportunistic buyers, you name it. We've seen parties to transactions make many mistakes along the way, but we have also seen many successes. What this particular transaction reinforced for us is that to get it done, an acquirer must have a truly intuitive feel for the opportunity up front, and an unwavering commitment throughout the process. This particular buyer was able to look past the "small stuff" because he had a clear view of the big picture: the tremendous value he knew he could create. The opportunity was not centered on what the seller had or had not done, but rather on what the buyer knew he could do with the business.
The buyer in this instance was a very successful, long-term industry player with a tremendous track record. His focus was on assessing the value of the opportunity and what it meant to his organization--before submitting his offer to acquire the business. He also knew that investments in people, facilities, systems, and operations would result in dramatic improvements to the business. He never lost sight of the prize, and once he decided to move forward all hurdles were treated as if they would be overcome. His focus from the very beginning was to close the deal without getting hung up on the obstacles of the process.
He also understood the importance of demonstrating to the seller that he was the right buyer for the business. He removed any doubts about his commitment to close. He resisted the temptation to be "penny wise and pound foolish" in negotiations. Of course, he understood there would be some financial issues from the onset, and factored that into his initial assessment of the business. The buyer was not going to let minor price negotiations (correct as he may have been) kill the deal. Too often, if not truly committed to the big picture from the start, a buyer can kill a deal over minor items that can arise in due diligence. He understood this was right deal for him, and he wasn't going to let it slip away.
This all sounds simple enough, but often this isn't the case. In a deal world consumed by data, financial models, and over-analysis, many buyers have lost their ability to intuitively assess an opportunity and fail to rely on their instincts.
The ability to assess the future potential of a transaction over a longer-term horizon separated this buyer from an overreliance on trailing multiples or standardized financial models that didn't fully portray the potential of the business. We are not suggesting that financial analysis and due diligence are unimportant; to the contrary, they are a critical part of the overall assessment process. What we are suggesting is to not let historical data completely control your decision-making and lose sight of your ability to stand back and assess the situation.
Furthermore, invest the time up front to define the right strategic characteristics of a transaction for your organization. Not all transactions represent the right fit for all companies. Know what is important to you. Many buyers we come across don't really even know what they are looking for in a transaction. So how can they know if the right situation is staring them in the face when they have no idea what they should be looking for? We are reminded of the old adage: "If you don't know where you are going, any road will get you there."
Finally, if you come across an opportunity that seems to meet your criteria, invest the time up front to fully understand the transaction before presenting an offer. Too often, buyers want to chase and prematurely lock up a deal before they truly understand it, only to back off or re-trade on it once they dig in and assess the transaction. Attempting to understand the details of the business only after a deal has been agreed to is often a recipe for disaster--for both parties.
In conclusion, establish criteria for what you are seeking in a deal. That way you will recognize the right deal when it becomes available. Do your analysis, but focus on the big picture. Ask yourself, "Given my skills, experience, and organization, what specific avenues to create value does this opportunity present to me?" And then, don't let distractions derail the process: have the tenacity to see it through to a successful outcome.
Dean Zuccarello, CEO and founder of The Cypress Group, has more than 30 years of financial and transactional experience in mergers, acquisitions, divestitures, strategic planning, and financing in the restaurant industry. The Cypress Group is a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for more than 22 years. Contact him at 303-680-4141 or firstname.lastname@example.org.
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