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In Today’s Email:

• 🤝 How to build a deal team

• 🎤 TSwift as Private Equity firms

• ✍️ Learn to write better

THE DEEP DIVE

Behind the Scenes of M&A: Unveiling the Key Players and Their Roles

This is week 3 in an 8 week season covering the world of M&A from the seat of the CFO

Many years ago I was leading the sale of one business unit from within our Group.

We had identified a preferred bidder.

Well, I say ‘preferred.’

They were the only bidder in an acceptable range.

Truth is we needed them.

We had concerns about their ability to run to the deal timeline.

But still, we didn’t have many options.

They insisted on exclusivity over discussions. This allowed time to finish the documents and close the transaction. (More on this next week)

What followed was a nightmare.

What should have been a simple 4-6 week close, ended up taking over 6 months.

It became clear that the buyer was working on 2-3 other transactions at the same time. All with a very skinny corp dev team. And they were totally intent on running our deal at the pace that suited them.

Weeks would go by with nothing happening.

We had little choice other than to hang in there. We needed to sell the business, and they were the only ones with serious interest.

We assumed it was an attempt to re-trade the deal.

But, no.

They eventually completed on the terms we agreed. Just 6 months later then expected.

We were dealing with a criminally under-resourced (and not very professional) counter-party.

I’ve come across this kind of experience a few times in M&A.

Any deal is only as strong as its weakest link.

So, getting your own team right is crucial.

That doesn’t mean a gold plated team.

It means the most fit for the job. And part of that is knowing who you are dealing with on the other side.

We’ve covered M&A theory and valuation. Over the next 4 weeks we are getting deep into the M&A process itself.

Understanding who all the different actors are in an M&A deal is a minefield if you are an M&A virgin.

And even if you aren’t, every deal is a bit different.

By the end of this post, you will understand the different roles and responsibilities in M&A. And where the watch outs are.

We’ll also cover some practical steps to getting M&A experience.

In the heat of a deal, things get messy fast. So much of M&A is about great project management.

M&A projects are complex.

Not always long, but complex.

And fragile. Man are they fragile…

Primed to fall to bits at any moment.

Good M&A execution means anticipating and removing roadblocks at every stage. Micro management of detail.

And all this is happening at a breakneck pace.

If it’s not clear who does what, it falls apart.

Anyway … onto Corporate M&A Deal Teams.

There are three types of party in most M&A transactions:

1. The Target

2. The Seller(s)

3. The Buyer(s)

Both the Seller and the Buyer could be ‘corporate’ shareholders, or private individuals.

In a simple deal, there will be one seller and one buyer. That will mean two deal teams, one for each (on opposing sides of the negotiating table).

Bare in mind a seller could be dealing with multiple potential buying parties, even in a simple deal.

To keep things simple, we are going to assume a single buyer and a single seller.

Deal teams will be made up of:

• Principals; people who work for the seller / buyer.

• Advisors; hired guns working for the principals to deliver a deal

• Intermediaries; those who sit between between the teams to make a deal happen.

Principal Team

Whilst the agendas will be different, the structure of the seller and buyer principal teams should be similar.

This is by design. Having a clear ‘man-to-man marking’ (or woman to woman) lineup is the best way to get a deal done.

Here are the key roles within the Principal Teams:

Note: some of these roles could be performed by the same person / people dependent on deal structure, strategy, size and complexity.

Deal Lead

This the person who leads negotiations and deal strategy on behalf of the buyer/seller.

Often the CFO, or the CEO, VP Strategy, VP M&A or equivalent. Dependent on deal size / importance.

They are the one who is going to get blamed if the deal turns out to be bad. Their incentive is to get the deal done at the right risk reward profile.

Project Manager

This role is all about execution. The hard work.

An all consuming full time job. Coordinating the internal resources, and advisors to deliver the deal timeline. They often are the internal M&A specialist; VP of M&A/Corp Dev or similar. They must have M&A experience, plus great communication and project management skills.

Project Team

These are foot soldiers working for the project manager. On a smaller deal this might be one person, on a big deal it could be many people. Most of their time gets spent working on the data room (more on that next week). These are also full time project roles. Their responsibility is to do the legwork on the deal whilst protecting the business from transaction distraction.

Workstream Leads

Within the project there will be some workstreams that need subject matter expertise. Corporate finance, legal, tax, commercial, operations, procurement, HR, environment, insurance, ….. to name a few.

The worksteam lead will normally be the relevant internal subject matter expert from the business. They will be providing their input alongside their day jobs in the business.

Sometimes this gets supported with external support if resources are short.

Internal Sponsor

This role is specific to the buy side. This is the President / CEO that will be responsible for the target if the deal happens. Said another way, this is the person that will get fired if the assumptions in the deal business plan are not delivered.

They will not have an active role in the deal itself, but will need to sign off on the business plan financials, because shorty, they’ll own them.

Board

The Board are there to oversee and ultimately approve the deal. They will support and challenge the Deal Lead to ensure the transaction is right for the business.

The Board can also double as a ‘higher authority’ in the negotiations. Playing the role of the ‘faceless decision maker in the background who is hard to please’. If you have done any form of negotiation training, you’ll know how powerful this negotiating technique can be. If not, read this

Advisor Lineup

You will need support with the right advisory line up. If you are serial M&A dealers, you may want to internalize and build some of this skill in house. But in most circumstances it’s most efficient to buy it in as a hired gun when it’s needed.

Good advisors are expensive.

But good advisors pay for themselves 10x on big transactions.

If you do need a hired gun, hire the sniper who makes the 2 mile kill shot and never misses.

These folk are normally paid on a time cost basis or a fixed fee subject to a fixed scope.

The fixed fee is often a sham though. They will always find an excuse to claim scope creep and bill an over-run.

Don’t kid yourself, you are paying for their time (at $1,000+ an hour). So make sure they are efficient.

It is impossible to get good advisors, to agree to a fee that is contingent on closing.

The best know they don’t need to agree to this to win work.

Legal Advisors

They are here for two things:

1. Conducting Legal Due Diligence to surface possible legal issues in the target

2. Negotiating the detail of the transaction documentation

The quality of the legal advisors will make or break the deal. A huge role. Good lawyers are worth their weight in gold.

They can make the deal happen, or grind it into dust.

You must use M&A specialist lawyers. This won’t be a problem for any big law firm.

Financial Due Diligence Provider (FDD)

This is the work to validate the financials of the target. Particularly the Quality of Earnings. We will have one whole newsletter dedicated to this point shortly.

FDD is often provided by a Big 4 Transaction Services team.

It feels a bit like an audit, but with more experienced people. And focused on budgets, forecasts and performance trends, rather than balance sheets and source documents.

It's all about assessing the financial assumptions in the business case.

It’s possible to do this work in house, but Boards normally want an external report.

It gives them someone to sue / blame if things go wrong.

My preference is to build in house capability on FDD if I'm in a position as a serial acquirer. It's much cheaper and more focused.

Much more to come on this topic in future weeks.

Specialist Due Diligence

It is possible to source external due diligence for almost anything. Commercial DD, operations DD, environment, insurance, IT, HR, and so on.

It works like FDD, but with a different focus.

I prefer to only use these by exception. I rely on my workstreams leads for expertise.

Specialist DD comes into its own where there is an assumption which makes or breaks the deal. And there is some uncertainty that needs extra pressure testing.

For example, if a deal hinges on a real estate value, you get a specialist valuation done.

Specialist DD is also used where a seller isn't comfortable providing information directly to a buyer (who could be a competitor).

For example, if a deal is based on an assumption of 3% procurement savings from synergies. By using a procurement DD specialist you put all data into a 'black box'. The procurement DD specialist provides an independent view of the savings potential.

Managing Advisors

The key with all advisor management is:

1. Very granular scope of work.

2. Only use what you need. Distinguish added value from added cost

3. But then hire the best

4. Create milestones to minimize abort fee risk. These guys want paying whether you close the deal or not.

Legal and DD fees could run to 1-2% of deal value.

And that doesn't include the most expensive of the bunch. Which brings us to Investment Banks...

Intermediaries and Investment Banks

Investment banks are responsible for playing the role of intermediary. The appointed sell side Investment Bank would be responsible for running the transaction process.

A buy side investment bank would be advising their ‘client’ on the best way to succeed on a process. I’ve never used a buy side banker, I prefer to know the sector well enough myself.

An investment bank's value is in their sector expertise, deal experience and contact network. They spend all day every day running deals and networking in the sector. They know who has the money and appetite for a deal and who are the tire kickers.

They could be a global investment bank, or a boutique industry specialist.

Typically investment bankers get paid on success, and linked to value (with a ratchet). Their incentive is to get a deal done. Sometimes at any cost. The fee structure is critical to align incentives. They are typically paid 1-3% of enterprise value, dependent on role and performance.

Funders

For a buyer who needs ‘new money’ to fund a transaction they will also need to manage a conditional fund raise. This could be debt, equity or both.

This is yet another reason for a deal to fall down.

We’ll cover more on the circularity between funding and a deal process in future weeks.

Target Management

At the start we said there were three parties; seller, buyer and target.

We’ve talked about the seller and buyer teams, but not the target.

There is a reason for that.

They are the NPC (Non-Playable Character) in this particular video game. M&A is extremely distracting.

Having a great deal team is important so the management of the target can carry on with running the business.

In a PE sale, the PE fund will take on the ‘deal team’ roles as shareholders, and leave management to run the business as much as possible.

I’ve seen plenty of deals fall over because the target performance hit the rocks during the deal process. The seller will be doing everything they can to avoid this, so will be very protective about how and when the buyer can speak to target management.

There is also significant conflict of interest risks to manage here.

They will have some information to provide, and will need to deliver management presentations. But the aim should be to limit the blast radius of the nuclear distraction as much as possible.

Good M&A management swallows as much work as possible into the project team and away from BAU.

Bringing this together, here is a summary of the roles needed in a deal team:

How does a non-M&A finance pro get M&A experience?

This is one of the most common questions I get. “Experience is important for M&A. how do I get it?”

If you are in the Big4, I would recommend grabbing a year in the FDD team before you move on if you can.

If you are working in a business, make sure they are engaged in M&A. You can’t get M&A experience in a business that doesn’t do M&A.

If you are proximate to M&A for long enough and show enough interest, you’ll eventually get a chance to be in the project team, or run a workstream. That might be providing information / modeling, without seeing or hearing much back. But the exposure alone will be formative.

Then soak it all up. It’s a different world to your day job, so don’t miss the learning opportunity. Then next time you can get a bigger role in the project, moving nearer and nearer the epicenter of the deal.

Working in a Corporate Development team will give you direct exposure. But it also takes you out of the core business. So mind the trade off here.

Remember, if you want to be a CFO, good reps on the financial management cycle are the most important thing.

You won’t get that sat in a corp dev role for three years.

Those are the fundamentals for building a deal team. We will build on this significantly over the coming weeks, as we dive deeper into the M&A process. We will return to the roles in the deal team again and again over the next few weeks.

So if you have unanswered questions at this stage, I hope they will be covered soon.

Next time we will take a step by step walk through of the ‘buy side’ process for corporate M&A.

THIS WEEK ON TWITTER

My Twitter BFF created a thread for the ages, with Taylor Swift posing as different Private Equity firms

Meanwhle, I’m bearing down on the hundy…

BOOK CLUB

Many have asked me how to get better at writing (after my last post).

This Book Will Teach You To Write Better by Neville Medhora is the inspiration for my Secret CFO writing style.

You can read it in less than 30 mins, and it will change how you think about writing for impact.

FEEDBACK CORNER

A review of the last edition:

It’s great when my content hits people at a time when it’s particularly live or useful for them. This review was especially satisfying as it was from an OG twitter follower.

REFER A FRIEND, GET A GIFT

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CASHFLOW TIP OF THE WEEK

Anyway …

That’s all for this week. As always you can find me here:

• CFO Secrets

• Twitter

• LinkedIn

• Threads

Next week we are going to get deep into the process of buying a business.

Until next time…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.