Big Deals vs. Small Deals: What's the Difference?
In talking to potential sellers, we are often asked about the work required for a small deal when compared to that of a big deal. Most people in the industry will answer this by saying: the work is the same, so they would rather do big deals! Well, this is only partly correct. Yes, the journey towards the deal can be very similar as one needs to prepare marketing documentation, build financial models and research where to find the best acquirers in each case. But the real issues arise with the deal making and deal conclusion processes.
For example, we are busy concluding a large deal between a local distribution business and an international private equity firm (with a deal value close to R500m). With opportunities of this size the competitive behaviour between acquirers is often more pronounced and there is a lot of activity in the offer and negotiation process – more than one is likely to achieve with smaller businesses. That said, when acquirers on larger deals get to a non-binding agreement on deal structure and price, they are typically well prepared in terms of due diligence processes and other transaction advisors such as lawyers and tax advisors, so they are able to work through large amounts of information quite efficiently.
By contrast, we recently sold a smaller manufacturing business with a deal value of around R60m. This was a highly efficient process with the buyer doing most of the due diligence work themselves. In this particular case, the acquirer did a superb job of building trust between himself and the sellers, resulting in a very smooth deal conclusion process. The opposite has been the case on another relatively small deal which we are busy concluding (a R30m plant hire business) where the lawyers on each side simply could not find common ground. That deal is two months overdue!
Ironically, one often forgets that there is still an entrepreneur behind larger business transactions. Although the sales process may seem more efficient, and the general sophistication of the acquirers of larger businesses is more pronounced, the emotional roller-coaster that the business owner goes through cannot be forgotten or over-looked. This is a real risk for a larger deal and we offer a much needed support framework that gives our clients assurance every step of the way.
So, what are the real issues when comparing smaller and bigger deals?
Trust is vital. Clear up the difficult issues early on.
Sellers are sometimes relatively naïve and are often surprised by the extent of the legal and financial processes involved.
Buyers often bring processes designed for much larger deals, frustrating the seller who (rightly so) expects the process to be simple.
These take longer but are often more efficient given the size and complexity.
With listed companies, or large private equity firms, involved, the administrative processes can easily add three to four months to the deal duration.
There are a lot more advisors involved, which is fine when everything goes according to plan, but can create a real mess when things don’t!
So yes, there is ultimately a lot more work with larger deals, but to be honest that does not always determine the time taken from the day you approach the market, to the day the money lands in your bank account. The two large deals mentioned above will have durations of between 9 and 11 months, while the two smaller ones have durations of 14 and 20 months!
With this being the last newsletter of 2020, we will all look back on the year with a broad range of emotions. We often refer to the roller-coaster that our clients go through when selling their businesses, but we could not have predicted the roller-coaster that 2020 was for all of us. We have been tested personally, professionally and financially and have come out the other side, wiser, stronger, humbler and in need of a serious break.
From both of us, we would like to thank our clients and network of local and international acquirers for their support and belief in the DLA brand. We wish all of you a safe and restful Festive Season and only the very best for 2021.
Lastly, and most importantly, we would like to thank our amazing team for stepping up during these challenging times and doing themselves, and our brand, proud. They have all displayed professionalism, commitment and resilience when we needed it most. We couldn’t have achieved what we have this year without them, and for that we will be eternally grateful.
Be safe and best wishes,
Andrew and Rick