By John Kahn and Matthew “Matt” Podowitz, Partners at CFGI, the nation’s largest non-audit accounting advisory firm and a portfolio company of The Carlyle Group and CVC Capital Partners.
This article summarizes key points from John’s and Matt’s fireside chat at the 2023 M&A South Conference. Organized by ACG Atlanta, the Conference was attended by companies, private equity firms, investment banks, and others in the corporate growth ecosystem with a Southeast U.S. focus.
In today’s business environment, getting transactions to “Close” can be a challenging process, with a multitude of obstacles that need to be overcome. The due diligence process plays a crucial role in ensuring that all parties involved have the information they need to reach an agreement. However, even with exclusivity periods and the window to perform due diligence shrinking, the effort to get transactions to close is expanding while the time to do so is not. There are many factors contributing to this, including the need for more information from a broader range of parties, the need to handle certain tasks pre-close that were previously handled post-close, and the longer time frame for completing certain post-close tasks, particularly in complex transactions like carve-outs and integrations. In this context, it is critical to explore the challenges of getting to “Close” and to identify ways to address them effectively.
The challenges of getting transactions to “Close” are numerous, with various factors contributing to the complexity of the process, for example:
- The demand for more information from a wider range of parties.
- Internally, investment committees and limited partners require more details to ensure that their investments are sound, and the pressure on buyers to achieve their thesis means sellers need to provide more assurance than ever before. Additionally, lenders and insurers are more cautious than in the past, as buyers attempt to pass more risk to them. Furthermore, there is increased risk in areas such as cybersecurity and privacy laws, resulting in demands for more detailed diligence reports by specialist providers.
- Third parties, such as vendors responsible for transferring material agreements, are taking longer to provide consents and waivers, requiring more compensation or concessions for conveyance or third-party benefit/use during and post-transition.
- The need to handle more things pre-close that were traditionally dealt with post-close.
- Non-material agreements, such as janitorial services, and employment agreements for non-key employees, now require attention pre-close, with the current inflationary environment requiring close attention to avoid killing the investment thesis post-transaction.
- Things that must start pre-close, even though they cannot be completed until after the transaction closes.
- Onboarding acquired employees can take weeks, with payroll vendors requiring months of notice rather than days. There is less capacity in the system, resulting in less flexibility, and delays could damage relationships with employees. The same is true for changes in banking relationships, where more regulations and strictly enforced know-your-customer (KYC) rules require attention pre-close.
- Other tasks, such as conveyance of company car leases, company credit/purchase/gas cards, company-provided cell service, non-health/retirement benefits, and employee loans, require careful planning and a start to execution pre-close to ensure they are handled effectively post-close.
In conclusion:
- The current due diligence environment has become more challenging, with many parties demanding more information and traditional hedges like a good multiple being less effective against new risks, as today’s environment also features increasingly divergent views between buyers and sellers about underlying enterprise values.
- To mitigate these challenges, buyers and their supporting lenders and insurers are increasing the breadth and depth of due diligence, accelerating traditionally post-close activities, and carefully crafting investment theses to set achievable expectations. Under-promising and over-delivering is a key point to keep in mind for management dealing with private equity investors, as well as the need for more to happen pre-close and the importance of starting post-close activities earlier.
- Finally, while historical research shows that around 70% of M&A activity fails to meet expectations, this can be as much, or more, about not setting realistic expectations than anything else. In this case, being less aggressive with goals and more focused on delivering on promises will increase the probability of realizing value in line with the investment thesis.
With these key takeaways in mind, transactions can be more likely to successfully close and achieve their intended goals.
About the Authors
John Kahn brings 25+ years of experience with public companies, private equity portfolio companies, and other private companies to his clients as a Partner at CFGI. A Chartered Accountant (Fellow, ICAEW) and Certified Public Accountant (California), John’s experience includes complex US GAAP and other accounting interpretations, CFO and interim CFO services, M&A post-merger integration and carve-outs, hyper-growth, going public readiness, de-SPAC transactions, turnaround, and other advisory work, often with international or global aspects, and in many industries. John is contactable at jkahn@cfgi.com.
Matthew Podowitz is a Partner in CFGI’s Transaction Advisory Services practice, providing operations and technology platform readiness, buy-side and sell-side diligence, carve-out, integration, and transition services for over 28 years and on over 300 M&A transactions. His transaction experience includes companies ranging from $25M to over $5B in revenues across a variety of industries and on every continuously inhabited continent on Earth. Matt can be contacted at mpodowitz@cfgi.com.
