Thinking about common themes among the hundreds of deals he's done, LCG Advisors Managing Director Jay Clark says from the buy side, it starts and ends with leadership, management, and culture.
"If I've seen deals that have blown up afterwards, it's almost always because they didn't meet the needs of the current leadership that's going to continue on, or they didn't understand the culture of the company, tried to change it to quickly to bring it in," Clark said at last year's Denver Smart Business Dealmakers Conference. "So, from my standpoint, there's a lot of things that screw up a deal that you need to focus on. But if I was going to give everybody some advice: spend more time on leadership and management and continuity then you do on almost anything else."
As someone who see a lot of different businesses, Clark says recognizing red flags requires understanding the drivers of a particular business in a particular market. That, he says, is the first piece of the puzzle, especially for the buyer.
"From an investment banking standpoint, we're doing our own diligence upfront," he says. "And if a good investment banking firm has done that, you hopefully have identified as many of the risks and weaknesses as possible. You've already got a strategy for mitigation."
He says transparency to the buyer side helps ensure a smoother process and a greater chance of closing.
"We never encourage our clients to hold back on anything, especially with the goals for the management and the owners," Clark says. "If you don't get that out of front, you're going to have a failed process."
As an adviser, he says he does the work upfront because he knows what's coming is going to be difficult.
"I'm not really an investment banker. I'm a packager, positioner, and I'm a psychologist, that's really what I am, because of the ups and downs you're going to have," he says. "The first thing I tell any potential seller: hire a good adviser, have a good team, because you're going to need them because you're going to have ups and downs, because these guys are all going to ask for stuff that's going to seem daunting. And we know it's really not. So, that's a big piece of the puzzle."
When representing a seller, he says it's important to understand the buyer's exit strategy.
"In many indications where, especially if you're going to roll over or you have management that's going to be looking for an off ramp, to really understand that piece of the puzzle is going to affect who a particular seller will consider as a buyer," he says.
If the buyer can't articulate what their thought process for the next few years, and the seller is going to continue on as part of the capital stack, the seller might want to consider another buyer.
"I tell them the same thing: whatever they tell you it's going to be wrong, but at least directionally you have an idea of the thought process they're going to be, because you certainly don't want to go somewhere where, hey, we're going to sell in five years, and in five years, it's bad market and you need to hold longer," he says.
