Sometimes all this results in a happy marriage with healthy offspring. Sometimes not.

     Locally, and internationally, the 2005 Sprint-Nextel nuptials were among the biggest and most important in recent years. The deal, worth $35 billion, has great potential and the stakes are high—Kansas City’s economy needs Sprint’s revenues, jobs, and community involvement.

So far its relationship with Nextel seems, uh, companionable. The partners are working hard to overcome cultural and structural differences that frequently complicate such unions.

     Though it doesn’t compare to the Sprint-Nextel transaction, if approved, Great Plains Energy’s $1.7 billion bid to purchase Aquila will be a big deal by any measure. Shareholders of Aquila and Great Plains—parent company of Kansas City Power & Light—are expected to vote on the proposed acquisition later this summer.

     Just last week, YRC announced its intent to buy the Chinese trucking firm Shanghai Jiayu Logistics Ltd. for $115 million—not exactly chump change.

     The Kansas City investment bank Christenberry Collet reports that, in 2006, local companies were involved in 112 major deals, an increase of eleven over 2005. The bank says that in 60 of these transactions, local companies were buyers. In the previous two years, Kansas City businesses were more often acquisition targets.

     Multiple acquisitions fueled the growth of local propane company Inergy. The firm purchased ten businesses in 2006, leading all other local entities in acquisitions.

Size Matters

     Many, if not most, sales and purchases of businesses take place well outside the spotlight of media attention and are unlikely to show up on lists compiled by business publications or investment banks. The companies involved are privately held small and mid-size firms. And though these deals don’t typically make headlines, their impact on the local economy is significant. 

     Ross Franken, managing director at the Kansas City offices of the accounting firm RSM McGladrey & Pullen, says merger and acquisition activity has increased significantly locally, nationally, and internationally over the last several years. “The economy has been generally healthy,” he says. “Buyers feel as if this is a good climate for that kind of risk.”

Control Issues

     Franken points out that another major factor in the increased level of M&A activity has been the trend of investing in private equity and venture capital funds. “These funds have lots of cash,” he says. “And they’re using it to buy businesses.”

     Finally, Franken notes, business owners of the Baby Boom generation are reaching the age at which they’ve begun to think about retirement. “This is a good time for many of these owners to sell. There are plenty of buyers out there. And, frankly, they’re looking to slow down, maybe spend more time with their families.”

     Owners of family-run businesses need to keep key factors in mind when contemplating sale of their operation, says Franken.

     “The one thing many owners don’t fully appreciate is that venture capital and private equity inves-tors will want to see a professional management team in place before they buy. They want to know that when the seller steps away from the business after the sale, that there’s a good, solid team of managers in place that can keep the organization running smoothly and profitably. However, it’s this step that many owners of small and mid-size firms find so difficult to take. It means giving up control to people perceived to be outsiders, people outside the family. But, if you think you want to sell your company, you can’t keep running it by the seat of your pants. You have to invest in top management talent.”

     Difficulty in giving up control is frequently cited by accountants and attorneys in the M&A practice as a factor that many sellers don’t anticipate.

Mendy Kwetzel, a partner in Grant Thornton’s Transaction Advisory Ser-vices, says that buyers will often negotiate into a deal that the seller will stay on after the sale in some capacity, frequently as a consultant to help in the transition to new ownership.

“For a seller, adapting to this new role can be a real problem. He may expect to do things the way he’s always done them. He tends to forget he doesn’t own the place or run the place anymore,” says Kwetzel. “This can create tension and anxiety for the employees of both the buyer’s company and the seller’s company. And for the buyer, the problem is that he felt it necessary to keep the seller on in some capacity for important reasons—because his experience, his institutional memory, his specific skills, or customer relationships were considered valuable. But if those are all lost because of tension or role confusion, then the buyer doesn’t have all the assets he thought he had.”

1 + 1 = 1?

     Kwetzel says integration of the two businesses after the sale is actually the most critical phase of the transaction.

     “That’s what’s going to determine the success or failure of the deal. There may be significant difference in the cultures of the two organizations. Folding employees into a single workforce can pose very real problems, especially when it comes to defining new roles, responsibilities, and titles. There has to be lots of honest communication. And then there are the questions of how to integrate relationships with vendors and suppliers, and, of course, customers.”

     Melinda Yee, partner in the M&A Transaction Services practice at Deloitte & Touche LLP, says the process of smoothly merging the two entities has to start early.

     “The integration of the acquired company’s operations needs to be planned and executed. The full potential from synergies created from the combination are not realized when the target is not adequately integrated.”

     Kwetzel observes that there some issues that complicate a post-trans-action transition that are easily and frequently overlooked.

     “For example, IT systems are not always compatible. That can be a costly problem to resolve, but it’s not something that you necessarily think of during the negotiations. And if you’re buying a business in the same industry—a competitor—you might each have been selling the same products under different pricing structures.

For example, if you’re both chemical companies, and you’ve been selling a certain Chemical A for 18 cents per gram and Chemical B for 56 cents per gram, and the company you’ve just bought has been selling Chemical A for 20 cents and Chemical B for 46 cents, your customers are likely to want the lower prices for both chemicals. How do you integrate the pricing in such a way as to keep your customers happy and stay profitable?”

Teamwork

     Accountants, of course, are good at figuring out such things as new pricing structures. But buyers and sellers frequently don’t take the time or make the effort to assemble the best possible team of advisors to assist in the sale and purchase process, and in the transition process post-sale.

      Douglas Deady, of the Kansas City-based investment bank Christenberry Collet, says hiring competent advisors is the single most important thing

a buyer or seller can do to ensure the best outcome.

     “They need to have a track record of successful transactions,” he says. “They need to be specialists who spend most of their time doing M&A work.”

     In addition to expert experienced advisors, Deady says there are a number of other factors that determine a successful sale:

•     The buyer and seller must agree on a reasonable valuation range;

•     The buyer and seller must have similar time frames for conducting the transaction;

•     The buyer and seller must have similar business philosophies and their companies must have similar corporate cultures;

•     The buyer and seller must come to a shared vision of who will manage the company—existing managers or a new management team.

     Scot Hill, partner in the General Business Division at Stinson Morrison Hecker LLP, also stresses the importance of hiring a good team.

     “You need advisors who are not adversarial.  Clients sometimes make the mistake of hiring an aggressive lawyer to represent them. Too often that can backfire and cause a lot of problems in getting a deal closed. Plus you need advisers who will educate the client on the process. Most smaller companies have not grown through acquisitions, so they are unfamiliar with the process, which can be a little overwhelming at times.”

Pitfalls and Roadblocks

     Deady says that, in his experience, there are common mistakes buyers and sellers make in an M&A transaction. Because they’re common and frequent mistakes, they can be anticipated and steps taken to avoid them. Some of these include:

•     Failure to create a financial model that reflects the existing business, the acquired business, and the combined business, with financial projections;

•     Unrealistic expectations regarding the speed with which a complex transaction can be identified, engaged, negotiated, diligenced, documented, executed, and closed;

•     Lack of discipline during the acquisition process, resulting in overpayment or assumption of too much risk for

the price;

•     Failure to adequately plan for a smooth transition and integration period after the sale.

     An experienced team of advisers will know that there are certain aspects of the transaction that are likely to be difficult for certain clients. For example, Hill observes that small business owners frequently don’t have much patience for long negotiating sessions involving risk allocation. “The discussions can get rather theoretical at some points in the process of negotiating the purchase agreement, particularly the representations and warranties and the indemnification sections.”

      Bret Curtis, a partner at the Kansas accounting firm Mize Houser & Co., agrees that understanding and anticipating that a deal can consume considerable time and effort is critical.

     “With that in mind, sellers should not get distracted by the transaction process,” he says. “They need to stay focused on their most important task—successfully running their business until the closing date. And they need to keep post-closing, post-transaction, business activity also at the top of their agenda.”

Trust, But Verify

     Curtis points out that successful post-sale transitions boil down to relationships and how well they’re managed and maintained.

     “At its roots a business is, after all, a combination of customer relationships, vendor/supplier relationships, employee relationships, and capital. Movement of capital can be handled easily enough. Transitioning the numerous relationships of the business can be by far the more challenging post-closing effort.”  

     Curtis notes, as do Franken, Deady, and Kwetzel, that sometimes the most vulnerable relationship is between the seller and the business he’s selling.

     “Many small and mid-size businesses are owned by individuals who have worked in that business their entire lives. Often the most difficult aspect of the deal is the emotional side of parting with the business itself.”

     Hill explains that maintaining positive relations with and between employees is an essential element of a successful sale. “Too often the employees are overlooked by the buyer after the transaction and, as a result, a lot of them leave. This can cause some real problems in the business and take away much of the revenue forecasted in the buyer’s financial modeling.”

     Franken says that even though his formal role as an accountant in the M&A process is to provide counsel regarding financial matters, he frequently ends

up acting as an informal psychologist. 

     “You learn a lot about the personal issues of the seller or buyer in the process,” he says. “They tell you about their hopes and dreams and often their disappointments. They tell you how they wanted their children to inherit the business, but instead the kids would rather spend their time skiing. Or maybe they’d rather be an artist instead of following their parent into the family business.” 

     Tom Roszak, a partner in the Kansas City offices of Dysart Taylor says that emotional issues are not only a factor in post-transaction issues of transition and integration, they can also threaten to derail a deal before it’s completed.

     “As the deal progresses and the seller begins to sense the loss he will experience when he has to turn over the business to the buyer, he can sometimes begin to feel threatened by the buyer. That’s when I begin to hear the seller say things like ‘I don’t trust those people. I want you to write an ironclad contract they can’t get out of.’”

     Scot Hill agrees. He says that an important factor in creating trust is honesty. And honesty starts by being honest with one’s self. “Face up to your own shortcomings. Every business has its warts—and buyers will find them, so you might as well be forthcoming early. If you try to hide these warts you lose credibility, which can blow up an otherwise good deal.”

     Roszak counsels his clients that there’s no substitute for trust. He urges sellers and buyers alike to engage in sincere soul searching. Before, during, and after the deal-making process.

     “I tell them that there needs to be mutual respect and trust. Their personalities need to be compatible. Such things don’t necessarily seem like business considerations, but they are. People have emotional connections to their businesses. I’ve coun- seled clients to back away from a deal if they begin to have misgivings about the people they’re dealing with. Usually they don’t actually quit the deal, but it causes them to pay closer attention to the emotional aspects of the process. It helps them understand that it’s about more than money.”