- Doing ‘scorched earth” due diligence – Large buyers are required to do extensive due diligence; overkill is inevitable. What separates the best from the rest is that they do the diligence they have to do, while focusing on the few key things that really “matter” (like customer contract terms, employee retention, specific IP). Very few actually focus early on, doing more or less the same review of everything, and its one reason why deals sometimes blow up soon after closing.
- Failing to manage the legal process – Classic example: after weeks of intensive negotiation, only then it becomes clear a buyer simply can’t accept a certain deal term (e.g. definition of loss, treatment of IP, or a hundred other things). Second classic example: the legal “key issues list” after weeks of negotiation is a dozen pages (i.e. everything left is key). Sure signs the buyer’s legal team is driving the process and racking up hours. The best buyers are clear upfront what terms they simply can never accept, and give very precise instructions to their legal team. Legal excess isn’t just expensive, it kills deals.
- Botching the approval process – It is incredible how many $100m+ deals get preliminary buyer approval, and then get shot down by the buyer’s Board or M&A committee at the final approval stage. Fair enough if due diligence showed a problem; but in many cases its other reasons, political, budgetary, or the in-house product team waking up and presenting how the target’s products can be made in-house. Whatever the reason, a buyer who can’t get final approval never gets a second chance with the best targets. And VC’s have the memory of elephants.
- Insisting the target’s affairs are in better shape than the buyer’s – Large companies with often poor internal controls ignore a smaller target’s size, and require the target’s books, documents, and affairs are in perfect shape. Every contract must have an original not scanned signature etc. When a target is growing 50-100% a year, there will definitely be “holes.” Buyers with a tolerance for a certain amount of mess in due diligence can close key deals, whereas those demanding impossible perfection quickly find the best targets sell to someone else.
- Leaks – our (least) favorite – All large companies have trouble keeping deals quiet, but some are notorious leakers, often because so many people are aware of the deal before it closes. A leaked deal can be ruinous. Do you know which deals Oracle or Apple are doing at any one time? Exactly. These buyers enforce confidentiality in a way that makes the best targets feel totally comfortable negotiating a sale. It’s a huge, unheralded advantage as a buyer; we wish others would follow suit.