Don’t Forget About the Minority Shareholders!

Posted on: 04/13/17

Written by: Karl Wohler, PSMJ Senior Consultant

Topics: Mergers & Acquisitions

It’s no secret that there have been many potential very good acquisitions stopped cold because not enough attention was paid early in the negotiations to the needs and goals of the seller’s minority shareholders.

Obviously, when discussions about a potential merger or acquisition begin, the majority shareholders of the seller are the primary participants. It is also obvious that a lot of time is spent negotiating what those major shareholders want so they will be compelled to sell the firm.

But, what about the little guys? For just about any buyer, the next generation of leaders in the selling organization embody a big chunk of the firm’s value. But, just how can sellers deliver those folks to the deal? Even more critical in some stock deals, it may take a unanimous vote so the seller can deliver 100% of the outstanding shares at closing.

For this issue of the M&A Insider, we offer the following two-step process for getting the minority shareholders engaged in a transaction.

1. Put yourself in their shoes. First, during the initial discussions of terms and conditions, the primary shareholders of the seller need to put some serious time and consideration in the “little guy’s” shoes. The motivations and goals for combining with the buyer are very different.

Turn the clock back 10 to 15 years and try to remember what was important— job security, working on cool projects, opportunities for advancement. Now consider these values as you examine whether the Letter of Intent (LOI) speaks to all shareholder concerns…and not just the majority ones.

To this end, as a buyer, do not be content with the statement from the seller. “They’ll be fine with whatever we negotiate.” Chances are, they will not be fine. So, you need to press the subject and do not issue a letter of intent until you’re sure there is something for everyone in it. It is too easy to simply let the potential deal solidify around the concerns expressed by the senior folks you are actually talking to.

Buyers must insist in a meeting (or two) to focus on the anticipated concerns of those people not in the room. If not, there’s a good chance that the letter of intent will be a hurdle to overcome in the second phase rather than a tool for drawing-in the next generation of shareholders.

2. Make the pitch. The second phase comes after the LOI is signed and it is time to introduce the deal to all of the sellers’ shareholders. Make no mistake here…this is a sales job for both of the parties who agreed on the terms. Sellers have to sincerely talk-up the benefits of the “merger” on an individual basis with everyone concerned. We’d all like to think that shareholders will always do what’s best for the firm, but when it comes to selling it, we have to be realistic and deal with the fact that everyone is worried about “what’s in it for me.”

Since the majority of deals have some of the realization of value dependent on the future success of the combined firms (sometimes quite explicitly through an ‘earnout’) and future success is largely driven by successful integration, spending time thinking about the concerns of the minority shareholders is not only necessary many times to get the deal done but also to realize the full value of your firm.

The last A/E/C Mergers & Acquisitions Roundtable for the Spring 2017 season is scheduled for May 16 and 17 at The Westin Michigan Avenue in Chicago and, as of M&A Insider press time, a limited number of seats were still available (early-bird pricing ends on April 17). Visit www.psmj.com/ma-roundtable for all the details!

Merger & Acquisition (M&A) activity in the architecture and engineering space is certainly on the upswing and well on its way to reaching pre-recession levels. But, how ready are you for taking on the task of buying or selling an A/E firm? If you are looking for tips to help your firm navigate through the M&A process, check out PSMJ complimentary ebook M&A Survival Tips for A/E Firm Leaders.