Pretty Woman, the iconic 90s romantic comedy, is actually a lesson in the art of mergers & acquisitions.
Let’s pretend for a moment that you haven’t seen it.
In the film, businessman Edward Lewis (Richard Gere) is in the process of acquiring the Morse family’s shipping company when he meets Vivian Ward (Julia Roberts). James Morse and his grandson David are reluctant albeit motivated sellers.
This causes emotions to spill over during an intense dinner scene.
Vivian delivers the scene’s most memorable line when she struggles to deshell her entrée of escargot and cries “Slippery little suckers”, but it is the discussion between James, David and Edward that provides invaluable M&A insights.
David Morse: “My grandfather believes the people who create a company should control its destiny… We find it very hard to figure out what your real intentions are”.
James Morse: “I’m not thrilled at the idea of you turning 40 years of my work into your garage sale.”
Edward Lewis: “At the price I am paying for this stock Mr Morse, you are going to be a very rich man.”
James Morse: “I’m rich enough.”
The scene illustrates five general truths about M&A:
- Transactions are complicated by ego and emotion
- Lack of transparency from the outset creates distrust and resentment, which can be hard to reverse
- Sellers are motivated by many factors, not only money
- Buyers do not understand what’s really important to sellers
- Family members can kibosh the most logical, attractive deals
Being successful in M&A is not only about access to capital and the ability to identify and accurately value a sound business, then negotiate a good price and terms. A cashed-up buyer can do all that and still watch a sale fall over at the finish line because they did not manage the psychological components of the deal.
A company’s balance sheet – alongside its cashflow and profit and loss statements – are vital pieces of financial information for buyers to examine when evaluating an asset, but consideration must also be given to the psychological balance sheet.
Minds over matter
What is a psychological balance sheet?
In the same way a company’s balance sheet reports its assets, liabilities and shareholders, as well as providing a snapshot of how effectively a company is utilising its financial resources, a psychological balance sheet lists all important parties to a sale including business advisers, spouses, parents and children.
It takes stock of their holistic goals, values and beliefs.
It is important to manage the psychological balance sheet to avoid the risk of a single peripheral player with influence over a key party derailing a deal and dictating the outcome.
For most business owners, the family business represents decades of blood, sweat and tears. It trumps their home and superannuation in terms of their largest financial asset. As such, selling it is a huge deal.
A major decision like this is not made without seeking professional advice, and consulting family, friends and mentors.
All it takes is just one person to freak out a little and head down a psychological rabbit hole of overthinking to prevent even the most sensible, mutually beneficial deal from going ahead.
A common mistake vendors make is fixating on one small aspect of a deal to the point that they lose sight of the bigger picture. Emotion can reduce a person’s ability to process information objectively.
Buyers can minimise this risk by addressing the psychological needs of all parties to a transaction. That may look like meeting family members face-to-face to alleviate any fears and concerns; regularly reinforcing the vendor’s long-term objectives; and bringing everyone on the journey through open communication.
For example, as part of AZ NGA’s due diligence process, we meet with a vendor’s spouse at least once. This is usually over a meal because, in our experience, a more relaxed environment fosters richer learnings. In one particular dinner meeting, we learned that two key shareholders did not get along at all.
In many cases, the sticking point holding up a transaction has nothing to do with money.
Sellers and related parties are equally interested in a buyer’s motives, intentions and beliefs. They are looking for mutual ground.
Recently, during preliminary discussions between AZ NGA and a large, multi-disciplinary accounting firm, the firm’s founder and principal shared his personal business philosophy with me, and asked me about my beliefs.
He told me that early in his career he believed complexity was good because as long as it existed, there was a dollar to be made. However, he soon realised the value and importance of simplicity. Quoting Leonardo da Vinci’s “Simplicity is the ultimate sophistication”, he summed up his business philosophy as simplifying systems and processes, and eliminating complexity from clients’ lives.
It is a similar philosophy to ours at AZ NGA. (Our discussions continue and I’ll keep you posted, if talks progress to a deal.)
Similarly, in Pretty Women, Vivian encourages Edward to find common ground with the Morse’s and, in the end, they do a deal by agreeing to build ships together.
Sometimes it just takes a little extra care to avoid the psychological rabbit hole and get a deal over the line