Cross-border buy side in small cap: a field report on challenges

These are very profitable targets in the small cap sector, with usually 25–80 employees. In addition to the regular challenges in the execution of M&A processes, there are special features in small cap projects that are relevant for consultants on both sides.

• First of all, there are radical differences in resources, transaction experience, and corporate culture between buyer and seller, and this requires an adjustment in communication. 

Build trust: It is necessary to create a foundation of trust with the seller and their consultants right from the start. Local, small-cap-experienced, buy side advisors could be very helpful in a mediation role.

• Common valuation schemes and deal-structure models are often completely unknown on the seller’s side.

Explain a lot: These items must therefore be explained carefully by the buy-side consultants in a detailed yet comprehensible manner. 

• Contract documentation often overburdens the seller and their legal consultants, which are often smaller law firms with little transaction experience. 

Prepare drafted legal documentation at an early stage: Contract documentation should be shared with the sellers as soon as possible in the process. This should be applied analogously when considering the legal aspects, so that law requirements and contract drafting are fully covered.

• In small-cap transactions, sell-side consultants play an important role since they act as personally trusted consultants to the seller while often pursuing, to a certain degree, their own agenda. The target is often a very big client to the sell-side consultant, which is usually the tax advisor of both the target company and shareholders. It is important to consider the interests of all parties at all times during due diligence and negotiations.

Whenever possible, meet in person: In the transaction processes of our projects, the most important decisions of a small-cap transaction are often made during personal discussions with all parties involved. Considerate mediation and professional preparation are enormously important to the success of this phase. 

These special challenges for M&A projects in the small cap sector involve exciting and demanding work. However, with good preparation and professional cross-border colleagues, these challenges can be met successfully, resulting in structured and smooth project implementation. Throughout the transaction process, it is a great advantage to have and use an international network of professional colleagues on the consulting side. 

Sven Dierking is a Business Consultant and Managing Partner at Gehrke Econ. He has over 20 years of experience in management consulting, with a strong focus on corporate finance, in particular advising owner-managed SMEs.