This is Part V in my six-part series on the anatomy of an M&A deal from the buyer’s perspective. To read Part IV, which covers financing and negotiation, click here.
In the world of mergers and acquisitions (M&A), there is one basic, unstoppable factor that derails transactions right before they would otherwise close: lack of momentum and the failure to drive to closing.
It can happen on either side of the deal. During the late stages of negotiation—after the parties have agreed on the business’ value, completed due diligence, and secured financing—the buyer or seller sometimes begins to hesitate. The process drags on, meetings get rescheduled, and communication breaks down. In a matter of weeks, the deal shifts from a “sure thing” to a hopeful possibility to an unvarnished failure.
Second thoughts in the seventh inning sound the death knell for any M&A transaction. In the final phases, buyers and sellers should be on the same side: fueled by growing momentum as each moves through the funnel towards collective consummation. Both parties should be on the same page to finalize the transaction quickly. However, sometimes regardless of the monies spent and the efforts to date, deals languish. Why? Frequent deal killers include time drag, lack of closing drive and the loss of momentum, all of which are signs of trouble.
As a buyer, you need to familiarize yourself with the factors within your control that could cause you or your seller to fall into these deal killer modes.
You Need to Earn Approval from Everyone
Make sure every shareholder and decision maker is aware of, understands, and approves of the deal. It should be obvious whether you are negotiating with the individual or individuals who own the business versus a liaison such as a vice president or member of lower-level management. If you are continually finding it difficult to reach the actual business owner, face the facts: your seller is not committed.
The same principle applies internally, to your organization. Ideally, you should win unanimous approval for the purchase long before entering negotiations with your seller. If you don’t, you face an increasingly contentious struggle as you attempt to convince investors, executives, and board members in both ends of the table. No matter what, emphasize common objectives and shared value.
Check in with your attorney, investment banker, and any other advisors familiar with the impending purchase. When you’re suffering from deal fatigue, the other members of your team can step in and let you know whether you strayed from your true purpose.
You Need to Keep an Eye on the Target Business
Never assume anything about the business you intend to buy. That includes its ongoing performance during the deal. An upcoming merger or acquisition can distract personnel and affect employee morale. Stay mindful of the target’s sales numbers, marketing efforts, and any outward signs of distress or mismanagement.
M&A is challenging for sellers. Even the best leaders can flounder without strong support team. Poor performance during the deal could be a momentary lapse due to extenuating factors, or it might be symptomatic of underlying corrosion at a structural level. Trust your instincts and know when to push and when to pull back. If you believe your seller is dealing with you in good faith—and they should be—overdoing due diligence at these late stages could backfire and spoil the rapport you have developed together.
Keep the lines of communication open, and voice your questions and concerns to all stakeholders involved in the deal. Your seller’s ability to address your doubts says as much about the state of the business as the business’s apparent performance does.
You Need to Set a Date
Determine your schedule and stick to it. Emergencies notwithstanding, there should be no reason to delay your closing date. You will also need to figure out closing terms in advance. Decide on whether every party will sign in person or virtually (e.g. over Skype or phone conference), as well as how you intend transfer payment to your seller: all at once or over time? A deferred closing can give you more flexibility, but may demotivate the seller.
Depending on the structure of the transaction, closing may be your final interaction with the seller or the start of a months-long transition process involving earnouts and escrow. (For more information on this aspect of M&A dealmaking, make sure to read the previous installment in this series.)
You Need to Know When to Just Say “No”
As a business attorney, I often tell the sellers I work with that they have not sold their business until they have sold their business. The same holds true for buyers: you have not bought a business until you hand over the cash and sign your name on the dotted line.
It is never too late to walk away. Do not give into the sunk-cost fallacy. You may not be able to recover the time and money you have spent thus far but those costs in and of themselves should not be your only motivation to close. Understand that your emotional attachment to the deal could cloud your judgement, especially this late in the game. You should not be feeling conflicted or uncertain about the purchase—that’s your gut telling you to say, “no.”
Equivocating doesn’t help anyone. The good news is that your seller will quickly pick up on the fact that you are stringing them along and back out, thereby making the decision for you.
In the end, consummating a transaction requires focused commitment with constant review of the many variables that can derail the deal. If your deal starts to drag and there is no closing set in the near future, the transaction may be in trouble. Deals need to be driven to conclusion or risk drifting along to the frustration of all parties.
In the final article in this series, I will explore what may be the most difficult stage in an M&A deal from the buyer’s perspective: post-transaction integration.
Buyers of all experience levels can benefit from partnership with business transactions attorneys like the ones at Offit Kurman Attorneys at Law. Since 1987, we have been working with clients to achieve their long- and short-term objectives. From pre-transaction planning to closing, we can provide you with the knowledge and confidence to succeed during every stage of the M&A process.
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 120 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eight offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.
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