Any serious athlete will tell you the very end is usually the hardest and most important part of the competition. For example, the last few miles of the marathon and the “championship” rounds in boxing are grueling – but they always matter the most. That’s easily where the race or fight is won or lost. Similarly, the “last 5%” of an M&A deal is virtually always the hardest and most important component to obtaining a successful outcome for what are often life-changing deals for M&A sellers.
Once key deal points such as overall price, terms, and conditions have been agreed upon and the finish line is in sight, there may be a false sense of relief for both parties. But even after these key points are negotiated, deals can and do fall apart. Deal fatigue sets in and, thinking it’s “just a matter of closing,” the unsuspecting principal may become complacent and fail to give appropriate attention to the final stages of the transaction. The same focus and energy that has been accorded the rest of the process needs to be applied to this final 5%.
The last mile involves countless crucial details that may not seem especially important at a 30,000-foot level but must be completed to actually “close” the deal. The last 5% inevitably always take longer and involves more parties than anticipated. Consider these examples:
The ancillary agreements matter – a lot – as each adds or subtracts value from the deal. A savvy seller budgets time to review these complex agreements with their M&A attorney and investment banker to develop a thorough understanding of the following:
- Rollover equity positions
- Escrow agreements
- Employment agreements
- Real estate leasebacks
Small changes can create big ripple effects. Seemingly small changes can permeate what are hugely long and interconnected agreements and spreadsheets. One change or renegotiation late in the process can permeate hundreds of pages or spreadsheets, and it happens at the end of every deal. A savvy seller stays on top of small changes and thinks through the various ripples and ramifications.
A working capital adjustment was likely agreed upon as part of the overall price calculation, but how, exactly, will working capital be calculated? In some cases working capital has the potential to move the effective price by millions of dollars! Lots of times parties make assumptions about this essential element and it causes hiccups and negotiations late in the deal on one of the main deal points. A savvy seller insists early on that the calculation methodology be explored and negotiated.
Purchase price allocation is rarely discussed in depth when agreeing on the overall price, but the way price is allocated for tax purposes (to goodwill, inventory or other asset classes) must be agreed upon. It creates potentially large differences in (1) ordinary income vs. capital gains treatment for sellers, and (2) step-up in basis and deductibility for buyers – cash out of one pocket and into another. The purchase price allocation is rarely negotiated until the end and is always harder than anticipated with accountants, tax advisors, and lawyers scratching and clawing. Once again, the savvy seller brings up this topic early and often.
Third-party consents often involve multi-million-dollar customer contracts that cannot be assigned without the customer’s approval. That multi-million-dollar customer will have some questions about their new business partner before simply signing the consent, and the parties should expect some bureaucracy and process around that. To add another layer of complexity, the government may also need to approve the deal. Obviously, this work cannot commence until the parties to the transaction are ready to divulge the deal to customers, but a prepared seller assembles all customer contracts so the consent can be circulated rapidly when the time comes.
Execution risk is frequently ignored or minimized by principals who don’t understand that high-level agreements between principals can’t and don’t address all the execution elements of the deal and the different ways value can be eradicated. The price may be good, but what about the clawbacks the buyer created for themselves?
Or the fact they want to sit on 25% of your money for two years to make sure it “works out”? Would that change things for you? Of course, it would. The savvy seller remains alert to such aspects of the deal structure and insists on negotiating them throughout the process.
Most of these factors come into play in every M&A transaction, so what else can a savvy seller do to prepare for optimal handling of these potential deal-breakers?
- Coordinate your M&A deal team – internal personnel, M&A attorney, investment banker, and tax advisors – and ensure that key points and messaging are consistent.
- Structure and then adhere to rigid communication protocols with both parties to the transaction, expecting and providing regular status updates and addressing issues early.
- Build a trusting relationship with the buyer in the early stages of the process to help move through late-arising roadblocks.
- Work through details as much as possible early in the negotiations, and include them in the letter of intent.
- Understand key must-haves in the deal – both your own and those of the other party – and be prepared to negotiate your points clearly and compromise when necessary.
- Anticipate and work through deal fatigue by creating a sense of urgency, setting deadlines, and maintaining momentum.
Like that tired marathoner closing in on the finish line, buyers and sellers experience deal fatigue. You can still easily lose when you’re exhausted at the end of the race. That’s when you must be MOST focused and block out the noise because, if you give in, all the hard work and negotiating you’ve done can easily come undone in the final mile. Happens all the time.
The Last 5% in M&A
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.
