Who doesn’t love a good to-do checklist or blueprint? They lend a sense of control where otherwise there is mayhem and provide satisfaction as you check completed tasks off the list. It probably won’t surprise you to know that most M&A buyers (especially institutional and private equity buyers) have checklists and blueprints of their own when working through an M&A transaction. And that’s a good thing – to a degree. A checklist or blueprint provides a starter roadmap, ensures that no major deal component falls through the cracks, and they outline the types of key legal agreements required to thoroughly address the situation.
But there can be a dark side to these checklists and blueprints. If the phrase “we always do it this way” sends an involuntary shiver down your spine, you understand the flip side. A buyer’s preexisting checklist or blueprint can become a bit of a trap, freeing dealmakers from thinking too hard about the details of your specific transaction and discouraging creative thinking. If your buyer has relegated your transaction to the completion of their checklist or overly rigid adherence to their blueprint, it’s a red flag. We can tell you in our experience that more than once, the phrases “we have a checklist or blueprint for these deals” was effectively a kind and subtle way of indicating “here’s how we will get one over on you and maximize our positions at the expense of yours.”
With that in mind, consider the following situations we’ve dealt with recently, along with suggestions for handling them.
The Lazy Buyer
The lazy buyer is unable or unwilling (or both) to think or work outside the box. They are stuck on repeating things that brought them success in the past. “We always do it this way,” the lazy buyer asserts. “Why reinvent the wheel?” Consider the over-lawyered, overly lengthy, in-your-face definitive legal agreements containing sections that have no bearing on your situation, or worse, which negatively impact your overall financial and legal positions for no legitimate reason. You might be surprised to learn, whether knowingly or naively, that a lot of so-called high-level institutional and private equity deal makers and their attorneys do this to entrepreneur M&A sellers all the time (usually in passive aggressive fashion). These agreements may repeatedly restate negotiation points with each restatement changing things somewhat – a little bit more here, a little more there, a little claw back there, a little bit more money for the buyer here – to where when added up the buyer has moved the needle a lot in their favor while also moving the needle a lot to the seller’s detriment (including financial detriment). And in some cases, your requests for additions or other changes to the agreements – even when they’re logical, straightforward, common sense, win-win, and within the overall financial and business spirit of the deal in mind – are ignored or denied for no good reason other than the buyer “always does it this way.” That is of course before a well-advised seller properly repositions and renegotiates in response.
The Arrogant Buyer
The arrogant buyer’s negotiations are always one-sided rather than seeking out mutually attractive solutions that result in win-win outcomes for both sides of the deal. When your buyer demonstrates little partnership mentality, the future will most likely be bleak for you. And remember, only in the minority of cases do M&A sellers pocket all the cash at closing and ride off in the sunset never to worry about their business again. In most cases the primary selling owners will stay on for some period after the sale, often times with significant rollover equity or other skin in the game requiring them to be around to participate in a second bite at the apple opportunity down the line. The absence of a team-oriented mentality exhibited by your buyer during the deal will likely also continue to be absent after the sale. And what do you think they’ll do post-closing if collaboration isn’t 100% in their interest? After you’ve signed on the dotted line, you’ll have no leverage. Be on guard.
The Bully Buyer
The bully buyer is a forceful negotiator (again often in a passive aggressive way) who assumes they have all the power in the deal, and that you have none. With every response and gesture, their actions seem to be implying, “We always do it this way. We don’t need your input. We are smarter than you. You should be happy we are paying you anything.” They focus on winning, winning, winning every small point at all costs (up to and including losing out on a transaction) while placing little value on the seller and the relational elements of the deal.
What Does An M&A Seller Do In These Situations?
Maybe your potential buyer is exhibiting one or a mix of these traits. Your transaction toolbox should include the following:
- Strong-willed, experienced and advocacy oriented deal professionals who run interference and negotiate on your behalf. Even when you can’t quite put your finger on the reason for the difficult relations, your M&A attorney and investment banker will immediately recognize a difficult buyer. They know from experience what is and isn’t standard procedure and have tactics of their own to offset the buyer’s one-sided approach.
- Your full focus. Pay close attention throughout the negotiation process and all dealings with the buyer. In some small way, virtually every communication through the M&A process is a negotiation. This is something a seller should never lose sight of. Don’t fall into the trap of telling yourself that things will get better once the stress of the negotiations is behind you. Once you close your M&A deal, your leverage to change or improve your position will be non-existent.
- Know and identify the must-haves and deal breakers for your transaction. Spend plenty of time evaluating your wants and needs before you embark on the sale process for your business, and then stick to your guns during negotiations. Rest assured you’ll be glad you did in the end.
- Tolerance and even encouragement of uncertainty and uncomfortable, sometimes contentious, discussions. Be ready to work through them with your buyer. Don’t fold. This is frequently unavoidable in deals where the stakes are high (and if you’re selling your company, it’s often a life changing transaction with naturally high stakes involved).
- Be prepared to walk away. This is a very difficult decision to make, but you need to consider it at the outset of preparing to sell your business and position yourself in a manner such that it’s always in your back pocket. Closing your transaction with a lazy, arrogant, or bully buyer won’t improve when the agreements are signed. It’s typically forever. Many of the most successful sellers we’ve represented at some point during the transaction process were ready to walk, and their willingness to express their sincere conviction to the buyer ultimately got things over the hump to where the seller felt good about closing the deal. Remember, if you’re not willing to walk away from a deal, you’re not actually negotiating, you’re just begging.
When you’re selling your company, your buyer’s checklist or blueprint can be a valuable starting point. It means that your deal will be fully vetted. But you are being underserved if your buyer merely relegates your transaction to completion of a checklist and is overly reliant on “we always do it this way.” Your business is unique, your transaction is unique, and they each need to be treated as such. What’s worked in the past isn’t necessarily a solution today. And there are two parties to the deal. As they say, it takes two to tango. Buyer and seller need to discuss all critical deal points and strive for a mutually beneficial outcome. If your buyer can’t accept that your transaction requires a level playing field with two equal parties involved, always be prepared to walk away from the deal. Recognizing that opportunity cost is real and a deal falling through can be hard, in the end life and M&A deals are never limited or constrained to one situation or one buyer. Never lose sight of the big picture.
About Linden Law Partners
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.