There’s a saying in the deal world that time kills all deals. That may be a slight overstatement, but the passage of time definitely increases the likelihood that a transaction won’t close, as issues arise and enthusiasm wanes.
This leads to an important question: What tactics might a seller undertake to plan for the vagaries of a deal process so as not to lose momentum?
Here are several ways to keep the time monster at bay.
- Plan effectively upfront. This includes thinking through the deal process and developing a well-thought-out timeline, with a person responsible for each item and an overall transaction leader who maintains the forward energy. This is especially important with a complex process, or when there are several streams of work. For instance, we are working with a client with several concurrent objectives — buying out minority partners, changing the legal structure of the business and raising debt and equity capital to acquire several add-on businesses. All of these dependent and coincident work streams need to fit together so that a logjam does not result in lost momentum.
- Don’t be derailed by a scarcity of people resources. The information required and the questions asked by buyers and capital sources are exhaustive. The documents alone often reach into hundreds of items. Tight resources at the target company can slow down the process and present the company in a negative light. Consider supplementing your talent with external resources, such as your accountants or lawyers, to help with the deal process. This is especially critical upfront and in final due diligence, when the stress of the process peaks. In one of our recent sell-side engagements, the client rehired a recently retired employee for a four-month period to take on some of the transaction load. This was critical in moving from letter of intent to close in 57 days.
- Complete a quality of earnings report before going to market. While an external financial report can seem expensive and redundant, the impact can be immeasurable. It provides a level of insurance for the seller that the buyer is unlikely to uncover something in due diligence when they do their own quality of earnings — and they will do their own. In addition, it provides a sense of confidence to a buyer that the financial results are accurate and not marketing-oriented numbers.
- Acquire reps and warranties insurance. A somewhat newer phenomenon in the transaction process, acquiring reps and warranties insurance can significantly reduce the amount of time spent negotiating between the buyer and seller attorneys. In addition, it increases the cash available to sellers at closing. For a recent transaction that we closed, it limited the document negotiations to less than a week, and the buyer was responsible for the full premium associated with the insurance.
- Run a competitive deal process. One of the many positive aspects to a competitive deal process is that it creates momentum by having multiple interested parties working toward your schedule and objectives. Generating the competition to drive momentum and value starts by carefully selecting potentially interested parties and setting timeframes to drive the process forward. Once a buyer is selected, maintaining the relationship with the second-place finisher is also helpful, as it keeps the winner motivated to close and provides a ready option if the transaction process goes sideways.
Maintaining momentum is important to transactions closing at the agreed-upon terms. Stuff happens. Investors change their minds, and economic conditions vary, both in your company and at a macro level. Don’t let a poorly conceived and executed deal process get in the way of your personal and business objectives.
Ken Marblestone is managing director at Cascade Partners, an investment banking and private investment firm serving entrepreneurs, businesses and investors active in the middle market. The firm provides the guidance and resources necessary to navigate the complexities of managing growth and executing acquisitions, divestitures and other strategic initiatives. For more information, contact Ken at (216) 404-7221 or [email protected].
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