Key to a successful merger or acquisition is keeping the process moving. The adage “time kills all deals” is absolutely true with mergers, and this is why:
- Adversarial positions: Naturally, both parties to the deal are looking for the best possible terms. For example, the seller wants to receive the highest compensation possible, and the buyer wants to pay the least. Successful deals depend on the parties working together for a common positive outcome. However, the longer negotiations last, the more likely the talks will develop an adversarial tone.
- When a successor firm is slow to move the process along, many firms seeking an acquisition wonder two things:
· If this is not a priority for the successor, am I talking to the right firm?
· Does the successor firm have the capacity to take on this venture? (Neither of these perspectives, which are inevitable with delays, leads to a good outcome.)
- Every time someone reads a contract, it has new meaning, and, all of a sudden, issues that were previously resolved become new problems. That leads to more delays and more conflict.
- Some things can’t be kept under wraps forever. Many times word gets out that a firm is “in play.” This can lead to competitors and constituents acting on incomplete and false information.
THE SEVEN STEPS
Following are seven steps for deal management designed to keep the process moving. This is not to suggest that one should rush to get a deal done, throwing caution to the wind. Rather, the parties need to focus and commit to the process until they realize they have a viable deal or they don’t. This improves the probability of closing a deal that should be done and avoids wasting time and resources on one that wasn’t meant to be.
Step one. The firm seeking to merge up or sell should prepare a generic information sheet. Generic, in this case, means that the document should not disclose customer names and other confidential information. The sheet should include strategic goals for the affiliation and the operating characteristics of the selling firm, including sales volume, products / services rendered, types of customers, billing rates, headcount for staff and owners, profit margin, and other information necessary for a potential purchaser to determine initial interest.
Strategic goals should include near-term transition plans, if applicable, and possibly growth, expansion, and other upside opportunities that can be accomplished through a sale or merger. The objective of this summary information is to share what the selling firm has and what it believes a successful transaction would look like. This allows the prospective buyer to determine whether there is a foundation to move forward.
Step two. The parties should identify “must-haves” and be ready to discuss them. Often there are certain items that would be deal breakers if they are not handled in a way that meets the selling firm’s needs. I recommend those items be discussed upfront with the other party so they don’t come up late in the process, after extensive negotiations, to kill the deal. Examples of must-haves include unexpired leases, location requirements, compensation, other deal terms, staff retention, and other operating requirements.
This requires keeping in mind three things:
1. The more must-haves a prospect presents, the fewer firms are likely to be interested in a deal. Some of these must-haves can affect a firm’s value.
2. There are sometimes ways that haven’t been thought of yet to overcome an issue considered a must-have, but the firm must be open to finding alternative win-win outcomes.
3. The firm needs to categorize “must-haves” into (a) what it really must have, (b) what it strongly prefers, and (c) what it would like to have.
Must-haves that are easy to explain (such as unexpired leases) are best included in the summary information, while more complicated ones are best discussed in the initial meeting.
Step three. The firm should define what its merger partner/successor should look like. This involves using the four C’s.
· Chemistry: If you don’t want to eat lunch with someone regularly, don’t merge with that person. In other words, if the partners don’t personally like the people they are talking to, why would their staff and clients like them?
· Capacity: Understanding the goals for a deal leads to knowing the capacity issues required of the other firm.
· Continuity: Most firms have their client base because their clients are comfortable with their people and approach to service. A successor firm must be able to avoid the clients’ viewing the merger as a loss of a prior firm and instead promote the gain of the combined firm.
· Culture: This term is used a lot but remains a vague concept for many. Culture can be thought of in three ways: (1) What’s it like to work here?; (2) What’s it like to be a client here?; and (3) What’s it like to be an owner here? A selling firm needs to consider if a merger candidate or buyer can cut the mustard in all three areas.
Step four. Before any meetings occur, information and goals should be shared with, and preliminary information obtained from, the other firm. This qualifies both firms for each other. Now attention can be turned to the four C’s and the must-haves in initial meetings. The firms should share what they believe success looks like and find out what their strategic goals are for the merger. What do they intend to accomplish? What is their business plan for this merger?
Step five. The potential deal terms should be addressed as soon as possible. If several firms are courting the selling firm, the field should be narrowed to ones the selling firm likes and those that like the selling firm. The selling firm should obtain a nonbinding offer from the firm(s) it likes of how the firms would come together. It is not unusual for this to happen as early as after one initial meeting and certainly after no more than two.
Many firms think they need to perform due diligence before making an offer. However, it should be kept in mind that every step described above is part of due diligence. In step one, the selling firm has already told the other firm what it has and what it wants. Other critical issues can be addressed in the form of additional inquiries. It is appropriate to assume the information and responses are accurate. The nonbinding offer should describe what a deal would look like philosophically and financially, subject to verification in due diligence.
The terms should be complete as to must-haves, deal structure, and terms.
Step six. Now is the time to perform field due diligence. Each firm should share what information and data it is seeking from the other, and appropriate nondisclosure agreements should be signed (if not done previously).
The authors suggest breaking due diligence into three parts to keep the process moving. First, information that is easily available should be shared. Frequently, this can be done through email. Second, the parties should exchange information that needs more effort but that is still only data. Third, the parties should conduct field due diligence in each other’s offices. This is not to imply all three steps can’t be done at once. What’s important is to not let the process stall, waiting for the last piece of information to become available.
Step seven. Now that it is time to close the deal, the parties can bring in lawyers. The selling firm’s partners probably have enough experience to negotiate financial terms and business plan issues on their own, or they might be using a consultant to assist. Often the best use of legal advice is to make sure the deal that is negotiated is properly memorialized in a contract and the legal i’s are dotted and t’s crossed.
It is best to avoid renegotiating deal terms on which agreements have already been reached, and contract drafts should not be used as a tool for further negotiations of financial terms and business plan issues. If something new, other than a legal issue, needs to be addressed, it should be brought up orally. Few things irritate the other side more than a new item suddenly popping up in a contract draft.