We regularly hear about M&A transactions that have been successfully completed, but many more deals are terminated either during the process of negotiations, or after due diligence has taken place. A busted M&A deal taking place after many months of discussions and negotiations is a Managing Partner’s worst nightmare.
The M&A deal process can be one of the most significant events for a firm and its partners. The intentions behind such a transaction are unique for each Buyer and Seller (for purposes of this article, whether a merger or sale, the larger firm is the Buyer and the smaller firm is the Seller). Some of the ways that terminated deals can be avoided are:
- The devil is in the details. Draft a Letter of Intent (LOI) / Memo of Understanding (MOU) as quickly as possible, stating all the significant terms, such as partner compensation structure, equity calculation and allocation to the seller, voting rights, retirement/buy-out payments, governance, name, location of offices and any lease termination issues, non-equity partner arrangements, valuations, capital requirements, and any other pertinent issues. The document should be distributed to all of the partners and/or Executive Committee for approval and signatures. This will advance the deal process beyond words to a heightened sense of reality. Discuss the tough issues ASAP and don’t leave them for the attorneys to negotiate and discuss.
- A Buyer may value a firm much lower than the Seller was expecting. The valuation expectations between a Seller and Buyer can differ significantly and can be a major source for a deal breaker. Once initial financial information is exchanged, valuations should be discussed and agreed upon quickly as they tend to drag on and can create enough friction between the parties to terminate the transaction.
- Have the “real” decision makers for each of the firms be involved in the discussions and negotiations very early in the process to avoid “egos” getting in the way of good business decisions later on in the negotiations. It also provides less of a chance that misunderstandings of negotiated terms/provisions could lead to an abrupt deal breaker.
- Having a sense of urgency to sign the LOI/MOU will put pressure on the partners to make realistic evaluations of the transaction to gauge whether there are sufficient synergies and compelling reasons to consummate the deal. A draft version should be provided to the Seller after the second or third meeting.
- The Seller should be prepared to speak to prospective Buyers by having all relevant financial and other information prepared to provide to prospective Buyers for the preliminary discussions. In addition, the Seller’s partners should be on the same page as to any sensitive issues they wish to have negotiated that will most likely be challenging to the Buyer in evaluating the deal.
- Both parties should agree on an effective date of the transaction early on in the discussions and schedule milestone dates, such as the signing of the MOU/LOI, partner meet and greets, announcements to staff and clients, commencing and completing of due diligence, and completion and signing of the M&A agreement. Momentum is critical in keeping a deal alive and closing it within a reasonable amount of time. However, both parties should be honest with themselves at the beginning stages of the discussions if they feel that the synergy between the two firms isn’t sufficient, or if there are cultural or compatibility issues, and walk away prior to wasting each other’s time.
Increasing the odds of a transaction success can come from a number of factors which might include everything from momentum builders, continuous communications, staying on schedule, creating schedules and gathering necessary information on a timely basis and mutual cooperation.