M&A negotiations can become acrimonious when you get to finalising detailed documentation. This often arises due to surprises in DD or differences in understanding of a letter of offer, or, the letter of offer misses important items.
This may cause delays and changes to price with the deal eventually called off. Significant costs are incurred and many months hard work wasted. We firstly recommend a “no surprises” approach, disclose everything and secondly when negotiating a deal that “it’s only agreed when it’s all agreed”. We strive to ensure that the important and key items are negotiated and agreed upfront. This minimises the potential for misunderstandings and renegotiation later on. It is important to ensure that the deal is clear with common understanding between the parties. Use concise language and avoid advisor jargon particularly where the parties are not experienced in M&A. Use advisors to explain what is normal, acceptable or unreasonable.
Concise Clear Offers
In some instances, differences arise due to a poor, unclear or ambiguous letter of offer. Sometimes both buyer or seller may leave out critical issues and avoid important sensitive items. Parties may misunderstand the implication of various clauses and how some items link together or can contradict items already “agreed”. Poorly interpreted, unclear or items avoided or not addressed may then need to be negotiated or renegotiated after “agreement” has already been reached. Neither buyer nor seller likes to re-open negotiations particularly if they see themselves being worse-off. Both sides in a deal have long memories, any changes or items renegotiated often lead to ill-will or distrust, accumulating over a long sale process eventually resulting in flash points and arguments over minor and rather irrelevant items.
Key to effective deal making is ensuring there are no surprises. Securing early agreement is far easier if all key decision making information and significant matters are on the table when negotiations commence.
Midmarket deals do however rely on trust between the parties and the advisors. Irrespective of documentation and agreements reached during the sale process, trust and integrity is the foundation of the deal right up to the day of payment and document exchange. If any party betrays that trust, the other party will be weary, alert and on the lookout for future breaches. Lack of trust will also slow down the deal process adding further frustration with more in-depth confirmatory due-diligence and questions. Trust however has two key dimensions, that is the integrity trust (character) and expertise trust (competence). You need both to succeed in business and particularly in M&A.
Buffet & Trust
Earlier this year, as per historical form, Warren Buffet closed a major deal over a weekend. A $10bn preference share investment in Occidental Petroleum for their purchase of Anadarko Petroleum.
He first met with Occidental on a Sunday morning agreed on a deal within an hour. Simple deal documentation was ready by the Monday evening. A deal of this size and nature was based on trust between deal makers. There was no detailed documentation or pre-conditions, performance guarantees or even limits to the eventual take-over price.
Integrity in Deal Making
Buffets approach, which has been extremely successful over a lifetime, is in stark contrast to a recent example of mistrust. A senior manager of a company looking to sell contacted Optimal through our website “businesses wanted”, a good match had been identified. We contacted the buyer and interest in the sellers business was confirmed. The seller was then advised as to the M&A process, services provided and fees and a meeting held confirming details. The seller was introduced to the buyer at a joint meeting. Interest was confirmed by all with agreement to progress. However, when engagement documents were provided to the seller, they ignored the earlier agreement, circumvented the sale process and approached the buyer directly. Key reason was to avoid advisor fees and purportedly for this senior manager to have a closer relationship with the buyer and build rapport (with potentially his new boss).
What this however meant to the rather bemused buyer, was that the seller couldn’t be trusted. In the unlikely event a deal did progress, DD would need to be more substantial, more questions asked. The buyer was concerned that he was dealing with inexperienced sellers which would complicate the deal process. On the flip side the buyer also knew that due to seller inexperience, he would be able to buy the business at a much lower price! Further, how would any new boss rate the integrity of the sales manager who’s main objective was to negotiate the best outcome for himself? What about the sellers majority shareholder interests, he would clearly be worse off?
Costs of being “Clever”
The seller will never know what their “cleverness” ultimately cost them, how much money was left on the table? How would the buyer view the integrity trust (character) and expertise trust (competence) of the sellers manager. Would the buyer keep this manager on or for how long? What was the true price of integrity?
Intermediaries, Negotiations and Agreements
For any M&A deal, it’s only agreed when it’s all agreed. The deal is only completed when payments are made. Midmarket M&A sale process can be very long with many tests of integrity and character!
Good intermediaries have a thorough understanding of each company they represent and strategic imperatives of buyer and seller. The spend time building trust and understanding, this is the foundation of their trade and future business.
Come from a position of honesty and integrity
Counterparties may disagree with advisor valuations; with the price you put on your client’s company, with how you managed the sale process, negotiations and all the rest. But if you come from a position of honesty and integrity, they will respect you nonetheless, and they will trust you. And without respect and trust, it is all but impossible to convince a buyer to complete a transaction on terms favourable to your client. Remember, it’s only agreed when it’s all agreed.