What’s most critical to the success of an M&A transaction? Many industry insiders point to factors like culture and pricing. The following are some key factors that can help lead to a successful transaction:
Detailed Letter of Intent
A detailed letter of intent nails down many key deal factors early in the process. This is a preliminary document that ensures both sides are serious, and addresses key issues early. If a seller insists on something that the buyer doesn’t want, it saves both parties time (and the money that time costs) by preventing a deal that was doomed to failure. Don’t make the mistake of making the only substantive term the purchase price. The more you can work out now, the more time you will save in the long-run.
There’s no substitute for a thorough due diligence process. Buyers must verify seller’s representations. Due diligence goes beyond mere representations, though. Buyer should investigate “hidden” factors that could affect a deal, such as a catastrophic lawsuit against a seller’s primary customer. Due diligence isn’t solely for buyers, either. Sellers should examine whether a buyer is prepared to undertake the transaction, and ensure that the buyer has plans for the merger that comport with the seller’s vision for the company’s future.
Negotiate Termination Fees and Other Costs
Buyers pay termination fees to a seller if the seller accepts a better proposal from a third party. The amount of the fee and the conditions under which it is paid vary greatly and are negotiable. Likewise, expense reimbursement provisions paid to the party that did not terminate are common and negotiable. Both parties should be willing to negotiate these fees with the assistance of an M&A advisor who understands how these fees may affect the parties’ bottom line.
Have a Thoughtful, Specific Timeline
You and the other party must agree to a deal timeline. Critical to this is the role of “drop dead” dates. This is the date by which a deal must close, lest either party be permitted to terminate. Calculating a fair realistic date is challenging, and must take into account the realistic timeline of the deal. A shorter timeline encourages a faster closing, and increases the likelihood of the deal being successful. Yet a longer timeline gives both parties sufficient time to do their due diligence and ensure a successful merger. A proper balance between these competing factors is critically important.
Treat Critical Staff With Respect
Integrating two teams is key to a successful transaction. Too often, both parties neglect the needs of their staff until the last minute. And then they jump ship. Buyers should consider creating a retention bonus to keep critical staff on board. It’s important to consider also that who exactly is a “critical employee” might not be obvious. They’re rarely the loudest or best at self-promotion. They’re often not managers. Unsung heroes may keep things running smoothly without a lot of noise. Find them. Reward them. Keep them.
Be Mindful of Board Dynamics
CEOs and CFOs commonly negotiate deals that include pay packages for themselves. When presented to the board, they become skeptical of the agreement, often citing concerns about executive pay. The board’s advisors can help directors assess the merits of a transaction without distracting executive pay issues if both parties are willing to proceed this way.
About Carpenter Hawke
Carpenter Hawke was founded in 1991 to provide expert M&A advisory services to sellers of privately owned businesses. Carpenter Hawke has successfully advised a wide range of clients looking for unconflicted advice on the sale of their business. Personal integrity and professionalism govern our performance.
Our experience and knowledge of the appropriate steps enable Carpenter Hawke to provide strategy and plan formulation to suit the needs of each sell side client. New England based but we work, Locally and Globally!