M&A Issues: Timing
Yet another post in the M&A Issues series. This one is about timing, ie how long it should take from the first serious conversation about a sale transaction until the closing.
I've seen acquisitions done in a week. I've seen acquisitions take over a year from the first serious conversation to close. And one thing I know for sure, if a buyer wants to take their time and feels like they can get away with it, they will.
Not every buyer wants to take their time. Many buyers want the transaction closed as soon as possible. In that case, the seller has alignment with the buyer and the transaction closes quickly.
Sellers usually want a quick close. They should. Selling your business is distracting and fraught with risk. One you decide you are going to sell, you should move with as much speed as you can while being diligent, thorough, and reasonable.
Six weeks from serious conversation to close is fast. If the company is "clean" and the buyer is incented to do a quick close and there are no governmental approves, it can be done.
Anything over three months is too long. The sale process starts to hang over the company and impacts the team, the business, and can lead to lasting problems. Team members get antsy. Resumes hit the street. Customers hear rumors and start thinking about plan B. The senior team loses focus. The company suffers.
If there are reasons why a close is going to take a long time (governmental approvals, buyer approvals, diligence, etc) an approach you can take is to sign a defintive agreement which obligates both sides to close and provides remedies if the close does not happen (including breakup fees). This is often the way deals are done with public companies that require shareholder approval.
Another key issue related to timing is the news leaking out. The longer the process goes on, the more likely the news will leak out. The reality is most deals leak and it rarely gets in the way of a deal getting done. Buyers hate it when the news leaks out because it can bring additional buyers into the process and make it more competitive. But most sellers should prefer a quiet process too. The less chatter about the sale, the better in my opinion.
I'm a fan of quick M&A processes, within reason. It takes time to do the required diligence and legal work. Doing a deal in a day is generally not a good idea. Doing it in six weeks is desirable and should be the goal. Anything longer than three months is likely to be problematic and will require a ton of management effort to manage the fallout. If you are a seller, you should specifiy the time to closing in the LOI and do everything in your power to make the buyer meet that deadline. And if you are buyer, you should respect the seller's desire for a quick close and work hard to make it happen on your end.
Great post. Some good tips to speed up the process?: vendor Due Diligence (competitive deals), LOI as short as poss, experienced lawyers, …
I know where you are coming from but I would say that every minute spent on the LOI saves a couple of hours on the contract.LOIs are negotiated by business guys and are therefore more pragmatic and even handed.Contracts are negotiated by guys getting paid by the hour who think they are in the deal making business while they are only really good scriveners.If you get the LOI perfect, the contract is a breeze.You leave the LOI on a bar napkin, then the lawyers will spend all your money, piss everyone off and extend the time period to get it all done.When two CEOs have signed the LOI, then meet with BOTH sets of lawyers at the same time in the same room and go through it. This prevents one set of lawyers from saying — that’s not what my guy said. It will save you a fortune.It also makes it clear that the principals want this deal to be done and the deal points. It keeps the lawyers from running up your bill.
I prefer to have lawyers in the LOI as well altough I agree with you that the spirit of the agreement should prevail during this phase, and lawyers have no spirit…. 😉
does an LOI have any legal weight behind it?
The second you start worrying about “legal weight” versus getting the deal done, you’ve now fallen into the scriveners path. They become the winners.
I agree you should try to get the deal done. Its just that whenever I’ve heard lawyers talk about LOIs they always seem to dismiss it like no big deal
Read how I think you should deal with lawyers….that post is less than a month old.Whether they mean it or not the best thing that can happen for the lawyers and the worst thing for the business is if the lawyers not only focus on everything that can go wrong (that’s their job) but combine it with the business negotiation.Those bombs that get thrown over the wall open up the spigot. Your lawyer reviews their lawyers bomb, calls you (on the clock), crafts a response that shows you that they are clearly on your side again on the clock neatly crafting their bomb, throws it over the wall, rinse, repeat, try again until all the money goes to Dewey Cheatum and How.
No, but what it does have is the weight of the principals’ honor. Every time I ever sign anything I look the guy in the eye and tell him I don’t give a shit about his lawyers or his signature, but I want to know if his word is good.I do it in a particularly obnoxious and confrontational way.I have never had anybody fail to rise to the bait.I have settled more than a few matters by reminding someone we each gave our word of honor.My word is more powerful than an acre of garlic. Make yours so.Plus it’s great fun to see people squirm. I once made a big time lawyer from Boston wish he had eaten worms rather than get into a discussion about the honor of his firm and his client. In the end, they did the right thing.Personality and honor is way more powerful than any other form of commitment. I promise.
An LOI can indeed have legal weight; courts enforce particular provisions if it appears — in hindsight — that the parties intended those provisions to be binding.
Sure there are specific provisions that are intended to be and are, in fact, enforceable but to fight about an LOI means that the deal did not make.
Wish you had it on tape. It is great to hear of someone refusing to placate another’s presuming he/she is more important due to a degree.
Cannot like more than once. Paragraph 3 priceless.
The working of the LOI has the lawyers working for you, as it should be.
best way to speed things up is to create some competition for the deal. social proof, again….
That’s the key every selling scenario strives for – a bidding scenario.
Just like dealing with VCs or anyone else investing in your company. Whatever you do…..don’t give them a free call option.They’ll take it.
Think of it this way: three months to close a deal and three months after the deal closes to integrate means that the company has spent 1/2 year not focusing externally.If both of those double as can happen if you are not seriously pushing the company has spent a full year not focusing externally.Both buyers and sellers should think of that and be seriously scared as a ton of value gets lost in a year.
When we did our deal we definitely felt as if it was a major distraction but, thanks to careful process isolation, no one except a handful of people at our company knew the plans. So, despite a 4+ month process, the company continued to operate, sell and grow with the distractions that senior management had to deal with.
I think it still has to affect focus on the outside. Somebody put it best: “you can only think of one thing in the shower every morning”The handful of people that have to be involved always are the key people and if they are the key people they are customer focused whether it be selling or developing for the outside.I’ve sold two and bought two. I’ve seen it go really bad and really good.Went it went well it was crisp and fast to a close: two months and quick and fast to a complete assimilation: two months.When it went bad it was five months to a close, and I suppose assimilation worked after I left in disgust in six months, but it went bankrupt nine months later, so I don’t know if that counts.
Great post, Fred and very true. I’ve sold two companies and both times, we were able to get the deal from first talks to closed in six weeks.One of those was my dad’s company and his industry was in a tailspin. I spent two weeks flying around shopping it to larger competitors. The last one I met with immediately put their full resources behind making it happen and I had a feeling they’d be the one.Sure enough, six weeks later was the dinner with the champagne. And even though my dad didn’t make a ton of money right off the bat, it was still worth celebrating because of the circumstances.
That’s remarkably fast, in my opinion. Glad it was! Congrats.
Once the news is out, what do you recommend, both internally and externally? I feel that transparency internally and very controlled message externally are best but difficult to achieve.
I agree with you
Like most everything in business, selling a company is a talent which can be developed and perfected. It requires a bit of focus and diligence and really not much more than just a dash of luck. Of course, the harder you work, the luckier you become.The two best answers to anything in business are a quick yes or a quick no. Even getting a quick no is better than a long drawn out unfruitful courtship.The most important thing to learn is the motivations of the prospective buyer. If a buyer cannot articulate why the buy makes sense — then they are just fishing.Find out whether the buyer is an experience buyer both personally and in that business entity. A company may have never bought anything but if the principals are deal guys, they are still deal guys. Everybody’s first trip to the rodeo takes longer to absorb the process.Figure out immediately if they have the money. No money coupled with a handful of Viagra still doesn’t get you any deal wood.Then I would counsel to do all the heavy lifting yourself and be prepared to do it at night after you have worked all day — letter of intent, contract, due diligence, closing checklist and closing. Force it not to impact your business.Take a lot of early morning breakfasts to deal with the other guys and make them deal face to face. You can read when the deal wood has gone soft if you meet face to face.Make the buyer put up a meaningful amount of earnest money. This is a test of commitment. Recently I had some guys fling a contract over the transom and it had $5K in earnest money — probably an approximation of their Am Ex account for a weekend. I countered with 5% of the deal and they bit — surprised the hell out of me. Deal did not make but I got a quick “no” in the next three days.Competition — create it, if you can. Don’t shop the deal if you have a “no shop” provision but get over that hurdle right up front.Ask the buyer if they are pragmatically capable of keeping your deal confidential and then make confidentiality a default condition and if the deal gets out, then have the right to pull the plug and keep the earnest money. It is not a great resolution but it keeps folks honest.
Does not this remind one of the “Rules” in dating scene. When being a seller, usually a girl, you do it not too slow, and not too hasty. You have passion to “tie the knot” but hey, don’t forget your strategy.
Selling a company is more like being a really skillful courtesan — not wasting time, getting to the main event, getting paid and doing it with a bit of class. Maybe enjoying yourself in the process.I can assure you it is NOT a marriage as they intend to kick you out of bed right away.Just make sure the check has cleared before you fanny hits the floor.But, hey, what do I know anyway.
You crack me up JLM. Such a good analogy
If I was selling a business, I would want it to be fast also! Great post, Fred. Thanks!
One key to getting through the process quickly is to run a tight ship operationally. Do you have board meeting minutes? Are your vendor and client contracts all in good order? Is your cap table up to date? Are your option grants all properly documented and ratified? Are your financial statements in good shape?Once you get that LOI done, you’re going to get a data room request to start due diligence. You should be able to get that room populated quickly to get the buyer’s team working on their review.Any gaps in information or inconsistencies gives lawyers and corporate development teams a reason to delay. There’s no reason to let that happen, but it comes down to how you and your team run the corporate affairs of the business.
Nice to read about your experience on this timing subject! For our M&A course at the university I did some interviews focusing on the pre-formation process and also found that speed plays an important role and seems to be influenced by M&A experience of the parties. I developed a (concept) management matrix http://www.antoniothonis.co… on how to manage acquisition experience to improve this pre-formation process. Timing would be a good addition to that.
Nothing kills a deal more then time. Now that I have learned that lesson I would never go into a deal without making sure it is spelled out in the LOI.Great post.
It took 7 months from the very first meeting to selling my last company. . . .3 months from when we signed the LOI. Everyone knew about the pending transaction at the company but no one could talk openly about it. . . .3 months of pins and needles is about the most anyone could take.What helps speed things along. . . an earnings announcement, vocal investors, and optimism.
Wow. That’s impressive you got it done over such a long timeframe
Having been through the process that didn’t the way we wanted, don’t let anyone outside of the most critical circle know you are considering it … CEO, Operating Manager (ie COO), Board, CFO, that’s it.
We just had this discussion at a board meeting. Really tough call on thisone
Do sellers ever try to find out what the ulterior motives are of the buyer and vice-versa. Is money the biggest criteria to decision making i.e. for a specific price all the road blocks go away and if so, does fairness ever play a role or it is buyer beware.
I don’t think three months is particularly long and certainly don’t agree that anything over that is “too” long. Granted, I’m no expert, but everything I was told in preparing to sell my company suggested that three months is actually fairly fast.Keep in mind, 90 days is not that long to prepare and negotiate terms, prepare and deliver reps and warranties and, as is often required, allow the buyer to perform some serious financial due diligence – perhaps even perform an audit. Add in travel schedules for both parties and a smattering of holidays and you’ll see you can easily fill up the calendar – and that’s if everyone is hustling. And, I didn’t even mention tech companies and their need for IP review – often with teams of tech experts making on-site visits. Plus there are tax ramifications and their respective reviews.When we did our deal, it spanned Labor day, Halloween, and, finally, Thanksgiving. They all contributed to delayed travel. And, if the buyer has a bunch of deals going on simultaneously (as our PE firm did) they’ll feel uncomfortable pushing things much faster.
I guess examples will flow in the comments section.
I’ve seen the scenario in your last paragraph. Great way to describe it. Thought of you as I was in Oxford yesterday.
“Shit or Get Off the Pot!” This line applies to every point in a company’s life cycle:- Getting started- Selling- Marketing- Selling- Expanding- Competing…
Agree with you. Really its a full life cycle