Avoiding Transaction Deal Breakers

Doing deals is difficult. Nowhere is it more cumbersome than in the event that you decide to buy a rival company. And no where in the timeline of deal negotiations is the deal most susceptible to annihilation than in the final hours–the time when most deals end in a magnificent implosion. Take Congress’ recent fiscal cliff negotiations as a “case in point.” Increasing the odds of smoothing transaction success can come from a number of factors which might include everything from better due diligence to more clear initial expectations.

Mitigate Litigation Risk

Pending legal action, especially if its existence does not surface until late in the deal game can be an absolute death grip on any deal. Regardless of whether pending legal action originates from shareholders, customer, vendors, employees or some combination all potential legal threats become fodder for deal negotiations and can significantly sour a deal with many investors. Here are a few key questions which may be helpful in the quest to unearth potential issues:

  • Does the company have a reputation of honesty, fairness and integrity with vendors, clients, employees and its industry at large? 
  • Does the company comply with all legal and ethical guidelines from regulatory bodies including state and federal jurisdictions?
  • Does the company have a history of litigation issues in any shape or form?
  • What is the company’s overall litigation history?

Even if a current lawsuit is not in the works, future lawsuits may be impending if the aforementioned questions are not addressed.

Unknown or Unanticipated Liabilities

Similar to legal liabilities, other unforeseen business risk such as current and future pension requirements and/or health insurance premium increases in the future could throw a wrench in the deal’s cogs by making the deal much less desirable for investors. Additionally, some companies may not be operating under the strictest legal code. For instance, we worked with one company who initially stated they were operating legally, but when deal negotiations and due diligence ensued, it was found the company had some 20 employees working illegally. Not fodder for good deal terms. The deal completely imploded once this came to light.

Pay Attention to Tax Implications

The tax implications of a particular deal’s terms and structure can have huge implications on both buyers and sellers. If improperly structured, a transaction can quickly unravel if deal terms are not amicable for both parties. It combination, it can be helpful to have a tax advisor with a strict legal understanding of the tax code in the jurisdiction in which you operate. This makes for a great combination for avoiding tax-related deal breakers.

Controlling Labor and Overhead Costs

Labor and overhead costs vary greatly from company to company and many labor and overhead issues can prove deal busting for some investors. Here are some questions to consider:

  • Is the labor force unionized? 
  • If not, does the labor force contractual obligations put other burdens on the company which may not be obvious?
  • What types of tacit knowledge does the labor force hold? Will key employees make a b-line for the exit once the deal closes, taking profits and customers away with them?
  • Is overhead running too lean or too heavy? Will significant investments be required post-deal to ensure turnkey operations continue because the company has failed to reinvest?

Overhead and labor can be two major sources of cost liability for any business. Understanding how the business operates before deal terms are negotiated will help to alleviate deal implosion risk.

Ensure Insurance

Insurance is key to ensuring deals move forward smoothly. Specifically, insurance may be required for several components of mergers and acquisitions. If the company is not protected with worker’s compensation insurance or product liability, the deal could go much less smoothly. From the acquirer’s perspective merger insurance can work in some scenarios, but is often overkill as it generally only protects against punitive deal terms which we’ve noticed have decreased over the years.

In short, don’t let deals go south by preparing early and knowing what sticky points could alter the deal’s progress.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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