Motivation to close without delay when both buyer and seller are in agreement that an acquisition or merger should proceed is idyllic. In fact, any due diligence lasting greater than 60 days has the tendency to cause deal implosion. In the middle market, any due diligence over 90 days further increases the probability of a deal completely falling apart. However, no two deals are cut from the same cloth and sometimes delay is necessary for M&A completion at all. This is especially true in the case of necessary third party (including governmental) approval or when delay may be required to facilitate financing for the transaction. For example, larger deals may often require FTC approval while others may require filings and blessing from the SEC (like in the case where the purchaser issued as consideration shares that may constitute a public offering). The SEC will most certainly slow acquisition speed by requiring doc filing, especially when the acquirer represents a publicly traded entity subject to the proxy rules of the SEC.
There are an innumerable number of detailed nuances that might shift the gears of a deal from overdrive into first. Without going into all possible scenarios, I’ve outlined at least one characteristic from buyers and one from sellers that will give some good insight into how deals can be greatly slowed by the decisions of one side or another.
Buyers Kicking the Tires
A great number of buyers are, for whatever reason, simply out to kick some tires. From my own personal take, tire kickers who’re repeat offenders often either lack the resources to acquire the companies they inspect, don’t have the industry-specific expertise in enough areas to truly add value or feel comfortable with investing in a particular business, or they’re just not ballsy enough to take on the risk associated with an acquisition. In most cases, however, I would equate most tire kickers to very disciplined CPA-types. They know what they’re looking for and know exactly what they’re willing to pay for it–no more, no less.
This no-bull mentality actually helps weed people out. In short, it swings one of two directions. The buyer is either extremely interested and wants to make a deal very fast, or backs out immediately. I personally like this level of no-bull discipline in deal making. For those deals that take much longer than they should, it’s usually not the disciplined folks holding you up. They’re typically in or out very rapidly. Those that hold you up are the ones who know nothing about the business and ask way more questions than would be necessary for a strategic acquirer. It’s like due diligence comes early and all eight potential buyers all want to have it at the same time. It can be a big time suck.
When the Lawyers and/or the Regulators Get Involved
We’ve had a couple of deals that were red-flagged by the state Attorney General in the state where we were doing the deal. One of the acquirers would have created a small monopoly for consumers, allowing them to have full control over product pricing in the region where they were located. As such, the AG jumped in and made specific requirements which included cross-selling of product to other suppliers to ensure the prices wouldn’t be hiked and ultimately hurt the consumer. Luckily the final winning bidder in the deal wasn’t the local competitor and no additional concessions were required of the buyer-seller combo after the deal close. Prior to, however, the AG had dragged out the original terms of the deal for over a year. This him-haw issue caused the deal to go soft and without the right advisor, the company sat in limbo for months–still desiring very much to get the deal closed–but without the legal ability or strict process to push it through.
This just paints a simple example of what can occur and why deals can get bogged-down in the mire of legal issues so very close to the finish line. The catalyst to move things forward is often different and extremely personalized on a per-deal-basis because of the various and differing nuances of each opportunity.
Just a little side-note: it’s best to be very careful with the AG. They make their reputations as protectors of the people and if any business deal appears to provide an AG with an opportunity for advancement by stiff-armed squashing, it’s most likely going to occur. It’s their job and they’ll ultimately do a darn good job at it.
The Cold Feet of Buyers and Sellers
Like any good analogy to a marriage, both buyers and sellers have been known to get skidding, especially right before a deal. It’s interesting to note that it’s not just one or the other either. Just in a snap judgement, I would suspect that sellers are almost as guilty of cold feet syndrome as buyers. It’s tough to sell your baby and getting through the emotions of getting the deal done can slow the process significantly if seller’s aren’t full committed to the process.
I’ve seen deal makers on both the buy and sell side go from, “When can we sign, we’re so excited!” to the next day pulling the plug and wanting nothing to do with the process. There’s a lot of unforeseen emotion in these decisions, rather than straight financial logic. When it comes to out-of-check emotions, the truly sophisticated buyer (and seller for that matter) typically has his/hers much more easily in check than a would-be seller. Sellers are laying out all their cards and selling the family farm in one foul swoop. It’s not easy and the slow speed of transactions, unfortunately reflects the unease at times.
Speed at closing is almost always desired, but as my dad always told me, have a long courtship and a short engagement. If you’ve got the time, spend it. Don’t rush yourself or your potential buyer into a deal that may not be a good fit for either party, but when the stars align, move.
One final caveat. Deals like this are always perceived as slow and can take 12 months and longer. In fact, it’s highly rare that a deal can get done–from start to finish–in less than six months. So, being slow in any event may just be a reflection of a deal-maker’s [insert my name here] impatience with the process 🙂
Acquisition agreements with provision for simultaneous closings help speed the acquisition process by simplifying the financial engineering as well as generally requiring less paperwork. Additionally, documentation governing the time between signing and closing can be completely eliminated, reducing one less step in an already elongated process.
In delayed closings provisions such as “no shop,” “options” and “break-up fees” are often included in agreements involving a deal with delayed closing. Other reps and warranties and related indemnification provisions further slow the closing process, especially in the event of a two-step closing.
Unfortunately not all deals can conveniently be placed in the simultaneous closings category. Thanks to a Delaware Supreme Court decision in 1996, two step mergers that follow a change in majority control during the transition period require that any value added during said period are then
…accrued to the benefit of all shareholders and must be included in the appraisal process on the date of the merger.
In this case, holdout shareholders can become a major problem. If dissenting shareholders do not sell their shares in the first step in a two step acquisition, then they may be entitled to their pro rata share of the pie with the value added to the acquired business during the transition period. This forces the buyer to pay a higher-than-the-original price to the selling shareholders as part of the second step of the acquisition. Hence, the somewhat obvious benefit that simultaneous closings can happen more rapidly, not to mention the money saved by not being required to payout the increased value to resisting seller shareholders.
While never an ideal scenario for any business owner, sometimes selling a company quickly is an absolute necessity. The mantra, “nothing that is worth having comes without a price” is applicable throughout the M&A process. Consequently, extreme care must be taken when owners and their advisors work to sell a business as fast as possible.
In doing so, one must keep in mind that the cost, quality & speed trade-off applies: the faster you want something done, the more you’ll have to pay and the greater likelihood the quality will be below an acceptable standard. Keeping all these components in mind should make an owner rethink a speedy strategy for selling a company. But, when re-engineering is not on the table and speed is the best solution, there are a few key risk factors that still need to be considered.
Sometimes speed is forced by factors outside shareholder control and could be motivated by internal conflicts among partners or shareholders, family health issues, or an initial bid by another potential acquirer. When speed is necessary, the advisor focused on the deal will need the following characteristics as an absolute must:
In short, the factor with the greatest correlation to successful deal speed is the advisor with existing industry contacts and industry expertise doing deals in your niche of interest.
A note about distressed and special situations
Occasionally we’ll come across a client or a potential client who’s business is under duress. This scenario can be extremely stressful for owners who see a business with high fixed costs whose cash-flows may not be covering the outflows. In a bleeding business, a quick fire-sale may be the only available option to avoid financial ruin or bankruptcy. Such special situations may require the quick sale of non-producing or expense-driving assets while maintaining the core cash-producing money center for the company.
Sometimes the company may have been plagued by external macro factors like changes in regulation or general industry consolidation. In some cases, distress is suffered as a result of internal management incompetence. Whatever the case, the company management should recognize the situation before it’s too late. You can either merge or die a slow death and end up selling the assets-only at a massive discount from fair market value (FMV). This only underscores the need to have M&A expertise retained long before shareholders are intent on selling so as to be prepared in the event that factors out of the owners control significantly change the current and future outlook of the company’s fortunes.
Selling quickly is, in and of itself, a special situation that requires the assistance of experts and the networks to make it happen.