Post-LOI Challenges in M&A
Roadblocks to M&A have squashed many a nearly-closed deal. In fact, we always maintain the mantra that a deal ain’t done until the money’s in the bank.
For most M&A advisors, getting to the final deal closure is the end of the line. It’s certainly a great deal of work in its own right, but the real challenge for much of M&A occurs in the post-merger integration step–the one most consultants avoid altogether.
For those unfamiliar with the Letter of Intent or LOI, it’s the document that precedes the final Purchase and Sale Agreement as well as Due Diligence and deal closure. The LOI is truly what engages both parties into getting into and airing all the dirty laundry. Post-LOI is the time when companies with skeletons in the closet have the hardest time getting to that final day and closing a transaction. Here are some hang-ups in the post LOI phase that can quickly shutter a deal and some examples of where that has happened.
Due Diligence Difficulties
We’ve spoken before about some of the difficulties inherent in due diligence. It’s almost never a fun time for the seller. He or she will be asked to provide all the private details relating to the business, it’s contracts, legal coverage, insurance, payables, receivables, employee contracts, tax returns and bank statements. This process’ stress is compounded by the fact that the deal hasn’t completely closed yet. At some point, a finding in the due diligence could be cause for renegotiation, or worse, complete deal implosion.
Preparation for due diligence before it occurs is one of the best things sellers can do. Begin gathering ALL information about the business, it’s operations, bank accounts, liabilities and employees while the deal is being marketed–having all the data ready before due diligence. As we’ve said before, the faster due diligence, the greater probability of M&A success.
Post Offering Memorandum Aberrations
Once your Offering Memo is out and includes all the adjusted financials, including balance sheet and income statement, there will most certainly be changes that occur–for good or for ill–in the company’s performance. Such changes can, at times, significantly alter the state of the business, its valuation and the ultimate sale price. This is especially problematic because most deals can take between 9 and 18 months to finish.
Certainly most of such issues will come out in the due diligence phase, but stickiness remains on some of the finer points of the deal if significant changes in the performance of the business cause significant and often less-than-desirable valuation adjustments.
Doing Business Between Buyer and Seller
As a general rule, it’s best to keep business opportunities where buyer and seller can work together to a minimum–and preferably at a level of zero until the deal has been completely consummated. While not so obvious on the surface, buyer and seller are certain to find differences of opinion in any number of issues as to how the business is to be run.
We ran into this issue sometime ago where the seller knew the buyer had access to networks and people he didn’t. When an internal opportunity came around right before due diligence that would have resulted in significant revenue opportunities for the new combined entities, the two jumped at the chance and together started working on fulfilling the request. Unfortunately, disagreements as to how the process should have been completely most effectively caused a flare-up and nearly blew up the deal.
While it’s important to date before you marry, we suggest casual conversations before you transact. Sometimes it’s better not to know the buyer’s management style or preferences, it may turn you off when you know how he/she might treat the company once the deal is complete. Prioritize things by order of importance. If the deal is paramount, let other things slide until closure. Exceptions exist to this rule, but the rule is just good horse sense to live by.
After Closure
The Letter of Intent is where the easy stuff ends and the hard tasks begin. Even after deal closure a number of issues remain in merging two separate companies:
- Bringing together different management and employees where cultures may not exactly gel according to plan.
- Expanding the business and continuing the planned growth trajectory with differing products, services and management
- Consolidating operations and making the business even more efficient after the transaction has taken place.
As a recent Forbes article outlines:
Hard as it is to build a … business designed to last in perpetuity, it’s shockingly easy for any successor to tank it.
The same holds true for any deal, regardless of its size.
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