Insights

Managing a Deal for Efficiency and Effectiveness

By Steven Keeler

A company raising capital or engaging in an M&A transaction should be mindful of how an effective and efficient transaction process can not only produce an optimal outcome (including price and terms) but also minimize management distraction and help predict and manage professional fees. A poorly planned or executed deal process almost always brings deal fatigue and less optimal results for a company and its management, and can result in the dreaded “busted deal”. Here is my list of the top 10 variables that impact deal process efficiency and outcomes and some best practices to manage these variables for a more successful transaction. The company and its advisors should share responsibility for getting the process right. These variables and practices are usually well understood and addressed by buyers or investors, but companies and sellers stand to gain the most from a well- run deal process

Top 10 Transaction Variables (or Don’t’s) that Drive Inefficiencies:

Not all of these problems can be managed solely by the company or its advisors, but an awareness of them will allow the seller and their counsel to manage the process to avoid or minimize deal roadblocks and “ambushes at the finish line”.

• Limited or late pre-deal planning (selection of deal advisory team, assessing the potential buyers or investors, and task assignments)
• Inefficient or outsized due diligence (by buyer or investor) and seller preparation of disclosure schedules (i.e., to the definitive purchase agreement – a substantial portion of the legal fees for a deal are often, and unnecessarily, related to these).
• Disorganized seller, buyer or investor, including their counsel (pre-deal seller housekeeping, and buyer or investor commitment and financing sources, are key).
• Unforthcoming seller (i.e., slow or hesitant in providing requested information – this makes a buyer or investor nervous and lengthens the process) or excessively picky buyer or investor (e.g., too many or inefficient due diligence requests and slow decision making).
• Inadequate data room (i.e., where company documents and information are stored for buyer or investor due diligence – get this populated asap, which will require work by someone inside the company).
• Short-changing the term sheet or letter of intent (the more financial due diligence that’s been done before the LOI, and more detailed the terms, the better for the seller – buyers and investors often try to rush the LOI to take the company off the market and increase their negotiating leverage).
• Poor understanding or articulation of seller, buyer and investor business goals and acceptable risk.
• Deal complexity (especially unneeded complexity).
• Over-lawyering (often the seller, buyer or investor should direct and manage their counsel).
• Stops and starts during deal process (which typically result from the first 9 variables – sellers should keep the buyer or investor on as short a timeline as possible, including minimizing the length of any “no shop” period in the LOI).

Best Practices (or Do’s) to Make Deals More Efficient

Not all of these problems can be managed solely by the company or its advisors, but an awareness of them will allow the seller and their counsel to manage the process to avoid or minimize deal roadblocks and “ambushes at the finish line”.

A. Pre-Deal Preparation:

• Assess and engage outside advisors (attorneys, accountants, brokers and others, with in-house capabilities in mind) before deal is “live”.
• Discuss deal strategy and scope of work for in-house personnel and outside advisor.
• Leverage deal team efficiently (clearly assign tasks and establish communication protocols).
• Proactively prepare legal forms in advance (confidentiality or non-disclosure agreement, letter of intent or term sheet, “standard” pro-company purchase agreement (especially if multiple buyers or investors will be engaged in an “auction” process), and ancillary documents such as corporate stockholder agreements, LLC operating agreements and employment and option agreements).
• Communicate plan to, prepare and update check lists and timelines for, the seller, buyer or investor deal teams in advance and have regular checkpoint calls to discuss status.
• Decide deal structure (e.g., type and terms of debt or equity issued, or asset versus equity sale) and flesh out letter of intent (“more is more” for the seller in avoiding late-stage negotiation surprises or buyer or investor “re-trading”).
• Set seller (and buyer or investor) expectations regarding process and timeline and educate the seller regarding what issues matter and what issues do not matter
• Avoid unneeded complexity (e.g., overcomplicated earn-outs, management equity participation, tax planning and working capital adjustments).

B. Closing the Deal:

• Get fee updates to “course correct” as needed based on fees to date to see if some tasks can be re-allocated to non-billing team members or the buyer or investor.
• Understand difference between due diligence for risk identification versus diligence needed for integration (with buyer or investor) after closing.
• Prioritize identifying risks and liabilities based on business rationale and risk tolerance.
• Have a separate budget for post-closing business processes, integration and management (e.g., new IT, personnel changes and board reporting).
• Handle certain pre-closing and post-closing tasks internally if possible (depending on management “bandwidth”.

Take Away:

Every company seller or issuer, buyer, investor and transaction is unique and presents different opportunities, objectives and challenges. Early planning and team organization around transaction process and deal execution will almost always add value, result in optimal results and better manage fees, costs, frustration and fatigue. The company or seller may have more at stake than the buyer or investor if a process is poorly planned or executed, so the company should take ownership of the process, be clear about its expectations and proactively and push the process to a closing. As I’ve heard it said, “deals that don’t get done quickly too often don’t get done”.

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