Risk management: Closing the deal

'Deal fatigue'

Brian Rich
Catalyst Investors
Managing Partner

When you consider that only one out of every hundred deals reviewed actually closes, the obstacles to closure seem countless.  But one completely avoidable obstacle is loss of momentum, commonly referred to as deal fatigue. This phenomenon occurs on both the buy- and sell-side.  Sellers hire intermediaries to manage the process and enhance demand which in turn escalates the price.  As a buyer, whether we admit it or not, the most hotly contested deals are the ones that happen at the highest multiples, on the best terms for the seller and in the shortest amount of time. 

Conversely, we’ve all walked out of a store having nearly purchased an item – never to walk back in again. Similarly, the wise dealmaker never lets a buyer “walk out of the store”.  One must understand and concede early on in the deal process which points are sacrosanct and which are merely part of the negotiation. It is important throughout the closing process for the seller to reaffirm the original conclusions made by the buyer and drive the transaction to completion. A very shrewd dealmaker (and billionaire) once said to me “your price, my terms; my price, your terms”.  I couldn’t agree more. Now get on with it!

‘Too little thought’

Edward Rees
SJ Berwin
Associate

So, you have identified a good deal. You want to make it happen and fast. You want to put pen to paper. What could possibly go wrong? One common problem – too little thought goes into thinking through the processes required before signing on the dotted line. Here are some tips:

First, consider what consents or conditions need to be met for this deal to be done. How long will it take to obtain these? Remember that moving money and obtaining bank consents take time. Allow for slippages – particularly when dealing with regulatory, governmental bodies or GP’s consents.

Second, identify and communicate the exact rationale for the deal to the whole deal team (including the lawyers and accountants). This helps everyone focus on the key issues. This should save legal expenses – particularly on the smaller transactions.

Lastly, use a completion checklist to prepare for the days leading up to completion. This tool enables you to allocate responsibility for the production and delivery of each document. It also gives you a status update as you approach the day of completion. Generally speaking, the more detailed such checklists are – the better. If possible, include who the signatories are for each document. Too many deals get delayed because the right signatories can’t be found on the day of completion. A major city law firm recently had to send a trainee to Paris to search for their sole signatory for two days. The deal was delayed for two weeks as a result.

Ultimately, paying attention to all these minor details will help your transaction run more smoothly.

‘A lack of time and transparency’ 

Charles Moore
Trilantic Capital Partners
Partner

What is the biggest risk to closing an investment in a founder or family-led business?  Far-and-away, the biggest risk is failing to adequately take the measure of the person who will be your partner. This is a risk that goes both ways.  Founders can “pull out” of deals before closing, as they digest the realities of working with an institutional investor with specific governance and exit requirements.  Call it cold feet. Occasionally, it’s a personality conflict – Wall Street types aren’t known for being a loveable lot. In my own experience, Trilantic has often wound up in the poll position in an otherwise competitive process based on the “late innings” behaviour or demands of other prospective investors.

GPs, for their part, can also turn sour on a deal when, in due diligence or contract negotiations, their founder/partner reveals a side of their character or personality that they hadn’t seen before. Call this a reality check. For a sponsor to leave control in the hands of an incumbent shareholder, that partner must be both competent and ethical. How the founder handles the overall investment process, right up until the end, will cast light on those qualities. When you discover in diligence that a few thousand dollars of Cuban cigars are running through the P&L, is that a humorous idiosyncrasy of the founder or the tip of an unethical iceberg?  When and how this kind of thing is disclosed and explained will effect an assessment of the trustworthiness of your partner and, consequently, your interest level in pursuing the investment.

So, if the biggest risk is discovering that your partner is not who you thought they were, what do you do about it? The answer: time and transparency. Both sides have to take time, in structured and unstructured settings, to really get to know one another. What matters and what doesn’t; what makes them tick. Of course, time and transparency can be the enemy of auction processes. This explains, I think, why many founders choose to take a more tailored approach in picking a partner. With adequate time and early transparency, founders and investors can keep the wedding bells ringing and the divorce lawyers at bay.

‘Effective due diligence’

Robert Darwin 
Withers
Solicitor

From a legal perspective, one of the key risks to a successful deal turns on whether the legal due diligence for an acquisition is executed effectively by the buyer’s attorney.

The first part of effective due diligence requires the buyer’s lawyer to ensure that the diligence process for each deal is bespoke; focused on this deal, and the issues which are particular to it. This involves listening to the client and forming a clear understanding of the commercials driving the deal. There is no ‘one size fits all’ approach that works. Due diligence should focus on a general review of the target, understanding any known issues, and assessing any specific areas of focus that the client has.

Equally important to the process is how any issues identified by due diligence are handled. No target company is perfect. Problems are to be expected. It is not the absence of problems that makes a successful deal, but how they are addressed.

Too often I see lawyers building up issues to their clients as deal-breakers whose commercial importance to the deal is minimal. It is important for a lawyer to really focus on understanding how identified issues fit within the client’s commercial drivers.

If an identified problem does need resolution, it is then the job of a transactional lawyer to devise solutions that protect the client, whilst being capable of agreement by the other side. This latter part is key; there is no point in fixing the issue whilst killing the deal.

If executed properly, effective due diligence can assess a target company’s health whilst addressing problem areas. But, if bungled, the process can be a deal-killer or, even worse, lead to exposure of the buyer to unnecessary risk.’