THIS WEEK IN BROKEN DEALS

Here’s what’s in store for this week:

• Announcement: Get a free copy of our new ebook, The 10 Commandments of a Sellable Business

• Best Link: The State of Private Equity in 2024 with Charts & Data

• The Graveyard: Are you getting screwed in your deal? We argue its a matter of fact, not feeling and then show you how to navigate the high emotions of tense deals where someone feels like they’re “getting screwed”.

• Work With Us: We help business brokers and M&A advisors with financial analysis. Reach out if you’d like some help on a success-fee basis.

ANNOUNCEMENT

Get our new ebook, The 10 Commandments of a Sellable Business!

This ebook contains the main principles we’ve uncovered analyzing hundreds of broken deals and describes the 10 things you must avoid to close more deals, including:

• Why focusing on price is often a mistake and how to use it to your advantage to speed your deal to a closing

• How to manage your team through closing so your sales stay strong

• The mindset every selller must have to guarantee a successful exit (and why avoiding it can cost you millions)

• And more…

Click this link now to download your free copy. 

BEST LINKS

Matt’s Favorites

• One of the best investment memos ever written (Twitter)

• Deconstructing the A-player in Private Equity (LinkedIn)

Finance & Capital

• M&A deal points for rollover equity valuation (LinkedIn)

• The State of Private Equity in 2024 with Charts & Data (Twitter)

Salability

• How to figure out if the SMB you want to buy is over-reliant on the Selling Owner (Twitter)

• Why deals aren’t always as simple as you’d think (LinkedIn)

THE GRAVEYARD

Being screwed over is a factual determination, not a feeling

I was working a buyside deal a couple years ago which started off with an incredible dynamic. The Seller was one of the best I had ever worked with. He really seemed to get the idea that he needed to sell his company. Be personable, admit there might be a few things wrong with the company (which, conveniently, he was continuously coming up with great suggestions for how the buyer and the buyer’s new skillset could fix), and have clear asks from a contract perspective on the things which we needed to do to make him happy with the sale.

Due Diligence was actually a great time. We got to go in for some really long site visits, and he even took my client out directly into the field on sales calls. (Seller hint: No one will know you’re thinking about selling the company if you happen to have a “new sales hire” with you on some client drop ins. You’re just showing them the ropes!)

Like all good deals, this one sort of had an energy to it all its own. The personalities meshed, the business capabilities meshed, and the broker had done a good job getting price expectations in order before the deal started.

Diligence was still ongoing when it came time to start writing the PA. Our side sent over the first draft. First call on redlines went well, some simple asks from their side which weren’t too bad (some equipment the Seller wanted exempted from the deal as personally owned, a little higher interest rate on the Seller Note, easy stuff).

Confusingly, though, the tenor of the deal changed as redline discussions continued. It seemed that for some reason there was always a new kink in the hose every time we got back on the phone with the Seller team.

Getting in touch with the broker, we asked what we felt like was the obvious question - Is this a price issue? We knew the company was continuing to perform well, and sometimes the Seller can get upset he’s doing a deal at a price he thinks is more in line with the value 6-12 months ago opposed to its present worth.

The Broker assured us he’d get some answers.

When he called back though, they didn’t make the ask to increase the purchase price - they still thought it was fair.

Ultimately, the Broker didn’t have much in the way of an explanation. The deal was still moving forward, albeit at a bit of a slower pace, so his opinion was to just keep chopping at the tree and we’d all be able to close the thing.

We came to that same conclusion as well, but things had turned from feeling like we were sailing with the wind at our backs to hiking up a mountain face.

It’s difficult to say what the issue really was, but the best way to sum it up might be the following: The Seller stopped agreeing to agree. Now, when we came to the table for our weekly meeting to resolve issues, issues we were happy to have frank negotiations on, the responses started to come as “I’ll have to think about that one,” and “Not sure, gonna need some time.”

I’ll skip ahead here, cause this story doesn’t have a happy ending.

The deal eventually died. My client managed to get the skinny straight from the horse’s mouth afterwards, since the failure of the deal was pretty surprising to all involved.

In short - the pace the deal was moving at had started to scare some of the Seller’s advisors (including friends and family).

The reasoning was essentially the following: “The people you’re negotiating with seem very professional, very smart, and very capable. A little too professional, too smart, too capable, if you catch our drift, don’t you think? Are you sure you’re not getting screwed somewhere you can’t figure out?”

Don’t Do That

There’s a lot packed into that way of thinking, probably too much to go over in one post.

What I’ll highlight in this article, though, is simply the lack of groundedness which it showed about the actual facts of the deal at hand. Could the Seller’s advisors point to a direct part of the PA which was unfair to them? No. It was all “vibes.”

While I am not one to try to downplay gut instincts, in this case I actually believe it was simply a lack of specific knowledge about the kinds of topics that PA’s really cover which led to this misstep on their part. A PA is not some magical document which signs away your life if you fail to read the fine print.

To be fair, though, looking at the deal from their perspective, I see them making the same mistake my own clients have a tendency to perform when I’m on the Sell side as well.

They were trying to second guess the minutiae of the deal as opposed to taking big wins on the deal points which they were most familiar with.

The Divisions of the PA

To help reduce these kinds of mistakes in the future, I am going to give some advice here on how I explain Purchase Agreements to my clients, albeit with an enormous caveat -

I am not a lawyer. Which means, not only am I not giving explicit legal advice, this is not even implicitly about giving legal advice at all in terms of your PA’s.

It’s about how to navigate the emotionally difficult PA process as someone who has no chance of understanding them, because you and I never will have the law degree necessary to do so.

As a deal practitioner, I break PA’s down into three main categories:

1. WHAT is being sold, and for HOW MUCH - This is really the bread and butter of the contract from the perspective of the business Seller and Buyer. What is being sold? Stock in a business? A list of assets? For what price? How is that price divided up? Paid now, paid over time? Are there any exceptions to any of these rules?

   • This is the part of the contract which I always advise clients to review extremely carefully, as they have the greatest chance of both understanding it (it’s usually written in less “legal” language).

   • Additionally, it’s the part of the contract which actually has the least to do with the lawyer’s expertise - they don’t know, and in some sense ought not to care, how much you’re selling your business for, whether you are holding back assets, how you’re getting paid, etc. These are really business considerations, of the same type as an owner is already an expert at making. How much does he sell his products or services for? Under what conditions?

2. LIABILITY around what is being sold - This is the famed “reps and warranties” part of the contract. Both the Seller and Buyer make certain claims about what they know about the company and their negotiations, and talk about how much money they can try to get from each other if they have been lying.

   • This is where an enormous amount of negotiations break down. As I said above, I am not a lawyer, and I am not about to try to suggest what sorts of Reps and Warranties you should try to shoot for. What I’ll do instead is suggest the following very simple strategy:

   • Just trust your lawyer on this. Whatever they say, whatever they are comfortable with, that’s what you should shoot for. Typically, this portion of the negotiations can actually get resolved with the lawyers speaking to each other privately and coming to a mutually beneficial agreement for all parties involved.

3. Rules surrounding how and when and under what circumstances the business will close. Dates, a few stipulations on what kinds of reports certain diligence providers might send in.

   • This is an easy one as well… Just trust your lawyer on this.

How to use this list

This list was intentionally extremely simple - but that is the point. The goal here is NOT to try to explain the finer rules of negotiating a PA. The goal is very different - to keep the proper perspective on what you should be hoping to get during the PA negotiations themselves.

1. Make sure all the economic facts are there - price, tax structure of the purchase, which assets are being sold.

2. Get your lawyers blessing on reps and warranties. Let them do most of the work here.

3. Get your lawyers blessing on closing concerns. Let them do most of the work here as well.

And that’s it.

The point should be to avoid big blowups at this stage. And with emotions running the highest during this portion of the deal, often you need to simplify and reduce the variables in order to stay on track.

Conclusion

Purchase Agreements can be emotional minefields, but the best deals are grounded in facts, not feelings. Keep it simple: focus on the economics, trust your lawyer, and avoid overcomplicating the process. Remember, feeling screwed over ought to be a factual determination. If there isn't anything wrong with the price or assets, and your lawyer has checked off the reps and warranties as well as the closing method, chances are extremely high you've got a good deal on your hands.

THAT’S A WRAP

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