We wanted to talk about a phase in business combinations known often as the 11th hour. The final phase before definitive agreements are signed and proceeds are distributed. This segment of time in the overall deal process is short but it comes with a fair amount of surprises, emotions and at times frustrations. During this episode, we are going to touch on setting expectations going into and hopefully exiting the 11th hour of an M&A transaction.
The 11th hour is a tough one for both sides and while we always work hard to circumvent any objections or emotions it is important to both the seller and buyer to remember why they started the process, signed the LOI and why the market will see value in what they are going to build together. Nothing is perfect but keeping a clear and optimistic mind can ensure that no matter the outcome you made the best decision for your company, shareholders and ultimately the marketplace. Here's what is covered in this episode of Shoot the Moon.
Let's talk about the surprises a buyer or seller might expect to see at the 11th hour:
Now let's shift to a discussion on emotional implications that enter a deal at the “11th hour”:
Keeping your cool during these surprises and emotions is often the most important if the parties want to make it to the other side of the “11th hour”.
For more information on getting to a successful close check out our resource section of the revenuerocket.com website. Thank you for tuning in to another episode of Shoot the Moon!
Mike Harvath 00:07
Hello, this is Mike Harvath with this week's Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. Revenue Rocket is the premier growth strategist and M&A advisor for IT services companies worldwide. Today with me on my partner's Ryan Barnett and Matt Lockhart. Gentlemen, welcome.
Matt Lockhart 00:32
How goes it, Mike? It's a it's a nice brisk but sunny day here in Minneapolis. So good to be with ya.
Mike Harvath 00:39
Thanks, man. Yeah, it's a it's a great day. Thanks for moving along. Today, we are going to talk about sort of what to expect in the 11th hour of an M&A transaction negotiation. We certainly are in the middle of the 11th hour on many deals right now. So this touches close to home for us, we like to kind of relay what's going on in our world and hopefully help our audience learn a few things along the way. And we are going to be talking about what's going on with the negotiation 11th hour what to expect in the 11th hour of a deal. And what we define 11th hour, we're really talking about the final phase, kind of before the definitive agreements are signed, and the deal is closed. So these are sort of the weeks leading up to the final negotiation of the definitive agreements. It is always the most stressful time in the transaction and the one where most deals, if they're going to come apart, come apart. And so there's lots of surprises and emotions and frustrations. And, you know, if you're a seller second thoughts about why the heck you're doing this to begin with, and if you're a buyer, you're wondering if this seller will ever get their act together enough to sign the deal. So I'd love to, you know, gather some perspectives from both you, Ryan and Matt, on your experiences in the 11th hour, and I'm certainly happy to share some of mine. So Ryan, maybe I'll turn it over to you. Yeah, thanks, Mike. It's your point. We often on this podcast, talk about things that are hard for us. Well, right now, we're working with some deals that that sometimes the the end line, and the goalposts seem like they're changing, to set this up a little bit of a backup, and make sure our audience knows when a company signs up for an M&A deal. There's typically a letter of intent. And that letter of intent on binds the goals of the deal. But it's a non binding letter of intent. And what that means is that, although the top topics of the the general deal are outlined in the letter of intent, it's really reliant upon the definitive agreement getting signed, and there are hundreds of negotiation points that end up happening between that signed letter of intent, and the actual execution. So a lot of what we're talking about takes the spirit of the deal, and then walk through what, what really needs to get done to make sure that that deal gets completed. So that's the contact here. There's a lot of things that come up, maybe maybe we could start here with either Matt or Mike. I'm just curious, do you guys have any interest just either funny or strange, or the weird stories that could add a bit of color? So what happens in the last, and the last moments of a deal? Maybe either both ways, one that goes right, and one that goes horribly wrong? That's a great question, Ryan. Certainly, I think, you know, emotions are running high, particularly on behalf of the seller, at this phase of the negotiations. And oftentimes, oh, say oftentimes, you know, maybe there's certainly sellers will ask for some stuff that we think as pretty crazy. The last minute, that kind of comes from left field. And we've went when sellers realize that, you know, the light bulb goes on, they were down to the last week or two and after that, I can't get some of these owner benefit items. You know, either put through as expenses on through their business or whatever. There are sometimes some pretty crazy asks. And, you know, we've had a few of those as it relates to owners that have benefit around, you know, maybe their vehicles and you know, they're rare vehicles and they have to be accounted for somehow the transaction or you know, airplanes or boats or you know, all tanzic goofy assets are what are the excluded assets? Maybe that's a better one to use as an example, you've certainly seen some very interesting, excluded assets that are on the list as it relates to either artwork or personal, personal items. So it's very, very interesting. What some, some of these things that come up at the very last minute, I don't know, Matt, if you have any other thoughts on that, but certainly, you've seen a variety of things that you would have never expected in the final weeks of the deal.
Matt Lockhart 05:35
Well, yeah, I mean, you know, it's, it's all about the last pieces of information that start to come out, right, that is, you know, sometimes may be surprising, you know, we had a recent one here, where it turned out there was a shared client, between buyer and seller, and that caused a little bit of hand wringing, if you will, in terms of how we are going to manage this shared client. And, you know, so so, you know, I think that going back to shoot, we've been talking about due diligence previously, and, and the need for transparency and due diligence. And, and, you know, it sort of comes out in the 11th hour, if there was a lack of transparency earlier on. And so, you know, kind of going back to that principle that the more, you know, transparent and open with information early on, the better. Because, you know, if you can get some of that, quote, unquote, emotion out of the way earlier, well, that that sure is better. Yeah, I was, as Ryan, as you were talking about the Matt and Mike, the, the sort of the emotionality of it, I was thinking about that, you know, that phrase from whatever five years ago, you know, keep calm and carry on. Right, I think that's kind of a principle in the 11th hour is keep calm and carry on.
Ryan Barnett 07:09
It, the cool head prevails, for sure. And one of those things, issues where, where it's difficult, and it does run high. And this also happens in a lot of our because when you get near a deal, and it's just about done, there's sometimes an obligation to tell employees, and in starting to bring things in from my from a seller's perspective, from a very tight knit group of people who know about the deal to other people that know about a deal. And sometimes if a deal gets done, a critical person could be holding up a deal, Mike do you have any examples or any advice for after the cat gets out of the bag, but perhaps the ink is dry, what what could happen and what sellers should think about when announcing the kind of this transition before integration into deal closing? Oh,
Mike Harvath 08:08
yeah, I have lots of thoughts on that. We didn't have a deal maybe 10 years ago, that was scheduled to close on a Monday. And over the weekend, one of the key employees that was supposed to go with a transaction, called the seller or the CEO and said I need an extra $400,000 to pose on Monday. Needless to say that up ended the transaction, the business owner fired that person. And the deal was off. And that was unfortunate. There was certainly some unethical actors there and their team and it was not anticipated by the owner that this particular person would do that. There's other you know, more subtle ways so that we've seen key staff sort of hold up transactions. And they kind of do that through not really cooperating with the process. We've had several examples recently where certain key leaders have that our critical path to getting diligence done or getting things done, are holding things up. And they're doing that as a say they're being passive aggressive, but they're certainly trying to exert some influence on the deal. Or get a piece of the deal that might be egregious, or whatever, you know, might occur. And if they're not kind of getting in their way, they just don't necessarily cooperate with the process fully. They do what they're not doing it fully and that's our way to sort of protest either the deal or kind of what they're personally going to get out of the deal. These are people that are not equity holders. These are people that are folks that work on the staff. So it's important just to re emphasize that the knowledge inside your staff have a Potential transaction if you're selling is on a need to know basis. And that has to be a very short list. And some of our clients have had individuals signed NDAs, pursuant to a deal, just to further fortify their confidentiality. So they're not telling other employees or whatever. But, you know, I think also important, what's very important is to understand the motivations of that individual, post transaction and you know, make sure as a leader, you're helping facilitate a win win here, because you're going to need those folks. You need them to be on side, you're going to need them to be cooperative through diligence and negotiations, and to remain flexible. And if they get too much, if they get too self centered, or too greedy, because they see other, you know, a fairly substantial amount of, you know, consideration being paid to equity owners, but sometimes happens for non equity owners, that can scuttle a deal. And I think being able to manage expectations and, and roles and stuff through a transaction very thoughtfully and mindfully keeping that employee in mind or imperative to actually get the transaction done.
Ryan Barnett 11:23
it is definitely a tricky time and that role, and that can be anyone in the company. So if you had a critical path and in a at the company, that there's a reason why someone's buying your IT services firm. And oftentimes, that is the people that are with it. And there's those that have, it's very easy to get sideways and different and try not necessarily see all angles of the deal that others are dealing with. If I if I switch gears a little bit, the other thing is due diligence is really tough. And as we talked about in the last two podcasts, we dug into both buyer side and seller side due diligence. Sellers get asked 1000 questions. And it's it's a lot you're emotionally invested. And Matt or Mike, you can jump in on this one. But one of the last minute things we've seen is that it feels like a war of attrition in which the buyer kind of has the last minute control because they're the one wiring the check. And have you seen a case? Or what kind of advice would you give? If the sellers in a way give up and just take a take new terms? Or there's something that materially changes the deal? Have you been seen that or have any advice for that situation?
Matt Lockhart 12:45
Well, I'll let I'll jump in. Mike I, I think that not to be self serving, but this is where, you know, going back to what you said, Mike, that deals oftentimes don't get done, if there isn't an advisor in in the mix. At least one advisor if not both advisors for the buyers, as well as the sellers, because it's imperative in the last hour and the 11th hour that everyone keeps in mind, the strategic and cultural fits that have been identified early on in the process, you know, that there's there's a reason that this this deal is happening. And to continue to reinforce the value and the opportunity in two firms coming together, I think is just absolutely critical. Because there is last minute negotiating, right? I mean, you're negotiating working capital, oftentimes in the 11th hour, because all of that data is his sort of real time employment agreement. So it's another thing that oftentimes is sort of pushed off towards the end of the process. And, and, and yeah, the buyer may feel as though, you know, they've got the upper hand in some of these last minute negotiations. But as an advisor, we're reminding the buyer of the strategic imperative, and it's not, it's not about picking the berries as the deer are flying by. Right it is. It's keeping in mind that the the real prize is the deer.
Mike Harvath 14:40
Absolutely. Okay. Well, I think, you know, it's about give and take, right? So I think generally the right deals are ones that, you know, shift around a little bit at the end. And everyone sort of feels like they're giving too much. And I often say I joke around a little bit saying that, you know, we got the right deal if everybody feels unhappy, I didn't get everything. Because it is a, you know, it is a situation where there's moving parts. And when people are tired and emotionally drained, which just process does do that to you. I don't want to sugarcoat it, it is challenging, it's again, called the most unnatural act in business for a reason. You need someone who's not emotionally attached to the deal, to help find a path to achieve the impossible, right? It's probably the best way to put it. It's easy to sit on either side of a transaction and see, oh, man, how are we ever going to get there based on either this discovery if you're a buyer, and due diligence, for this development, or that development as a seller, and sometimes those have to do with tax ramifications, we learned about a deal yesterday that was going to have a negative tax ramification for the seller, kind of in the final hour. And we were able to solve that problem through negotiation. You know, there's just certainly all kinds of myriad of challenges that occur, where we can, you know, be in a position to bring, you know, a firm can bring expertise, whether it's us or some other advisor that's knowledgeable in in our space in M&A. bring their expertise and their quote, unquote, cooler heads slash, you know, perspective to bear and finding a path. And I think if you go into a transaction, and you're in the end, and you're focusing on getting the deal done, and you're coming at it in the right way, right, you're coming at it with the right perspective, which is, we know this will be challenging, we know there's going to be things we don't like, but the goal is to get the transaction done. And by doing that, you will find likely find a path. And you certainly have to put a lot of smart guys in the room, though, to find the path, right, because remember, the lawyers role a lot of people rely on their lawyer for this function is to try to manage to a zero sum game on risk, we can never mitigate all of the risk. But they're going to push and shove and try to work to definitely de risk your deal as much as possible. And there's times when you know, there is such a small likelihood of something occurring, that the risk is acceptable to take on on behalf of either side of the deal. And, you know, our experience has been a lot of lawyers don't look at the probability of the occurrence of the whatever that might be. They keep that in mind as a secondary consideration. Their focus is just to drive the risk out of the agreement. And sometimes they need to be reminded that, you know, what is the probability or likelihood of a particular thing occurring, and then we can break through? So you know, I just, I just think you have to remember when everyone is tired, and emotions are high, that the more smart people you can put in a room to have logical dialogue about how you achieve the objective is always a good thing.
Ryan Barnett 18:32
I have a general question. For either of you, and this is really genuine. Is there things that can be done to prevent the last hour negotiation? And what why are things kind of what why do things slip to a close date?
Matt Lockhart 18:52
Well, I think that, you know, yes, absolutely. There's, there's things that can be done, you know, we're putting together a schedule, within within the due diligence period, right. So the letter of intent maps out a close date or an intended close date. And then working back from that close date, you're able to methodically lay out a schedule of the things that need to get done, you know, obviously, the buyer needs to do their due diligence, the seller may have some some diligence items that they want to cover as well. But then, you know, giving the applicable time for that process, then you're laying out the schedule for, you know, the first draft of the definitive agreement laying out the schedule for the draft so that the employment agreements, you are you're working as early as possible to arrange the, the, the the algorithm for working capital, all of those things that that that can get done in a scheduled and predictable, you know, timeline, you know, really sort of can have a mitigation for the 11th hour turmoil, right? You know, because you want the 11th hour, you want everybody to be feeling good, right? As Mike said, you know, within negotiating, you're going to feel good about some things, and you're going to feel bad about other things. Well, the sooner that you can get that out of the way, so that people can be positive, right, and really focusing on those cultural and strategic benefits and working towards those things, you know, the better. So it's just, I think that the biggest thing that you can do is, is is laying out that schedule, sticking to the schedule. And then, you know, allowing the advisors to take the hits, as it pertains to negotiating.
Ryan Barnett 21:08
Yeah, a little surprised on, man, Mike, maybe this is that it seems like you're also bringing in other parts of the equation. So you've mentioned tax accountants, we've got lawyers that are bringing in, and it feels like there's a fine balance of when to bring your legal in. And I know, Mike, you've got some opinions about this. But certainly, again, going back to the themes are what can be done to mitigate the last hour or the changes in the 11th hour and balancing that with the goal to get a deal done as effectively and efficiently as possible?
Mike Harvath 21:46
Yeah, you know, I think identifying a lot of the issues upfront, and then keeping a running, punch list of items to resolve. Oftentimes, though, there's changes and things. I mean, I would say this is just a common scenario, I would say is there's this process, if you're a seller is a big distraction. And oftentimes sellers allow that distraction, to impact overall business performance. And when they do that, and you get closer to close, it may warrant a adjustment in some way to the deal. Either the consideration changes or a portion of the consideration changes, when that's discovered as part of due diligence. And sometimes that's right at the right. And so likewise, our working capital as an example, there was payments made, and maybe the working capital harvest is not what the sellers would have expected, or did they didn't calculate it right. Or there's indemnity scenarios that can't get introduced by lawyers, all kinds of stuff that require some sort of a some sort of a change. But the best way to mitigate a lot of those requested changes is to just try to keep a running tally of the open items. And you know, making sure you're huddling with everyone. We do think the best practice, frankly, is to have all parties, buyers, sellers and their lawyers on the same call very regularly. We understand that lawyers need to talk to their clients separately about specific issues and how they want to be them to be handled, so that they can communicate effectively with the other side. Lawyers are kind of hard coded to want to do those meetings with their clients, and then take those issues to the other counsel and back and sometimes, just like in the game of telephone, there's things that get lost in translation, the business intent gets morphed by the legal desire to mitigate risk in the deal. And that becomes pretty challenging to try to manage sometimes. So I think the best way to keep things on track is to have a clear running list of items that need to be addressed. And to try to get a sync up with all parties as frequently as possible sometimes every day, as you get into the final week or so before close is warranted. And so but a minimum of twice a week, if you get in the last two weeks is warranted. For those all hands calls and I think that helps keep things moving and helps keep everybody on the same page and frankly, helps hold everyone accountable to the actions needed in order to close.
Ryan Barnett 24:42
That makes sense. The 11th hour is really a tough one for both sides. And we really work hard to keep the emotions low and to keep working through deals and remember why you got together in the first place to make a successful transaction. So got it It's, nothing's gonna be perfect. But keeping a clear and optimistic mind, ensure that no matter what the outcome you've got, it's going to outcome within the details. You still have the best decision for your company and your shareholders and ultimately, the marketplace. So, Mike, Matt, that's less questions I've got for you. I'll turn it back over to you.
Mike Harvath 25:24
Alright, Matt, I don't know if you have any thoughts in closing before we wrap it up.
Matt Lockhart 25:30
Well, I don't I think it may be time to...
Mike Harvath 25:36
Tie a ribbon on it. There you go. We'll tie ribbon on it for this week. And for this week's Shoot the Moon podcast. Thanks for tuning in and make it a great week. Take care.