There are two critical elements to the Closing Stage once LOI is in place: negotiating skills and qualified and experienced advisors; your financial advisor or banker and your legal counsel, both critical team members. Let me comment on the advisors first.
This is the stage where definitive agreements are negotiated and finalized. The agreement contains representations and warrants, escrow hold-backs and other critical details. It is imperative your advisors know what the market conditions are for these provisions. For example, what is the market for escrow amounts for a company like yours in your segment of the market? Is it 10% or 20% of the purchase price? What is the holding period for the escrow amount? 12 months or 18 months? More importantly what is the significance of these provisions? Why do these provisions exist? Qualified and experience advisors can guide the company through this stage.
The second element is negotiating skills. This skill come from experience, experience, experience. To get a deal done, it will require give and take on both sides. It also means knowing when to assume some level of risk and when to minimize risk as much as possible. Experienced negotiators know how to create this balance.
Thanks, Russ. One of the things that we see happen sometimes is that firms retain law firms that have not done tech deals. You have to remember that a lot of the things that Russ talks about, the standards, employment agreements, hold-backs and so on, are really part of practice of the major law firms over the years. If someone doesn’t know these things, they’ll be trying to fly practices in other industries that simply don’t apply and you can end up having a lawyer that actually kills the deal. So make sure you get experienced legal counsel that has specifically done these kind of transactions.
Now let’s close with our Chairman, Ward Carter, on Integration.
Integration is sometimes ignored in the heat of getting a deal closed, but the fact is that 53% of integrations fail, and you can’t afford that if you are a buyer spending big money for an acquisition, and certainly not if you are a seller with an earnout or other contingent consideration on the line.
How do you protect yourself? Easy: identify those important integration points early in the M&A process, and make sure they are addressed by the buyer in advance of the deal closing. Issues such as key employee retention plans, compensation and benefits, opportunities for advancement, consolidation of staffing, how the merger is announced to employees/customers/vendors, goals of combined organizations identified, and so on.
The key is to anticipate the concerns that the stakeholders might have, and figure out answers before the deal closes, not waiting until after when it might be too late.
Thank you, Ward, thanks for wrapping that up. Integration is critical and you have to think about it from the very beginning, otherwise these deals can fail.