What Really Happens After the Letter of Intent?
You've just completed the tiring process of negotiating the final Letter of Intent (LOI) and you think things are going to get easy. Think again, because now the real work begins. From due diligence to close, you will become busier than you've ever been. While it is tempting to get comfortable with the buyer, you should remember that everything remains one big negotiation. Hopefully, you have your team in place including a good M&A lawyer (not just a corporate attorney that also "does M&A"), a savvy accountant who will be worth their fees in tax savings, and an experienced M&A advisor to manage the process and avoid valuation pitfalls and missteps.
The first thing you are going to be wrangling with is the due diligence process. Almost immediately after the LOI is signed, your acquirer will hand you a 15-50 page due diligence checklist, which is a request for all of the documents they want relating to accounting, legal, IP, sales & marketing, HR, etc. The list will be daunting and you will inevitably question some of their requests. Just remember that you don't need to hand everything over to the prospective buyer carte-blanche. There will be highly sensitive information that a buyer will reasonably need, but that could be highly damaging if it got into the hands of a competitor. Beware that this highly sensitive information can come in many different forms and many sellers don't think objectively about what information may be highly sensitive. A good M&A advisor will know how to identify those sensitivities and ways to avoid giving the acquirer sensitive information at the wrong time.
Remember, due diligence is typically used to benefit the acquirer, so the longer and more detailed the due diligence, the more likely it is that the acquirer will gain the upper hand.
The First Negotiation
At the end of due diligence, the acquirer may try to provide you with revised terms and price for the deal based on their due diligence findings or simply due to your growing fatigue and strong interest in closing the deal. Acquirers typically position this first negotiation before either side spends significant money on tax or legal advisors. At this point, you will have to decide whether you'd prefer to continue to play ball or walk away.
Negotiations can be productive like going to a dance where both of you are in the groove. Alternatively, they can be competitive, and leave you feeling as if you just entered a boxing ring. The aura surrounding the negotiations will often depend on the negotiation styles and personalities of the parties involved. If you wish to make progress and reach the finish line, the best approach is one of give and take.
The most productive negotiations are ones in which both parties expand the pie by finding creative solutions and productive alternatives which adds value to both sides. When you have a fixed pie, with each party wanting the bigger slice, take the negotiation as far as you can while keeping your professionalism, objectivity and rationality. Don't forget, M&A is not a contact sport.
The Second Negotiation
If you have made it past the first round of negotiations, congratulations, your deal is still on. The next negotiation is the Purchase Agreement which is typically negotiated between your M&A attorney and the acquirer's counsel. The Purchase Agreement negotiation is a much more choreographed negotiation than the first negotiation. In many cases, the acquirer sends you a draft of an agreement favorable to the acquirer. Your attorney should return the document with a large number of changes that the acquirer's attorney is already expecting. After a few rounds back and forth, most issues will be resolved, but a few important issues will remain. These issues are generally deal-specific and are geared towards specific concerns of both sides. At this point in the second negotiation, both sides are generally working towards closing the deal in good faith and it will generally make sense to discuss the concerns and develop solutions that address them.
Negotiations can be emotional and it is important to think objectively. How badly do you want this deal to happen and how much is the acquirer really willing to pay? At the final stage, most sellers think "this buyer really wants me," but in most cases, the buyer can also buy one your competitors or another company that also fits its strategic goals. You always have to know when it's time to close up the briefcase, sadly shake your head and walk away from the table. Negotiations aren't about making the best deal; they are about making the right deal!