Heading off surprises is the best way we have found to ensure successful transactions for our clients

Posted January 13, 2017 by Charles S. Lachman

One of the important lessons we have learned over the years, in structuring and negotiating transactions, is avoiding surprises. At any time, surprises are difficult to digest. Even surprise parties aren’t for everyone. But in the world of mergers and acquisitions, surprises are especially problematic.

Many surprises we can’t control as advisors…such as the departure of a major customer before a deal closes. However, most surprises can be managed, through comprehensive discovery by the seller’s agent.

The first and foremost surprise to be avoidable is our client’s motivations. We invest important time at the beginning of an engagement, ensuring that all shareholders are aligned in their objectives. This is not as easy as it may seem, but we stress the importance of not beginning a transaction process unless there is a clear decision to move ahead.

A more traditional perspective on surprises lies in the examination of the company, its financials, operations and management. We have found that putting yourself in the shoes of a counterparty, and thinking about what you might examine if you were the buyer, is the best way to proceed in pre-transaction discovery. Are there hidden liabilities that could sidetrack discussions, and erode value? What is causing margins to thin in a particular product line? Does your investigation of key management yield results that could compromise the transaction? An old expression among retailers is particularly appropriate here: The first markdown is the cheapest. Learn what you can before you go to market, since revelations later will be costly. Our goal is always to help our clients realize full value for their business.

We partner with our clients’ attorneys in completing transactions…but we believe that it’s our job to deliver a complete, negotiated deal to them, before a purchase agreement is crafted. As a result, we tend to negotiate letters of intent that are comprehensive, leaving little room for…you guessed it…surprises. So, in addition to price, terms and structure, we often include the level of indemnities (as this can be an important economic issue for sellers); our expectations for core representations and warranties; the calculation for a net working capital condition; other major conditions for closing; the buyer’s remaining due diligence process; definition of material adverse change; what consents will be required; and of course any exclusivity provisions. The result is a letter that outlines virtually all the major issues that are fundamental to the closing of a transaction.

We endeavor to minimize all the surprises that we can control, in structuring a transaction. It’s the best way we have found to represent our clients, and it’s the way we would do it if it were our money.