Winter storm hit your deal?
What happens when an unexpected winter storm hits your deal and what can be done to prevent this happening? If you can’t prevent it, how do you reduce the negative impact?
In the same way as with this historic winter storm that hit our region, you may not be able to prevent it, but at least with the storm we had meteorologists predicting significant snowfall before it happened. We may have thought they were exaggerating the extent of the storm a few days out, but by the day before, most people had acknowledged that it was going to be severe and took the necessary precautions. Can you imagine the impact if we hadn’t had any forecast and preparation time in advance?
When it comes to a restructuring, corporate finance or M&A deal, there are so many issues that can break a deal. Many, if not all of the following issues, however, can be forecasted and in most cases measures can be taken in advance to reduce the impact on the deal and in many cases overcome the issue before it becomes a deal breaker. The critical point is to have advance notice and time to prepare prior to the storm hitting.
The advantage of expert representation is a deal is that your advisor can help you to determine the likely timing, impact and outcome of a deal issue well in advance. We can’t prevent the historical issues from having occurred, but we can take preventative measures to significantly reduce the negative impact. Above all, it is key is to take your time in thorough preparation and planning.
In each instance, you would have to consider how important the potential deal breaker is, evaluate the time and cost to overcome the issue and then determine whether concessions need to be made from the seller/buyer/investor, and whether it is an appropriate use of resources to fix the issue, or whether it is less significant and more effective to openly disclose the issue early and often to ensure that the prospective investor moves towards closing well-informed and without significant surprises late on in the process. It’s also important to disclose the issues at the appropriate time and in the appropriate and professional manner.
Potential deal breakers are inevitable in even the best deals. Below are some of the issues we have encountered in the past and you may want to consider:
Financial
Historical financial performance and cyclicality
Inadequate financial systems, processes, reporting and accounting policies
Balance sheet issues
Negotiations over EBITDA adjustments, non-recurring and non-essential expense reductions
Quality of earnings
Non-GAAP financials and other financial irregularities
Financial forecasts
Vision for the business, growth plan and long-term goals
Business/Operational
Governance systems and controls
Personality conflict, firm values and culture
Cultural issues post acquisition – values, attitudes, behavior
Management approach and style
Organizational structure issues
Client conflicts or potential defections
Customer concentration
Geographic concentration
Competitive environment
Defensibility of intellectual property and intellectual capital
Management compensation expectations post closing
Key management agreements
Excessive benefit, health and retirement plans
Computer systems and IT infrastructure
Administration, structure and office integration issues
Legal, Tax and other
Family-owned business issues with multiple shareholders
Inappropriate conduct and contact between parties in initial stages
Real estate, Office ownership/lease structure
Machinery and equipment ownership/lease structure
History of employee fraud
Legal structure and organization of company
Desire for asset sale or stock sale
Tax treatment on sale proceeds
Historic and ongoing legal issues or disputes
Environmental, health or safety issues
Warranty issues and guarantee liabilities
International issues of cross-border transactions
Appropriate securities licensing of advisors/intermediaries
This list could be many times as long for all the different issues that can occur. You need to keep your head up, eyes open and be prepared with a range of forecasts, so that you are prepared for the worst case scenario. In some deals, you only get one chance to get the best deal, so you need to do it right the first time, every time. If you hope for the best and try to pick up the pieces afterwards, at best it will cost you time, price and credibility and at worst it will kill the deal.
Current forecast: more snow to come!
