Big Deal Small Business: Live Deal Process Update (01/21)
January 21, 2022 | Issue #59
The deal grind is real… This is an ongoing peek behind the curtain of my live search deal process. Have to admit, I’m feeling the deal fatigue at this point, so I wanted to talk about that more today.
Four prior posts related to the deal:
12/02 Update - discussed seller relationship
12/15 Update - discussed investment memo
12/23 Update - discussed APA elements
01/05 Update - discussed Reps & Warranties
Latest progress:
Done with Non-Compete and Lease
Roughly one turn away on APA, Seller Note, and Transition Agreements
Down to the final items on the bank’s closing checklist, making slow but steady progress day after day
I think (knock on wood) we are through the last of the “deal-killer” issues in the documentation, it’s mostly just drafting at this point.
Quick M&A 101 tip: I can’t recommend strongly enough the use of “issues lists” over “redlines” in negotiating documents. It may seem weird / painful at first, but I assure you it’s faster, smoother, and cheaper in the long-run.
An explanation if you’re new to M&A (please skip down to the next section if this is old news to you):
When lawyers make changes to legal documents, they do it in Word with “track changes” on so that you can show the other side exactly what was changed. The norm is to send over two versions everytime you update the draft: the “clean version” and the “redline version” aka tracked changes version.
Instead of making changes in the document, the alternative is to go through the draft and create a list of all the places where there is disagreement or confusion aka “issues list”.
Usually, the first iteration is a redline just to see where the issues even are, but from there you should negotiate using an issues list.
My process:
I send the first draft of document to Seller
Seller’s attorney send back redline of document
I sit down and create a bulleted list of every single change they made, and my initial reaction/response/confusion to it
I send that list to my attorney to see if he agrees with my views, or to answer my questions where I’m confused
I send the bulleted list to the Seller (or meet in person to discuss), with my responses to each issue in a different color of text
Then they can respond to each issue by writing in their response in another color
Once we cross off enough issues, then my attorney takes that issues list + back & forth and uses it to create the next redline of the document.
It may seem like a lot of work at first to literally go point by point and write out the issues list. But it allows you to very quickly focus on what matters and keeps the discussion between you & the Seller, rather than trading drafts of the actual agreements between lawyers.
Remember that each lawyer’s job is to protect their client, NOT to get the deal done. You will have to take risk in the document - your lawyer cannot decide for you when & where to take that risk. So if you rely on lawyers to negotiate documents, your deal has a way higher chance of breaking.
Today's Sponsor: Me Asking For Assistance
General call for help - do you have off-the-shelf transition checklists that you can share?
I have only ever done stock purchases before, which are much smoother to transition given you get the actual company, not just the assets.
So, if you've got asset sale transition checklists (transferring phone lines, 401K, payroll, etc.) - I'd appreciate you sharing with me as I get closer to close.
Further, please let me know if you're okay with me sharing your list (on a compiled, anonymous basis) - if I receive enough "shareable" versions, I can compile the lists into a master list that is publicly available as a Google Sheet.
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Deal Stress & Fatigue
I've been on the "deal rollercoaster" countless times in my life in private equity. While that prepared me for the constant stop & start, rest & sprint lifestyle that is M&A, it didn't prepare me for the stress that comes with it.
It's so different to do a deal that involves signing up to a $3 million+ personal guarantee. Not only that, I'm taking money from investors who I know personally & directly as friends. They understand the risk profile of what we're doing here, but they are still putting an incredible amount of trust into me.
Further, a deal closing will be a massive change in my life. It's like a reverse job interview, and I can't leave the job once I'm in it for at least a few years, and even then, it's not like you just put in your two weeks' notice and bounce.
There's real opportunity cost to closing a deal and dedicating yourself to it.
Suffice to say, each decision feels supercharged by that background context of money & personal life - I've been surprised at how much I "feel" each bump in the rollercoaster relative to my past deals in PE.
One other big difference than in PE is that after the deal closes, I have to run the damn thing. So while I am doing due diligence, I'm also thinking about all the stuff I want to do with the business post-closing.
The diligence list gets shorter, but the post-closing list gets longer, so it's easy to feel like I'm not making progress or that there's a massive "unknown unknowns" list lurking out there.
The reality is that I can't plan for every eventuality obviously, but it's hard not to spend every waking moment (including lying awake at night) thinking about all the unknown unknowns that might bite you in the butt.
My Coping Mechanisms
Look, I'm in the camp that hard things should be hard, and that's okay. Doing a deal is a hard thing. A deal should be stressful - if it's not, you're not doing enough diligence or thinking deeply enough about the business.
But you have to manage that stress to avoid making bad or rash decisions, giving up on negotiations too soon, or taking hard-line positions just because you're exhausted.
Some ideas to cope with the stress include:
Checklists: This may depend on personality, but it's very easy to feel like there's a million & one things to do and you're making no progress. Put them all on a list and start attacking them day after day. As they get completed, don't just check them off, take them off the list entirely. The list getting shorter feels meaningful to me.
Write Stray Thoughts Down: I'm constantly hearing good ideas from other operators/searchers, seeing stuff in the real world, etc. There's an ever-expanding list of "things to think about" for the business that probably aren't immediately important or actionable.
These are the ideas (both good & bad) that I find myself thinking about late at night when the workday is over - they expand into any headspace I'll give them. The only thing that helps manage these for me is to write them down. That way I know where they are, I can go back to them when I'm ready to think about them, but I can take them off the mental "to-do" list.
Affirmations to the Sellers: Remember that the Sellers are feeling the same stress as you, plus having to run a business & cope with the impending loss of their baby.
With the Sellers, I try to be relentlessly optimistic - they've never been through a deal before, and it is reasonably exhausting & mind-numbing. I keep assuring them that everything that is happening is normal, how deals work, etc.
Aside from lowering stress levels for everyone, it also maintains a collaborative spirit, which is crucial to dealing with the inevitable deal issues that will arise. "We" have to get through the deal checklists & document issues lists. It's not "Me" and "Them" have to fight through those lists.
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Conclusion
Deals are hard, they should be hard, but there are ways to handle them. If you've got other coping mechanisms that worked for you, I'm all ears.
For all of you in the late stages of deals, stay strong out there and drag that deal across the finish line!
Again, if you've got any asset purchase transition lists you're willing to share, that would be much appreciated.
As always, I’d love to hear your thoughts & feedback. You can hit reply to this email or find me on Twitter.
Thanks,
Guesswork Investing