When Microsoft inked the agreement for its $26 billion acquisition with LinkedIn in 2016, the agreement included a $725 million termination fee should the LinkedIn board change its mind, go with a competing bidder, or fail to get the deal approved by shareholders.
Break-up fees tend to find their way into public deals where the terms of the acquisition are out in the open. But they’re less common in the middle market. A study published by Harvard University found mid-market deals between private equity buyers and public targets valued over $100 million had an average break-up fee of 3.1% of the target’s equity value.
Of course, few buyers want to walk away with a kill fee rather than a new company. Break-up fees are a fail-safe when things fall apart. The key is to avoid that possibility by sensing when a seller is getting cold feet, then righting the direction of the deal.
For the buy-side, it’s easy to forget the seller may be new to the transaction process. Especially in the mid-market, where the deal may be a bit more personal—a mix of sale and exit strategy. Neglecting this element can send the wrong message or spook the seller.
Sure, both sides of the deal have a lot of work ahead of them, but taking the time to go over how the seller’s vision for the business fits within the new reality can help temper nerves. You want the seller to recognize that you understand the history of the business and have a plan for integrating that into the newly formed entity.
Just as it falls on the seller to effectively illustrate their company’s growth prospects, it’s up to the buyer to communicate why the deal is a strategic fit. And sometimes it’s a claim that needs to be re-stated.
The Long and Winding Road
Excitement runs high at the onset of a deal. The transaction plan is laid out, the seller has sat down with their deal team and pulled together their letter of intent. Eventually, due diligence (one of the most critical and often time consuming parts of the process) kicks in.
Everything from financials and customer records to sales forecasts and cybersecurity plans need to be combed through. The process should never be rushed, but it should be efficient enough that the seller doesn’t have too much time to rethink the deal.
Laying out a detailed timeline in advance can help prepare the seller for the potentially extensive process. Communicating the window of time required to execute due diligence upfront gives both the buyer and seller something to come back to as momentum starts to ebb.
Private Matters Matter
The seller is likely to feel a bit naked during the transaction process and sometimes issues surrounding data privacy can stunt a deal. If it’s not addressed early in the acquisition, it could magnify later on. If it reaches that point, it’s important to take time to communicate and identify to the seller the types of data that will be collected during the process, how it’s going to be stored and safeguarded, and what will happen to the data after the deal.
In an age of high profile data breaches, the seller needs to feel confident their information will be protected. Failing to do that could lead to them walking away.
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Second Thought Stakeholders
The deal isn’t over until it’s over. Which means the seller has a lot on the line by exposing itself. It’s not uncommon for stakeholders to shift to the top of mind. In public deals, the shareholders say is going to be transparent. But for private deals, it can be a little more challenging to gauge the sentiments of senior management, employees, and customers. The tighter the team, the more amplified these concerns can be for the seller.
The buy-side can offset this by establishing transition plans to protect key stakeholders. It’s in everyone’s best interest to preserve key clients and key staff to preserve the acquiree’s value.
Keeping the Faith
Synergy can be a unicorn. Despite the “merger of equals” adage, culture is a pervasive thing that lives in a company’s DNA and doesn’t always play well with others.
For a seller, sometimes the fear arises that the values they’ve woven into their business—values they often tend to associate with themselves—will be eroded once the reins are handed over to the buyer. It’s a valid fear. But as a buyer, you can help the seller get past that by identifying a clear plan to move through culture clashes and reassure them it’s not an “us versus them” mentality.
Saving the Day and the Deal
As deals grow in size and complexity, M&A advisor teams are critical for keeping the seller engaged, ensuring there are ongoing touchpoints with the buyer. Mergers and acquisitions can take a while to complete, and that time gives lots of space for second thoughts. Don’t let the deal die by ignoring the seller at the center of it.
Illustration by Christy Lundy