Stress Testing Deals

Most M&A transactions fall apart several times before closing, even during normal times. When a major crisis occurs—whether internal or external—a deal can truly be stress tested.

We hope everyone is healthy during the current COVID-19 outbreak. During this time of lockdowns, almost all deals have at least “caught a cold.” Even if the deal is solid, both buyers and sellers are scrambling to handle business and personal issues, so it is natural for the deal to be put on the back burner. Advisors on both sides will also be busy with internal and external issues, so their response time will most likely slow down. One of the worst things for deals is uncertainty, and until the parties are able to have more visibility, it may be difficult to set a clear timeline.

Here are 12 tips we have used (and are currently using) to keep deals rolling.

1. Keep communicating: Set a time to talk once or twice weekly. If you hit the “pause” button, set a date a few weeks in advance to reconnect.
2. Make realistic changes to the deal schedule: Pushing too hard or delaying too much will make it worse.
3. Make it clear early if either side needs to pause, change the deal, or walk away: Although it might hurt the deal to do so, to cover up your strategy or to “go dark” will lead to lost trust.
4. Keep working: Don’t take eyes off the business. The worst thing that can happen is that the business suffers more than it should because the owner and/or the executive team is spending too much time on the deal. Be sure to also take care of yourself, your family, and others that need you.
5. Lean on your advisory team for advice: Most of the owner’s advisors have seen a variety of crises. Each crisis and deal are a little different, but some of the available tactics are the same.
6. Disclose any issues early and clearly: Keeping any secrets will not help. Disclosing things early on will help build trust, and the other side might be able to provide solutions. Report both bad, good, and neutral news as soon as possible.
7. Keep executive team, partners, stakeholders informed: They may assume the deal is dead or going fine, so you don’t want to surprise them. They may have good ideas or at least be a good sounding board.
8. Sellers must perform augmented due diligence on buyers: Although most of the due diligence is usually done by the buyer on the information provided by the seller, in times of distress, the seller must make sure the buyer can complete the deal.
9. Use company videos, video conferencing, and data rooms: A lot of work can be done remotely, and the trend—even on normal deals—is for more remote working. Nothing can truly replace a face-to-face meeting, but just because we cannot meet does not mean that the work on the deal has to stop.
10. Don’t forget about outside factors: Banks, CPAs, government regulators (antitrust, CFIUS, etc.), landlords, and other consent providers may take longer, so anticipate these delays and contact these parties as soon as possible.
11. Be careful about reps and warranties, earnouts, and other aspects of the deal: Both parties must agree to the extent that the company has been affected by the crisis. The seller might assume that the buyer understands that the business has suffered, but that needs to be reflected in the agreements so that there are no misunderstandings later.
12. Keep an eye on the big picture: Do not get too focused on problems; look for opportunities. Be sure to pull back a few times a day to think about the overall picture, including your personal life and family. Try to be a positive influence on the company, customers, employees, and the partners in the deal. Many aspects of the crisis will involve coordinating individual efforts, but as a leader, you must focus on the big picture. Be wary of negative thinking, which can snowball and affect your team and the other party.

In times of crisis, leadership is critical—both for the deal and the business. If both sides are committed to the deal and making progress during a tough time, the deal can still go forward (at least to some extent). Although things will certainly be delayed, it is important to keep your eyes on the goal with the belief that things will get better someday.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.