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Surviving Deal Fatigue
Despite the continued surge of wealth management M&A activity, one surprising fact remains: most of these market participants are engaging in a transaction for the very first time. While there are aggregators and larger RIAs that will continue to build up their business through strategic acquisitions, the majority of today’s deals spark from a mutual attraction either from aligned competencies, or complementary competencies, that allow both firms to amplify their growth and sustainability.
According to James Fisher, Vice President of Mergers and Acquisitions at FP Transitions, “Many practices are looking to be acquired or merge with a larger business to spur growth, to benefit from economies of scale, to offload compliance and day-to-day operations, to increase bandwidth and offerings to clients, or to assist with the retirement of one or more senior owners/partners, among other reasons.”
Regardless of experience, it takes a lot of patience, communication, time, and expertise to navigate the entire deal process. For firms going through this, on any side of the table, negotiating and documenting the transaction can often be more time consuming than anyone anticipated, creating the perfect environment for an all-to-common problem: deal fatigue.
Deal fatigue is a condition during negotiations when one or more of the parties begins to feel frustrated, hopeless, irritated, or even angry about the pace of the transaction. Deal fatigue–at some level–is almost impossible to avoid in a complex transaction, but by knowing the signs and making an effort to minimize frustrations early on, it can be successfully managed. The biggest hindrance to deals today stems from misalignment of the parties early on, whether through lack of fit or, despite being perfectly paired, deal fatigue. Here we outline the biggest contributors to deal fatigue, and how to maintain your sanity throughout the entire deal experience.
Causes of Deal Fatigue
There are many factors that contribute to deal fatigue, but some of the most common ones are: time, perpetual negations, lack of process, communication, and lack of transparency.
- Time
Deal fatigue is typically correlated with the time it takes to complete an M&A transaction. As a transaction drags on without a clear and defined path to completion, deal fatigue will become more prevalent among the parties. If left unchecked it can, and often does, derail the transaction. Most M&A transactions have a surge of momentum once the term sheet/letter of intent (“LOI”) is agreed to and signed by the parties, followed by a lull as due diligence and documentation slowly progress. It is important that the parties capitalize on the wave of initial energy to propel things through to the finish line.
Of course, parties can become similarly frustrated if they feel rushed through a transaction, and a balance needs to be achieved between resolving any concerns and getting to the finish line in a timely fashion. Based on our experience and data, the risk that deal fatigue will impede the transaction increases dramatically if the time between the acceptance of an LOI and the signing of contracts exceeds three months. Keep in mind that this is not a hard and fast rule, and with the right M&A facilitator, deal fatigue can be appropriately mitigated for much longer time periods. It’s important to be aware of the time factor in your deal and to work to keep it in check.
- Perpetual Negotiations
Negotiations are the foundation of all M&A transactions.The agreed-upon deal terms govern not only the outcome of the transaction but, in many instances, the ongoing relationship between the parties.Thus, it is important to spend the time necessary negotiating the salient deal points to be included in the LOI and later incorporated into the final deal documents. However, once the LOI is signed, the negotiation over the agreed to deal terms needs to cease.
Time and time again we see parties using the preparation of the legal documents as an opportunity to renegotiate deal terms. Using the drafting of the legal documents to get a second bite at previously determined deal terms can cause significant frustration and create strain and distrust among the parties. Be thorough and upfront during the negotiation period to avoid any temptation to revisit terms once the LOI is signed.
- Lack of Process
There are many moving parts to an M&A transaction. Thus, it is critical that the M&A process be defined by the dealmakers early and that a projected schedule be put in place. While it isn’t always possible to stick to the schedule, it is important to revisit and revise the schedule when necessary rather than proceeding without a defined path with established targets and goals. Having a clearly planned process provides the M&A transaction with structure, minimizes distractions, reduces the risk of unforeseen hurdles, and provides clarity for all parties. Planning keeps the dealmakers on task and prevents the process from becoming overwhelming, ultimately reducing the risk of deal fatigue.
- Communication
In many instances, deal fatigue is a byproduct of insufficient or ineffective communication between the parties. Communication during an M&A transaction is crucial, but especially so in the beginning when both parties are still getting to know each other and are building their trust in one another.
In terms of frequency, after an LOI has been agreed to between the parties, we recommend the parties set weekly recurring check-in conference calls. While the parties will often need to talk more frequently, having a set check-in call helps keep everyone up to date on the status of the transaction.
As for best methods of communication, we recommend that parties don’t rely solely on email as the method to disseminate and discuss salient deal points or other important deal considerations. While email is certainly a convenient communication tool, we have seen many deals collapse because of the unintended consequences of a poorly drafted or misconstrued email. We find that it is often worth the effort – and more efficient – to coordinate schedules and devote that time to phone-based conversations instead, especially considering that back and forth email communication can hinder the momentum of the deal.
- Lack of Transparency
Due diligence is the parties’ opportunity to learn about each other to their mutual benefit. It is not a time to hold back or fail to disclose information in fear of resulting unfavorable deal terms or changes to the dynamics between the parties. There are very few things that come up during M&A transactions that we here at FP Transitions haven’t been able to work through, but the parties must be transparent with one another at the outset.
Remember, your wealth management practice has value to others because of the relationship you have established with your clients. That relationship, built principally on trust in the advice you are providing, is the “product” you are selling. The same is true in the M&A wealth management space. The firm that you are merging with–or being acquired by–must trust you and the information you are providing them.
We have seen frustration turn into deal fatigue and ultimately derail a transaction when a party isn’t being transparent, especially when the lack of transparency is discovered within weeks or even days of the intended closing date. In some instances, the information that was withheld would not have been a deal breaker but was not disclosed because of an unfounded fear by one of the parties that the information would change the proposed terms set forth in the LOI or be somehow detrimental to the transaction.
Signs of Deal Fatigue
Identifying deal fatigue symptoms is important as your transaction progresses. If caught and mitigated early, these can be well-managed. The first and most obvious sign is frustration from one or both of the parties. While some frustration is to be expected, especially when negotiating salient deal points, that anxiety should be short lived and resolved naturally. Deal fatigue is likely imminent if the frustration continues.
A lack of commitment to the completion of the transaction is also an important sign of deal fatigue that should not be ignored. When a buyer or seller begins to drag their feet or suddenly become incommunicative it’s usually indicative that they’re second guessing the transaction. Other indicators of deal fatigue include, but are certainly not limited to, parties being distracted, feeling helpless, irrational decision making, impatience to reach the finish line, and distrust of the process and the other party. Experts like our team at FP Transitions can help parties identify the signs of deal fatigue and keep a watchful eye over the transaction. Our support can prevent a small frustration or uncertainty from escalating and destroying your deal.
Minimizing Deal Fatigue
Deal fatigue doesn’t have to be a deal killer if caught early and properly managed. There are many techniques that can be used to prevent or manage deal fatigue (e.g., clearly defining and assigning tasks, setting attainable/realistic goals and timelines, having dedicated party project managers, having weekly status meetings), but many of these techniques, if not employed properly and at the right time, can actually exacerbate the problem. Managing a deal can be complex and it is to the benefit of all parties to employ an experienced, non-advocate M&A facilitator to provide you with expert guidance throughout the M&A process.
Employing a skilled M&A facilitator helps keep the parties focused on the tasks necessary to complete the transaction and provides the parties with an objective third party throughout the process. While parties may attempt to navigate an M&A transaction alone, this expert will prove their worth when hurdles arise, which happen in almost every transaction. An experienced M&A facilitator has likely encountered similar hurdles and can make quick work of the situation to get the parties back on track. “Expect the unexpected” is a recurring theme in M&A, but with the right guidance, the unexpected is easily navigable.
Experienced, Non-Advocate Support
Unlike some other M&A facilitator services, at FP Transitions, we provide industry-specific expertise throughout the entire transaction process, including advising on pre- and post-sale due diligence, common tax issues, post-sale employment, restrictive covenants, and preparation of the agreements necessary to consummate the transaction. Our unique approach provides non-advocacy support for both buyer and seller, leveraging our integrated team of M&A, legal, valuation, and business analytic experts to ensure a successful transaction and transition of clients.
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