Dealing with Deal Fatigue: Navigating the Ups and Downs of M&A Transactions

22 Nov Dealing with Deal Fatigue: Navigating the Ups and Downs of M&A Transactions

Shoot The Moon

Dealing with Deal Fatigue: Navigating the Ups and Downs of M&A Transactions

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Mike Harvath & Ryan Barnett discuss the concept of “deal fatigue” in the context of mergers and acquisitions, emphasizing the importance of having a competent advisor to guide the process and maintain engagement throughout the lengthy and exhausting transaction. They touch on the impact of funding sources, “retrades,” and the value of patience and effective project management in navigating the M&A landscape.

EPISODE TRANSCRIPT

Mike Harvath  00:06 

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, if you tune in regularly, Revenue Rocket is the world premiere growth strategy and M&A advisor to tech enabled services companies. With me today is my partner, Ryan Barnett. Ryan, welcome. 

Ryan Barnett  00:29 

Hey, Mike, thanks for thanks for having me. And welcome to everyone on the show again. We are M&A advisors for IT services companies, and we’d love to talk about things, all things M&A and the things that we see real people go through in their own experiences. And if you listen to our podcast, our last podcast, it was, you know, the reflections that you can take when you actually take a step away from the company and you get a different perspective by incongruity, and how that just that moment away can help bring you such clarity, some of the biggest decisions that you have and going away allows you to perhaps break some of the the fatigue that happens in in work and deals and everything else. And that really kind of led us to our topic that we wanted to expand on today is that in M&A it can be really tiring, either if you’re buying companies or selling companies feel fatigue can seek in and sometimes, instead of taking a vacation to another side of the world to get a different perspective on things, it’s good to recognize that fatigue can happen, and there’s ways to to get through it, and to make sure that you’re aware of what of fatigue, and actually making sure that you have someone by your side to ensure that you’re getting through things effectively and efficiently as possible. So Mike, tell us a little bit about what are your What are you from? What are your experience? What are some common signs of deal fatigue from both buyers and sellers, and why does that happen in M&A deals? 

Mike Harvath  02:01 

Yeah. I mean, let’s frame up kind of what deal fatigue is first. I mean, I when we talk about deal fatigue, you know, there’s hundreds and hundreds of things that need to be negotiated pursuant to an M&A transaction. And when people, deal makers and advisors talk about deal fatigue, we’re really talking about, you know, folks getting worn down from all of the decisions and the interdependencies that need to be made and that are related to the respective decisions. A lot of them are, you know, we like to think that everything can happen concurrently, but that’s not really the case. There’s certain things that are required that need to be done consecutively, and waiting on those can be tedious, not to mention the fact all the vetting and further, you know, proof or studying of proof points in due diligence that need to occur pursuant to that. So, you know, it’s a natural thing that, because this is requires a lot of energy, and not only emotional energy, but probably physical energy, to attending all these calls and having discussions and reviewing documents and interfacing with lawyers and accountants and M&A advisors to kind of move things along that as a party to the transaction, you can get worn out. You can get deal fatigue. Per se, some of those signs of deal fatigue are that I’ve seen in the past. Are people just, you know, shutting down as it relates to their willingness to negotiate. They just don’t want to move off their position. And I would say that that’s certainly something that occurs more often than not when you’re trying to roll your own deal, because you just don’t know what additional objection or concern or or proof point, or you know negotiated item is yet to come around the corner. It’s why you need to use a competent advisor to help guide you through this process, so you can know how far along relatively you are in the process to close, because it’s very easy to get worn down if you don’t have an end point in sight, you don’t know what objections will come up. You don’t know what still has yet to be done, because you’re kind of managing it on the fly. And so, you know, put my plug in for an M and A advisor to help you avoid deal fatigue. But even with competent advisors around legal and accounting and and M and A involved, you still can get deal fatigue. And those, you know, those warning signs around kind of just shutting down or not wanting to. Engage or not having a sense of urgency about moving the deal long certainly need to be recognized by you and need to be addressed accordingly. Yeah, 

Ryan Barnett  05:10 

it’s a great, great start. Mike, I think when we put this in context of an entire process, one has to think, if you’re on the buy side, finding the right fit, at that can be in a fatiguing conference process, as as you’re really working, go search out and find things in the first few weeks, it’s a struggle to just get momentum. And once you get momentum, I think things go faster. But I think by the time you’re negotiating final deal terms and you’re thinking about what you’re mentioning on kind of that last 90 days of close, when you’re working through purchase agreements and you’re working through schedules, and you’re working through a lot of really kind of needy parts of diligence that can be an exhaust in its own right. I think it’s helpful to understand the context that there’s so much that already went into the process on both sides of the table. So if you’re selling your company, going through that process and making sure getting all the your marketing materials available, and going through introduction calls and screening calls and NDAs, and same with the buy side, going through introduction readings, finding that kind of that origination search, those can all be points in which you have to set an expectation This process may take or this process is going to take some time. Mike, is there any guidance that you give firms when you’re starting out a process like this, on on the length of an engagement, and how to keep active during the length of that engagement? 

Mike Harvath  06:37 

Yeah. I mean, I would tell you it takes a year, right? You know, you can plan for and budget a year if you’re going to do a deal, whether that you’re going to go to market, or whether you’re going to, you know, do an acquisition. You know it likely will get done sooner, but you have to sort of frame your mind around that. You know, in many ways, it’s a marathon, not a sprint. I think particularly buyers can get very anxious about making progress and identifying targets and being able to facilitate dialog about with those targets. And they oftentimes either give up or they want to stop too soon, and they should be patient. I mean, if you’re going to make a commitment, particularly if you’re going to regardless of how you’re going to go about finding those targets, whether you’re hiring an advisor such as revenue rocket, or you’re trying to roll your own you need, you need to know it’s going to take some time and resources and investment to just identify those potential sellers and get them to the table. And that’s a time when I wouldn’t necessarily call it deal fatigue, per se, but much more, impatience can take over, and can cause you to kind of cut your nose off in the process. If you go a few weeks or even a month or two without what you would consider material progress, you might say, well, this is not going to be effective. Now we’ve proven out that the buyers that are most patient at that phase get the most looks at opportunities, right? They get more opportunities to vet because you are able to identify opportunities inevitably, and be able to make decisions about those opportunities moving forward. I think that, you know, certainly on the sell side, it’s a little more prescribed, you know, in the sense that there’s a lot more milestones along the way, if you’re running a process, which I would encourage anyone that’s looking at a private equity recap or a sell, a full on sell side, sell out type engagement that they use a competent advisor to manage that process, because you want to get a lot of folks looking at your business and competing, frankly, for it, and you want to have choices As someone who’s either selling or doing a recapitalization effort. You want to be able to have lots of choices, and the best way to do that is to work through an advisor that does that regularly, again, not to have a shameless plug. But certainly we do that, I think, better than anybody here at Revenue Rocket for IT services companies, and that will help you move it along rather quickly. I think, if you use an advisor who’s not experienced in the market or doesn’t have a good community to market your business to, you’re setting yourself up for a very protracted and lengthy process that may or may not be successful, and so you know you need to keep that simply in mind, and it may cause, ultimately, deal fatigue, just because you know that advisor can’t really help you in an effective manner, it’s always appropriate to ask the question of an advisor, how long does this typically take? Whether that’s buy side or sell side in their world, that’s a big tell as to, you know, how effective they execute those particular work streams, whether that be helping you acquire another company or helping you exit or get a recapitalization done. And then, you know, at the various stages of those deals, you know, certainly, you just have to keep that in mind. It’s not really deal fatigue in some ways. It’s impatience. I guess it’s probably the best way to put it 

Ryan Barnett  10:28 

Yeah, absolutely. And I think you did a great job if you’re working with an advisor and looking this process itself. Each one of those work streams is a critical path, and sometimes you can do multiple deals at once, and so there are, there are ways to to overlap. If you’re selling your company, you’re only going to do one, but you’re talking to multiple people and multiple things. And it’s, it’s important for your advisor to make sure that they’re keeping things straight, and they’re keeping clear lines of communication open, and they’re and those communication is really helping the the energy of the deal. Mike, what’s importance of kind of project management and deadlines and and shepherding, kind of being fairly aggressive on the project management side of getting if time, if, if time kills all deals, well, what are ways to keep things just moving within the process, as far as a project management, project manager and clear communication and deadlines to making sure that things go forward successfully. 

Mike Harvath  11:33 

Well, I think milestones in any M&A engagement, dates and milestones are pretty critical. You know? They sometimes slip. I mean, I think in many ways, deal fatigue sometimes sets in when you’re missing milestones or slipping. There may be good reasons for that. There may not be other good reasons. It just depends on where you are in the life cycle of deal. There’s a lot of things that are outside of, I think, any individual’s control, as someone who might be selling or someone who might be buying. Those can be macroeconomic factors, financing factors, diligence, timelines. There’s a lot of third parties that are involved. Typically, you know, you have quality of earnings providers that you know work their process on their schedule. You have lawyers that do the same. You have accountants regarding providing tax advice and structuring advice that you know do the same. You have any advisors that also do the same. So you’re bringing together sort of a team of specialists that all have to work together, and certainly having clarity and communication and having expectations set as to the milestones that are expected in the deal, and having someone who can manage to that schedule is important. Usually, that is the M and A advisor who it gets everyone to the table and make sure have clarity and communication, open communication lines to know that you’re moving towards a particular closing date and that the dependencies are being managed and handled in a timely manner, otherwise you’re not going to hit that date. You know, it’s the old adage, right? Without a road map, any road will get you there, and making sure that you have clear road map to close on a particular transaction will help guide the last 90 days of those transactions successfully. 

Ryan Barnett  13:24 

That’s a great, a great point. If you’re on the buy side, Mike, and you’re helping and we’re helping someone acquire another firm, what are some strategies you can use to keep internal stakeholders motivated, our clients that are out there and engaged as that deal continues to move on. As you mentioned, you might have a quality of earnings provider, you might have a tax advisor, you might have someone a corporate or you’re going to have legal agreements in here. What are some ways to keep people motivated engaged? 

Mike Harvath  13:57 

Well, I think you know part of that has to do with understanding, you know, keeping everyone on the same page. And we facilitate that through regular status reviews where we stand on a particular project pursuant to initiation to close, and all of the requisite stakeholders that need to be involved in any individual phase are involved with those communications. And those happen, you know, either weekly or bi weekly, depending on the phase of project that we’re in for us, that works pretty well, right? It helps people know that they can go off and work on, you know, the things they need to work on and in concert with the broader objective. And I think you know doing that, not only in the origination phase or the sourcing phase of opportunities to acquire, but also as you get through letter of intent, and ultimately through due diligence and or through the valuation phase and diligence phase, and ultimately into you. Know, negotiating the agreement and to close that’s important. A lot of times, those are interrelated with financing. Financing is critical to every deal, regardless of how it’s done, whether it’s, you know, a sponsor acquiring the business, you know, private equity sponsor, public company, private company doesn’t matter. There’s a variety of stakeholders that need to be briefed and understand the investment criteria and give your approval. Some involve banks. Some involve, you know, sort of debt and equity partners. Some involve the shareholders, right and boards of public companies or private companies, and I think you know, understanding and making sure everyone is up to speed on on the project plan, and where you stand in the project plan and the expected outcomes goes a long way towards one, avoiding deal fatigue, but also having clarity about when you can expect to have it close. Great point. And 

Ryan Barnett  16:00 

Mike, if you’re on the other side of the table, and we’re representing someone on this on the sell side, it can be an overwhelming process. And what is there some general advice that you can give people that are going through this process, where, especially due diligence, you feel a bit of prodding and pro poking, and people are asking for quite literally, maybe hundreds, if not 1000s, of questions and data points. What on the sell side? What advice can you give to firm owners who may feel fatigued, it may feel overwhelmed and hesitant as that process just gets longer and longer? 

Mike Harvath  16:36 

Well, you know, it kind of comes back to the old adage, right in a journey of 1000 miles starts with one step and, and I think, you know, you just need to put one foot in front of the other. As you work through this effort, there always seems to be more questions and more outcomes and more concerns and, and I think as much work that goes into all the diligence and proofing, if you will, proof points around your financials and the business plan and the forecast. What’s very interesting to me, and always is one that I hear pretty regularly, is you hear people say, you know, as we get to the closing table and close that, that was sort of anti climactic, right? We’re all working towards this. So goal of ultimately closing, and there’s so many things that go into it that when you circulate digital documents to sign and close and and transfer funds, it’s sort of like, wow. So we spent the last three months doing all this stuff for that. It seems a little bit anti climatic, but, but what I would encourage you to do is just think of, you know, taking a kind of one day at a time, responding to the questions, queries and input effectively, and then a timely manner to keep things moving. Because I think in the end, if you all are moving towards the goal, the goal line, eventually you reach it. It’s when things you know get off the rails. Is when there’s lack of communication, or you have an individual provider who you know doesn’t deliver on the schedule, and you just, you know, you start to lose your way. I think managing it and having an outside advisor, again, I would encourage everyone to consider that to keep things moving and be the voice of reason and objectivity, to keep things moving towards close will go a long way towards avoiding the deal fatigue or running into, you know, situations that could could create more time and And to your point, Ryan, ultimately put deals at risk. 

Ryan Barnett  18:44 

Now, has there been cases, Mike, in which deal fatigue has gotten gotten bad enough that a seller maybe stops the process or quits the process? Have you given examples of where fatigue has impacted the deals outcome, either positively or negatively, in any lessons learned from that, 

Mike Harvath  19:07 

you know, I would, I would say, in our deals, it hasn’t been a huge, a huge function. I would say most people say they’re tired when they’re done, but deal fatigue hasn’t interrupted the process. You know, I can think of a few situations where sellers, in particular, have had to take some time away from working on diligence items to focus on the business. Diligence can be a distraction, and it’s important that that time that your intelligence doesn’t negatively impact the performance of the business. Otherwise, it’s likely your buyer is going to want to Retrade your deal, right? So you have to be very disciplined about running the business as if you’re not selling it, and focused on doing all the activities that are required in order to keep the health and the. Growth and the profitability of the business on the trajectory it was on when that tutor came to the table and was interested. And so doing that means you got to lean on others, typically to do that. So I to answer the question more directly. You know, I haven’t, you know, necessarily, in the 25 years of undoing this, I haven’t seen too many situations where people have just decided to walk away and stop. Usually, I’ve heard of stories of that, and typically that has to do with time. To your point about time kills all deals. I talked to someone recently was trying to roll their own deal, and they literally, you know, ended up spending two years talking to a potential seller. They were an acquirer, and that seller came to them one day and said, Well, I sold to someone else, and it was because the buyer couldn’t move the deal along, they didn’t have either weren’t giving us the attention that it needed, or didn’t know what to do next, and so they got stalled, and ultimately, the deal went away. You know, we had another situation, I guess, on the buy side, where, you know, if a if a buyer is too slow in making decisions corporately to move forward with a transaction, approve it, move forward, and then ultimately get that company under a letter of intent, you’ve opened the mind of that seller to being open to other offers. And you know, in our market, it’s a competitive market, so a lot of these people will take another call if you’re not moving fast enough. We’ve had a couple situations in the past where I guess our buy side clients have been a little bit slow to approve deals that we think should be approved and and as a result, they’ve lost out. Right? There’s people that go under Letter of Intent with someone else. Once a dialog has been open, they weren’t considering a sale, but when we convince them to do so, they put their financials together. Valuations have gotten done, and we’re ready to make an offer. If you as a buyer can’t strike while the iron is hot, you do risk ultimately that someone might, that company, might sell to someone else, so having clarity about what needs to be done when it needs to be done, and being efficient will sort of help keep things moving. 

Ryan Barnett  22:26 

Yeah, and I think where we’ve seen it get stuck a bit is sometimes funding sources. So if you’re working with someone with uncommitted capital, understanding that early in the process to make sure that is committed can help avoid fatigue. Because if you’re if you’re going back and someone’s trying to get funding and can’t get funding, that can be an exhausting process, and I think that can be for both buyers and sellers, be frustrating to go through. And so make sure that you understand your funding, funding sources, you’re getting approvals throughout the process, that by the time it comes to actually strike the deal and get it done. Thing funding sources are filled, and I think that really checks something off in the seller’s mind to make that you’re able to deal with a lot more requests if you know the money is coming. 

Mike Harvath  23:16 

Yep, absolutely, 

Ryan Barnett  23:17 

yeah. The last question you brought this up, and I just want to, I think it’s important enough to highlight you mentioned a Retrade at the end of a deal. And this is where I think when deals get too long, and people have gone through a bit of a ringer on due diligence, we have seen, and I would even throw out, I think this is a bit unscrupulous, but I’d love to get your opinion, a retrade come through when they they feel like the seller is at the there’s no other alternative. What do you think about that? And what advice do you give to a seller who might face a Retrade at the last second? 

Mike Harvath  23:57 

Well, I think, you know, sell as a seller. You know, you hold a lot of cards, right? You always have the opportunity to walk away. You always have the opportunity to wait. You always have the opportunity to, you know, refresh, recharge your batteries, re-engage in the business and go to market at a later time, particularly in a business that’s growing, your value is going up, right? If you think about that, you know, as you continue to grow the business and optimize profit and revenue over time, that value will increase. And so I think if you have an unscrupulous buyer who’s attempting to take advantage of you as a seller during a time that either the business is not performing real well or is that maybe a declining performance through the diligence process, you really have to ask yourself, Does this deal still make sense? Uh, for you individually, it’s not a question likely that someone can answer for you. It’s one that I think you really have to think long and hard about. If someone tries to come in and Retrade your deal based on either softness in the business or ultimately, just because you’re worn down. We have seen that. We’ve seen buyers. Have tried to do that. Now they typically temper that or provide a more measured approach to that. When there’s other advisors involved, when there’s other either M&A advisors or lawyers or accountants or a combination of all of the above, because those points of opinion and observation should be knowledgeable enough to go to the weigh in on whether the deal is fair or not. And I think from a deal mechanics perspective, you want to lean on your M&A advisor. From a sort of legal risk perspective, you want to weigh in with your lawyer, and certainly from a structuring perspective and tax perspective, you want to weigh in with your tax advisor. But you know, there are buyers that will try to take advantage of you or offer sub optimal offers, because they either feel that you know there is no competition, they’re the only offer, and if they’ve got you kind of worn down, that’s the time for use them to renegotiate and get the deal done. It’s easier to defend that if you have you know, clarity about what your real value is, and there’s competition amongst buyers, for example, because then it’s easy to say, well, you know, if you don’t want to pay what, you know what we had agreed to, we’ll go to a different buyer, and you know, you’ll be out. And so, you know, I think all those come to bear as you think about what your plan is if you’re going to go to market. Or recap, 

Ryan Barnett  27:08 

yeah, absolutely. Well, Mike, this has been excellent. What I heard today is that buyers and sellers, they need to be patient throughout the process, and that’s even before a kind of deal. Fatigu may have said it so as you’re looking and exploring firms, finding the right firm, be patient, be willing to consider many alternatives, and keep kind of keep going with the flow. Once you’re under an LOI, make sure that you are taking one step at a time. And so if you get a large request, making sure that you’re getting through that large request and the most important items first and you’re just tactically executing very well. Keep your spirits up throughout the process. I think it helps. We didn’t mention it here, but making sure that you have a great network of people around you is important. That includes your your partners, and includes your family partners, and includes an advisor along the way. And Mike, I’ll just my last question to you, and I’ll let you wrap it up from here. But what should buyers and sellers expect from their advisor to help them with deal fatigue, and what ways can the advisor specifically make sure that that transactions are completed and the shorter amount of time as possible? 

Mike Harvath  28:27 

Yeah, I think what’s important to note is that what you’re paying that advisor to do is to advise you, right? I mean, it sounds obvious, but it’s clear, advise you on when to lean in, lean out, what to where to concede, where to not concede what the next steps in the process will be. You want them to be able to help you look forward and around the corner so that you know what to expect. That will go a long way towards avoiding deal fatigue. Because a lot of what reason deal fatigue surfaces is because you just don’t know what to expect or how long this will take, and it is a major commitment of time and energy to move deals forward, even with an advisor, but you have to have clarity about how long you’re going to be in this position of commitment to working through all of the items that are needed, and it is a bit of an emotionally exhausting process to consider working through everything here and and I think understanding and having A Sherpa, if you will, guide you to the top of the mountain. Certainly makes the deal less risky, less risk that it’ll fall out of bed, less risk that you’re going to burn out before you get to the end and just fold your tent and go home. Less risk associated with Retrade on. And all the other things that could come out of the deal, because that guide and that advisor has seen, hopefully, many other deals like yours, and has learned from that and can help work through any potential issues as they surface. So certainly they should help you have clarity as to how long it will take and what to expect and when things get handed or played, if you will, in the negotiation how to best position yourself and a firm in the best light to have an optimal outcome. That was 

Ryan Barnett  30:41 

great. Mike, I appreciate you walking me through this topic today and looking forward to the next one. 

Mike Harvath  30:45 

All right, sounds great. Well, with that, I think we’ll tie a ribbon on it for this week’s Shoot the Moon podcast, and encourage you all to tune in next week, we’ll unpack further topics around M&A best practice and growth strategy for IT services companies, feel free to tune in, and we look forward to hearing from you. If you have questions or things you’d like us to address on the podcast, please drop us a note at info@revenuerocket.com, thanks and make it a great week.