Navigating the Last 30 Days of an M&A Deal

14 Jul Navigating the Last 30 Days of an M&A Deal

Shoot The Moon

Navigating the Last 30 Days of an M&A Deal

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EPISODE 222. In this episode of the Shoot the Moon Podcast, Mike Harvath and Ryan Barnett dive deep into the often chaotic and critical final 30 days leading up to an M&A transaction close. Dubbed “herding cats,” this phase involves juggling legal, financial, advisory, and communication challenges, all while maintaining momentum toward a successful deal closure. They walk through the key players, from lawyers and tax advisors to internal teams and buyers’ funding sources, and provide candid advice on how sellers can stay focused and effective. Communication strategy, particularly with employees and customers, is emphasized as vital to a smooth transition. Listeners also get a detailed look at deal day mechanics, legal negotiations, working capital calculations, and integration planning. Whether you’re approaching a sale or actively in diligence, this episode is packed with insights for making the last 30 days manageable—and successful.

EPISODE TRANSCRIPT

Mike Harvath   0:07
Hello and welcome to this week shoot the Moon Podcast, broadcasting live and direct from revenue rocket world headquarters in Bloomington, MN.
As you know, if you’ve tuned in in the past, Revenue rocket is the world’s premier growth strategy and M and a advisor for tech enabled services companies.
With me today, my partner Ryan Barnett. Welcome, Ryan.

Ryan Barnett   0:34
Hey, Mike, thanks for having me. You know, as on this podcast, we talked to leaders of IT services firms. So I think your managed service provider is your cloud service provider is cybersecurity firms application developers. If you’re buying a service to a company and using tech, that’s who we’re talking to and and we talk about things that are in our business, in the mergers and acquisition world.
And part of M&A that becomes always some of the most interesting times. Mike, I think as we’ve talked about is The last 30 days of a deal and becomes a bit of a circus.
Mike, when you suggested the topic here today said how do we herd the cats in the last 30 days? So We just want to spend some time and take a look at, as you would consider an M and a process, and this could be both of them by side or sell side, but I’ll take an approach here of if you’re selling your business, you know what kind of.
Things should you expect when coming through that last 30 days.
So Mike, just let’s get us going before we’re prepping for this call you mentioned.
Just a cast of characters. And all the stuff you gotta do, why don’t you just get us going on in 30 days? Just who’s involved and and we can start from there.

Mike Harvath   1:52
Yeah, I think you know that’s a great question, Ryan and a great place to start.
You know, first of all, you know, if you’re a seller, you’ve assembled your, your, your advisory team, right?
And your advisory team is certainly going to be heavily involved at this point kind of working on what we call ticking and tying out all the things needed to get to close now. You inevitably by now if you’re in the last 30 days have been through.
Hopefully a diligence period that’s completed that’s. Confirming your cash, hold on your financials and your numbers are correct.
In the case of a sponsored company by private equity, or if you’re being acquired by a private equity firm with a platform. You’re likely have gone through a quality of earnings analysis and hopefully that is also done by now. You have a group of lawyers, right?
Your lawyer as well as a buyer’s legal team, you have a draft agreement.
Hopefully you’ll likely. Exchange it. Several times, if not many times, by now.
And are working through all of the legal items that need to get done and put into what we call a definitive agreement. The final and legal binding agreement. You’ve probably worked with your tax advisor to say, hey, how are we going to the proceeds of this transaction?
How are we going to receive them and how’s that going to be treated from a tax perspective?
So you can do some tax planning. As an example, you’ve likely met with the other side and done some integration planning, so maybe.
Developed an integration team and guys are beginning to look at how you’re going to manage it.
Ation and are you gonna announce a transaction to your employees and and and team members?
And you know, as all at a minimum, you know, that’s what I think about is a group order as a group of finance folks. There may be a funder on the side of the buyer that is also involved, right.
And they’re their interested party.
That’s gotta see certain things from the seller in order to either create a loan.
Owner or some sort of equity check in order to support that deal?
And there’s a variety of meetings that go into the approvals before those finances are released in order that financing is released to fund the transaction.
Sometimes they have their own lawyer that has to bless the deal, so you have another kind of group of lawyers, and so, you know, generally they fall broadly into the advisory firm on either or both sides.
It’s M&A advisors. They fall into finance folks, which could be, you know, folks that are advising you as a seller, like your tax advisor or people that are doing due diligence on the other side of the table. And they’ve all in this sort of his legal bucket of folks that are working on, you know, creating a legally binding language that everyone will be able to stand by.

Ryan Barnett   4:56
Yes, I I think when I when I hear that. If the cast of characters is is huge. So it sounds like a rampant zoo everywhere that needs some kind of management. And it also sounds like sellers are probably underestimating the the number of people involved to deal. Is that fair?

Mike Harvath   5:16
Absolutely, absolutely. And the number of agendas that maybe you know, people may have different agendas even on the same team on the same side of the transaction.
So, you know, I think certainly there has to be a lot of communication, if not over communication amongst the parties on both sides of the table to keep things moving.

Ryan Barnett   5:37
All right. Absolutely, Mike. The one person that I I didn’t hear in that and and we we just recently did a podcast on that it’s it’s the employees of the selling firm. Can you just again, we can refer back to the old podcast, but can you please give just some advice to sellers on the role of people that are not in the know about the transaction?

Mike Harvath   6:01
Yeah. I mean, it’s super important that you know, you take care of your people and part of keep taking care of your people is to probably not.
Let people know inside your organization. Until they need to know. You know, I kind of call it the need to know basis, right? So sometimes you bring in finance people on your team and swear them to secrecy earlier than later, but generally you’re going to advise your team about this deal.
When all the terms of the deal have been negotiated and documented, may not be closed yet, but certainly documented in the definitive agreement.
So on a typical scenario, you’re going to advise your team about a week before a close that you’re going to do this transaction maybe two weeks before close.
And allow them enough time to sort of provide any meaningful questions about it.
Understand the merits of the deal. Kind of get up to speed on their role sort of post transaction.
And I think a clear communication plan with them about kind of what’s in it for them and why you’ve decided to do this deal is super important. And I think you have to walk them out on the shoes of those employees. You just move their cheese in a big way and I think as a seller you have to remember that you know, you’re a lot of times the team works there because of you, right?
They’re following you and your leadership team.
And and you know If it’s, the communications aren’t handled right, they could feel betrayed by you that you’ve decided to quote UN quote sell out, even though that may not be what’s happening.
So again, back to the emphasis on communication. Communication here is super critical. The timing of that communication is critical. Can’t be too early. Can’t be too late. Got to be kind of just right.
We’ll call it the the Goldilocks approach, and certainly you’re going to want to be.
Sort of over communicating the merits of the deal.
And kind of what’s in it for them. I think if you can contemplate that set of questions and be able to be clear about all of that, it will land with a much better in a much better place if you get the timing wrong, the topics wrong or. The emphasis wrong. It’s not going to. It won’t.
It won’t really turn out well for you, and in a professional services business. So you’re really you think about what people are buying? They’re buying casuals that are delivered by people.
Right. And so those people have to be happy and feel if there’s an opportunity with a new suitor. Otherwise, they’re not gonna stick around.

Ryan Barnett   8:49
That’s a great point and and this is something the reason why we talk about a lot because it’s a big deal. And so when you when you think about selling your company, this is your, your close family should know with your advisors have to know but the employ.
Or something you want to just treat with the right level and this the same with with customers.
So in the last 30 days, part of this might be interactions with those customers.
But if I back up a little bit, Mike, let’s just kind of hack through.
Through the who’s who in the zoo and walk through part of this.
So in in the legal portion of it, you’re gonna have a buyer buy side representation or buyer representative, you’re gonna have a seller representative. You may even have someone representing a financial institution or that. But there is legal agreements and. And during that last 30 days, you’re gonna. See the final turn of a purchase agreement. You’re gonna see employee agreements for key management. You’re gonna see shareholder agreements.
And so especially if there’s equity involved, you’ll see ancillary agreements, things like non competes IP assignments, transition services.
You’ll be reviewing, you know, Bretton warrants and diminity caps, escrow mechanics, and finally negotiating any kind of legal terms and and oftentimes and even a page turn or a legal view.
Mike, if I step back and and and talk about this. What advice Can you give to the audience here to keep legal moving forward?

Mike Harvath   10:27
Yeah, super important. So you know oftentimes.
First of all, it kind of if you begin with the end in mind, you really need to have a lawyer representing you who is experienced in mergers and acquisitions.
Of companies your size, and preferably in the industry of IT services.
Right. There’s a group of lawyers out there that that have done a lot of these transactions.
They’re experienced. They know their way around. They’re considered quote UN quote an M and a lawyer. Not a general business attorney. All all folks that you know nothing to take away from from our legal brother and out there that focus on, you know, contract law or general business related matters. But you know to do M&A right. Oh, you really needed that. When a lawyer who’s done lots of transactions.
And given that and provided you have that level of experience on both sides of the aisle in a transaction, both representing a buyer and representing a seller, generally the process goes pretty smoothly.
You generally have an agreement that would be what we kinda call down the middle of the plate or one that’s pretty standard and we tend to negotiate on every transaction.
Pretty much the same bucket of stuff, right?
And we can find a good middle ground on those things. Where that doesn’t happen.
Is if you have an inexperienced lawyer in the M and a space.
You have someone who is focused more on billing than they are on helping you get your transaction done. And in many ways, you know you have someone who’s trying to figure it out.
As they go, and I think you know, certainly we’ve seen that on both sides of the transaction in the past. Usually means that deals get delayed or they end up costing more than they should because those inexperienced lawyers create fear and certainty and doubt in the parties and.
Or you, you know, get into a a *** for tat sort of negotiation between the lawyers.
The other thing you can do is sort of moderate those calls, right?
You know, I’d say the the lawyers we work with in the last several years have been much more open to being transparent in the negotiation on the terms of the agreement with the parties on the call.
Now I would say some lawyers don’t like that, right?
They want to be able to talk to their client independently on every topic, every issue, and then go back to the other side and trade deal points. And when that happens, often times you don’t get the best agreement. Or the one that aligns to your intention, which is the important part, right?
You want to make sure that the lawyers understand your respective intent, and then they can, you know, appropriately write it and fortify it with the appropriate legal language versus just.
Trading deal points, which oftentimes it can feel like that’s the case if lawyers go off into discussing all of these topics.
It’s on their own, so you know, I think it starts with selecting an experienced M and a lawyer who’s done deals in the IT services world.
And then being able to have full transparency to the legal negotiation and then also having a regular status call with all the parties and the lawyers to discuss, move how the project is moving along.
That way you can get fully caught up to speed on any discussions that may have occurred.
Outside of your purview, but also you could you both the buyer and the seller can weigh in and further align the lawyers to the intent between the parties and what they’re trying to do so they can work on language after the call or between those calls.

Ryan Barnett   14:35
Yeah, I think it’s a great point. Mike, you you do an excellent job of keeping things moving and the the role of that having an advisor to keep breakthrough logjams is, is, is critical as I believe that it is easy to delay here and you will always find an excuse to go another month and.
I think that’s important to think about.

Ryan Barnett   16:31
Hey, Mike and I don’t want to switch gears here a little bit. When you think about all of the machinations that are going on with buyers at this point and you think about things like funding and you think about even just the mechanics of what happens in the.
Last 30 days, one thing that we’ve talked about a lot and and again just surface level because we we’ve had other podcasts on it.
It’s often times we’re trying to figure out working capital.
And I’m just curious, how do you keep everyone involved?
In defining and executing what working capital should be in a transaction.

Mike Harvath   17:25
Yeah, that’s a great question, Ryan.
So you know, typically what most folks do is they look at your average.
You know, working capital. Over the last year. And that’s what they want you to leave in the business, right? And their logic. Most buyers logic is that, hey, you wouldn’t have left it in there if you didn’t need it, which is pretty weak logic. You know, when push comes to shove, working capital should really, you know. Generally be about.
You know when you think about taking your current assets minus your current liabilities?
That that, you know, provided you do a good job of, you know, posting your payables and tracking payables accordingly and you have the right, you know, accounting practices.
Generally That should be an adequate. Amount of working capital left in the business doing cash and AR and then any excess working capital is harvested by the seller.
Now most small businesses run with a coverage ratio.
We’ll call it a coverage ratio that could be as much as two or three to one, meaning your assets are two or three times what your liabilities are and that is considered over capitalized generally.
A1 to one ratio.
Show meaning current assets equal current liabilities plus about one month’s payroll.
Is a good rule of thumb for an adequate amount of working capital to be assumed by a buyer and you if you’re selling a going concern or a business that’s considered a going concern, you need to leave adequate working capital in the business so that the buyer doesn.
Have to put money in, as you can appreciate.
If you were a buyer, you wouldn’t want to immediately buy a business and then have to put a bunch of money in to operate it.
So you know, there’s always this concept of what’s adequate working capital.
There’s always a negotiation around it, typically because everyone’s opinion of working capital is a little bit different.
And you know, on one hand you’ll have, hey, we’re going to look at what your average positive net working capital has been for the last year and that’s what we want. If you’re a buyer and if you’re a seller, you’re going to want to minimize that number to.
Say.
Hey, let’s get as close to a one to one ratio as possible.
The the truth of the matter is the number is somewhere in between, you know, and we think it’s generally about 1:00 to 1 + 1 months payroll. And so Generally, when we’re representing a client, we will defend and negotiate working capital on their behalf.
And we have, you know, a financial team that does that, but that’ll just give you some level of guidance. Some buyers like to use working capital as a way to.
Take kind of a swipe at the purchase price. You know they reduce purchase price by asking for more working capital and that’s probably required.
And likewise some sellers try to leave in as little as possible or say, hey, I get to harvest all the assets and you get all the liability.
At least that’s not how it’s gonna work either.
Gotta be able to have enough in there so that the buyer can operate the business.

Ryan Barnett   21:00
Yeah. Thanks Mike.
And that’s just one point of negotiation, but I think it we’ve always seen it in the deal and it’s always a point of somewhat contention. And so even though there’s commonly understood definitions of working capital, every deal is different and and in the last 30 days, the her.
Of cats there is making sure that you’re going to have accountants. You’re going to have financial, just your accounting and legal all have to be.
Aligned to go do that.
Mike, if I take a step back and look at kind of the other people involved in the last 30 days, our our sellers are they typically working with tax professionals or wealth management advisor or anyone else or is that before or after the transaction before those 30 days?

Mike Harvath   21:48
Yeah, you know, could be. Hopefully you know if you plan and and manage, you know dividends you’ve taken out of the business well and conservatively. You know you’re you’re already working with a wealth manager, someone’s managing your investment. I think if you built a firm of any scale. You’re probably also offering a 401K plan or investment plan for your employees.
And likely you have a fiduciary that you’re working with who’s also wealth manager.
That’s, you know, doing that kind of work.
They they, you know, certainly that’s one bucket of advisors you should be working with and should be talking to about your intention to do this transaction.
You absolutely need a competent tax advisor.
There’s a lot of moving parts on tax and how deals are structured. You’ll want to structure them efficiently for tax. That involves both legal and accounting.
Sometimes you want to involve a tax lawyer if it’s going to be complex.
Depending on who your M and a lawyer is and the size of the firm, they may have a tax partner that’ll weigh in on the transaction from the seller’s perspective, you should be taking their advice as it relates to structuring for optimizing tax and tax treatment.
And then, you know, being able to, you know, take the appropriate actions as it relates to kind of when you’ll realize some of those tax and some of the gains.
I mean, you know, the short answer is your tax.
Exxon on on gains, whether they come from operating the business or they come from selling the business.
Most of you will be, you know, realizing long term capital gains on the vast majority of the purchase price, if not all the purchase price. Depending on how it’s legally structured. And then you know being able to determine what you’re going to do there from a planning PERS.
Ahead of time could be really important.
You know, you may live in a, you know, low tax state or one that’s more favorable.
For income tax or capital gains.
Some states that are very You know very favorable for him. Tax aren’t very favorable for capital gains taxes. An example so you know if you’re contemplating a transaction down the road, you’re definitely going to want to have a conversation with your tax advisor in some cases, years in advance. So you may need to be thinking about that.
If you’re in Canada, you’ve probably had to be thinking about it seven or eight years in advance.
As to how you may have structured the trend, your your company as it relates to your trust.
And so there’s certainly tax strategies also that can be thought about that optimize your tax efficiency way in advance of the transaction.
So you know we’re.
I know we’re talking about the last 30 days here and you’re certainly going to be talking to those advisors then, but you know, you should be thinking about long term planning of what your intention is as it relates to tax and sort of as it relates.
To, you know, or your investment portfolio way in advance in order to optimize the transaction for you.

Ryan Barnett   25:00
No, that’s great. That’s great. Mike, again to talk about the, we’re thinking about the herding cats here and and one of the interesting parts of a transaction starts to become actually the the literal financing or the financing vehicles or the bankers associated with that.
Mike, what are some things that you’ve run into from a funding partner source and what what would you mention to sellers?
What’s the best way to to work through?
Some of the challenges that you might see going into the close with those funding partners.

Mike Harvath   25:38
Yeah, that’s a great question, Ryan.
I mean, I I think there’s a variety of ways that deals get funded now.
You know everything from, you know, traditional bank financing.
To what we’ll call more.
You know, merchant bank, structured banking relationships.
To, you know, private equity funders to you know what we’ll call independent sponsors who will, once you’re under LOI, they’ll go seek funding.
To search funds, buyers who will, you know, look to buy a role in the company.
Maybe they have a massive well through.
You know, people have committed funds to them, whether it be friends or family.
But understanding the source of those funds and is super important and understanding the dependencies. I think in the last 30 days.
We’ll be super critical as a seller.
Almost all funders, regardless of source, are going to have various checkpoints in the last 30 days that you’re going to have to get through.
You could call it.
Oftentimes it’s called an investment committee or a loan committee is going to need to be able to provide approvals.
And final approvals for funding within the last 30 days and they all have specific dependencies and questions that can come up in the last 30 days, some of which are innocuous and just need to be part of the file, some of which can delay close. So you’re gonna.
Wanna understand clearly what the funding process is for any buyer?
What their approval process is?
And you know what the what?
The kind of where they are.
On that journey in the last 30 days so that you can, you know, manage expectations to close and also you know, make sure you’re on track to close on the timeline accordingly.

Ryan Barnett   27:43
That’s great.
And Mike, we talked about legal.
We talked a bit about the the bankers and funding source.
We talked about internal communications and and having there’s post merger integration and I think we can even delay that to another podcast because that’s not before the 30 days. You have to start thinking about that and you. But getting people involved might actually be kind of post 30.
Days.
Can you just tell me what happens today I close? I mean literally, what are the steps that happen day close that a seller should expect?

Mike Harvath   28:19
Well, you know, it’s somewhat of. A lackluster. Sort of. Event I I would say that you know.
Wallace work that goes into getting the agreements finalized and all the schedules and you know all the appropriate documents that need to get legally agreed upon, but then finalized, you know, releases lean releases. There’s just a Bunch of bunch of stuff.
Little kind of what we’ll call nitpicky stuff. And so after all that work that goes into all those things and you know, lots of hundreds of hours of calls you’re having between lawyers and accountants and buyers and sellers and, you know, you get to the closing day and and the closing call. And generally today and In our world now you know the documents are are circulated.
By your lawyer for signature on documents and. Then there’ll know what’s called signature escrow by your lawyer to make sure that both sides have all of their signatures and that they’re prepared to fund because there’s a bunch of different things that need to get signed, and so usually the respective legal teams will confirm that all. The signature pages have been completed by the parties they represent. And then they exchange those documents so that they’re all finalized and there’s one signature package, 1 ultimate signature.
For package that has all the appropriate signatures on those documents. And those are pending funding. So even though those documents are signed, usually there’s language in them that says, you know, that they’re. They’re sort of pending funding. If the deal doesn’t, for whatever reason, doesn’t get funded, then the deal isn’t closed, right?
It it certainly is closed when it’s funded, not when you sign the agreement. So it’s an important distinction. But generally getting all those signatures doesn’t take very long, or in some cases now it’s done ahead of time and held by your lawyer and sort of signature escrow. And then once all those signatures are received by the parties, the buyer for any upfront consideration will initiate wires.
They will wire that money to the designated account to not only the seller, but also the parties that worked on the transaction.
That are part of what’s called the flow of funds. Typically those are M and a advisors that have worked on the transaction.
Typically, those are lawyers that have worked on the transaction.
Typically those are maybe include accountants or accounting firms that work down the transaction.
Maybe they did the quality of earnings analysis for the buyer.But it’s folks that are owed money pursuant to the transaction. And you know, want to tie that out at the time. And so, once those wires go out and get received, typically they go out and there’s what’s called a transmittal confirmation, a wire confirmation when it’s initiated at the initiating bank. Those are usually exchanged with the parties that will be receiving the money, so they know it’s it’s initi.
Typically, based on the size of these wires, they all go through the Fed. They have to be sort of checked by the Federal Reserve. To make sure, for a variety of sort of you know, anti money laundering laws and terrorism laws are checked and then they’re processed.
And so those can take, you know, anywhere from what would be perceived as almost instantaneous to, you know, upwards of about 1/2 a day. It’s time to get transmitted on a wire. They’re usually same day received by the parties. If they’re submitted by the wire cutoff and.
The wire cutoff for the United States, typically 5:00 PM Eastern Time. So just as a heads up, because that’s kind of where the Fed operates.And and that’s it. So once those wires are received, typically everyone celebrates that the deal is closed and they move forward from there.
So normally it’s a pretty anticlimactic thing. You know, you circulate some signature pages and then you wait.
You wait for confirmations on the money being sent and then you acknowledge when it’s received.And then the deal’s closed.

Ryan Barnett   32:52
Yeah. And I think it’s a. It’s a point in which everyone, hopefully, if they did their job right, they’re they’re running straight to day one and start to move things forward.
And if not, and if it’s been an exhausting process day two IP taking a little break from everyone. So I when you’re hurting all those cats and dealing with all these people and event consistently working together. Day one or two might be just a break from everyone else.
Mike, is there any other parties or anything else you can think of in this last 30 days that our audience might be interested in?

Mike Harvath   33:33
Well, I think you know, you might want to begin to have conversations with your buyer about what press or your M and a advisor or what press you might release about this.
I know that sometimes buyers and sellers get so caught up in the deal they forget about announcing the win right? And releasing a press release about it. We think it’s best practice to have discussion and get agreement on that. That press release prior to the transaction closing and then to release it. You know simultaneously or within a very short period of time of the deal closing.
And, you know, oftentimes there’ll be other parties that worked on the transaction that might want to further amplify the announcement. Oftentimes I’m an A advisors like us. We we love to do that.
Further amplify your your success. And if they worked on the transaction, say they worked on the transaction.
So you know, that could include lawyers And accountants and others. And you know, so that’s something. Oftentimes it gets overlooked. Think about you know what sort of notice or press you might want to put out.
Certainly something that can delay that, however, is you might want to have calls with your clients.
Or send a communication to your clients that this transaction has happened or is happening.
And make sure your communications with your team are done.
As well, prior to sending a press release, we’ve seen firms that don’t have all that communication plan tightened up or didn’t execute it properly and then release the press release.
You don’t want your biggest client learning about the fact that your business was sold and not hearing it from you.
So pretty important that that gets done, but you know other than thinking of that, Ryan, I think we’ve kind of covered the watershed On sort of what happens in the last 30 days.

Ryan Barnett   35:31
No, I agree. And and that’s a great point. And I’ve been on the receiving end of that press release.
I remember writing it for a publicly traded company and it wasn’t the last 30 days.
It was the last six hours of the deal of I I was brought into the loop and to write the press release and it hit the wire 8:00 AM the next morning and I think I learned about the deal at 10:00 Sunday night and so. It sometimes people get looped in at the very last minute.
Hopefully it’s not a scramble, but it’s a it can be just quickly an execution mode and and and move forward.
I think it’s all great points. So Mike, I know you do a great job of managing lawyers, managing bankers, managing families and team members, managing all these people and it is does feel like we’re hurting cats as everyone has their own agenda. And so sellers, when you’re out there, make sure that you have.
Someone like Mike like Revenue Rocket on your side to help get you through this this time frame.So that’s all the questions I have with you, Mike. Turn it over to you to wrap it up.

Mike Harvath   36:43
Sounds great, Ryan. Thanks so much. To you and the listeners this week, I think with that well tie ribbon on it for this week, shoot the Moon podcast. Look forward to having you tune in next time when we unpack further topics of relevance and interest.
Hopefully to you around M&A and growth strategy for your IT services firm.
Thanks for tuning in and TuneIn next time. Take care.