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If I have said under my breath once, I have done so at least one hundred times… “The devil is in the details!” As we work with business owners and deal makers on the hunt for profitable businesses to acquire, this expression has become our theme song!
Recently, we have been working closely with one of our clients while they sorted out the details from documents dating back several decades to the language drafted into a Letter of Intent negotiated about six months ago. And every word, literally—every word in between, has been scrutinized.
Hard work? Yes. Exhausting? Of course. Rewarding? Absolutely! So, with several thousand pages of documentation, where are the details that matter?
A little background regarding how we got here…
This week we found ourselves at the very end of a transaction that started nearly one year ago. Yes, in early 2010, the economy was not in good shape and this company in particular was not doing as well as they had in the past. So, the deal when presented last year looked pretty good to all.
The purchase price multiple was lower than the business owner wanted, however the acquiring company had a strong balance sheet with Venture Capital behind it. They were paying most of the offer price in cash and the balance in the form of a reasonable earn-out payment.
The details in this deal—specifically, the way in which the earn-out payment was calculated seemed reasonable at the time the transaction was negotiated. Reasonable for both the Seller and Buyer of the business. However, neither the business owner nor buyer expected the company to actually exceed the revenue targets by a factor of two. In this case, the revenue target directly impacts the calculation of the earn-out payment. And that is exactly what happened!
In the final hours….
As we sat across the table with the Buyer’s Venture Capital analyst in my conference room, he asked question after question while he simultaneously replied to emails on his laptop. We answered the questions and wondered when the buyer and his financial team would realize that the financial projections provided to them last year were understated.
The actual current years’ financial results presented to the buyer in the final days of the deal were much better than everyone expected. This meant that the full earn-out payments would be paid for the upcoming calendar year, barring a disaster. And because the business owner recently signed a very large, multiple-year contract with a new customer, it also meant that new contract would produce a very nice earn-out payment for the seller as well.
This is where I found myself reminded that “the devil is in the details.” The terms negotiated into the Letter of Intent to sell a business stated that if the financial performance of the company suffered materially before the acquisition closing, they would be able to renegotiate the purchase price. This is not an unusual Letter of Intent term. However, we negotiated into the LOI terms that provided the opposite protection as well. Essentially, this meant if the company’s financial performance improved materially before closing, the seller would likewise be able to renegotiate the purchase price.
And so we did. Truly, the details matter.