The 24 hour rule when selling your company
Time kills deals. Here's a tip to help reduce the risk of your deal falling over.
You might have heard the phrase: Time Kills Deals.
Pumped up sales guys use this mantra to remember to follow-up quickly when closing a sale. The idea is that if you let too much time lapse, a prospect has longer to change their mind, get distracted or buy another product.
The same idea applies in M&A.
The harsh reality is this – most deals die. You can't say a deal is 'done' until the documents are signed and the money is in the bank.
Until then, you are just one email away from the deal being called off. And that can happen at the last minute... sometimes literally the day before closing.
There are a range of reasons why a deal might die. Some are within your control, like not getting aligned on valuation and price, hitting a serious snag in due diligence or having a really bad quarter during negotiations.
But many are outside of your control. Things that you couldn't have predicted, and no amount of hard work would have helped you to avoid.
Here are some real-world, recent examples that we have seen:
- Your sponsor gets sick and that pauses the deal. Or maybe they get fired and the new guy doesn't want to go ahead.
- The buyer publishes some bad results and the Board tell them to pause M&A. Or their priorities move change enough that they won't buy you.
- There's a regulatory change (or change of government).
- ...or there's a global pandemic or other black swan event like 9/11.
It's scary to think that these issues could come up, and they are totally out of your control.
The 24 hour rule
But there's one lever you can pull to minimise the risk.
It's a crude tool, which aims to reduce the 'window' when any of these issues could arise. The bigger the window, the more open to those risks you are.
You must reply to every request from the buyer within 24 hours.
That is most relevant for due diligence requests, asking for copies or files or to arrange a call to discuss an issue. But it also requests for feedback on legal documents.
That personal deadline that forces you to move the deal forwards as quickly as you possibly can.
There may be large requests that mean you need to break the rule. A complex technical DD requests that will need a few days of data crunching and modelling. Or feedback on the first draft of the SPA, that you will need to review with your lawyers.
Even then, you should revert as quickly as you can.
There's another major benefit to this – it makes you look extremely organised, diligent and competent.
Buyers (especially the experienced ones) get very frustrated with slow sellers who take ages to reply. They tend to either get bored and walk away, or assume you are sloppy and factor that into their valuation.
For sure, this is not easy to do. You also have a company to run and you don't want your numbers to slip during the negotiations. But try your best to follow the 24 hour rule.
Finally, one other tool that can help here. When negotiating the Letter of Intent, you should aim to reduce the period of exclusivity that you give the buyer. That's their deadline before you can shop the deal to other buyers. Ideally want that to be less than six weeks, but this will vary with the deal and its complexity. The shorter that period is, the smaller your risk 'window'... and deals always seem to close on the last possible day!