In any corporate transaction advised, the activity of the dealmakers has a decisive effect on its satisfactory closure. It all starts with an advisory opportunity, when the operation is usually pre-marketing and tentatively explored if there are investors and if the operation can be closed or not. From the identification of one or more potential interested parties, through the Letter of Intent –Letter Of Intent (LoI) -, due diligence, structure and closing of the operation.
In the execution of the operation, negotiation is a factor that appears on a recurring basis in all phases of the process. A committed dealmaker will bring to the negotiation a combination of skill learning, talent, and vast experience in similar situations. An experienced dealmaker can execute and negotiate operations of all kinds, from mergers, acquisitions, joint ventures, among others, in local, international environments.
The various phases of the transaction execution process consist of:
Start of the process with the buyer and seller
Establish an initial valuation and price negotiation
Negotiation of the Letter of Intent (LoI)
Agreement on the structure of the operation and the price
Closing of the operation
1. Beginning of the process with buyer and seller
For this, it is critical that the dealmaker knows the operation and his client as deeply as possible. In other words, you have to be prepared. They must be able to anticipate and know how to explain any factor that may affect the operation at some point later in the execution process.
Apart from the fact that you have to understand the real reasons for the sale – normally they are not disclosed immediately – and engage the seller in the process, it is essential to motivate the buyer in the operation, encouraging him to move forward and invest time in our operation. Unveiling and aligning these goals is not easy at all and usually takes time. Much of the information is usually in the documents that are prepared for this purpose such as Teaser, Infomemo or others similar.
The more we know the real motivation for the sale and purchase of the respective parties, the more confident we will go to the next phases of the negotiation and execution process. It is essential to have an attitude of active listening, which in particular tends to be of enormous importance in cross-border deals where cultural differences, certain linguistic or understanding barriers make negotiation and execution processes difficult.
It is important to keep in mind that although valuation is not usually the final element of discussion, it is a factor that appears in the first rounds of discussions.
2. Establish an initial valuation and price negotiation
From the basic information provided, the potential buyers and the seller usually do not have the same price in mind. The discussions focus on the financial information provided, projections and business aspects. There are various ways of valuing companies, such as discounted cash flows (DCF), comparable transactions or listed companies, or other methodologies applicable to companies common to a sector (value per user, per m2, among others).
Again in these circumstances, an experienced dealmaker applying appropriate questions, active listening, reading between the lines, understanding personalities and emotional aspects are essential to reach an agreement that allows the parties to be satisfied, even if it is minimal.
3. Negotiation of Letter of Intent
The Letter of Intent – Letter of Intent – is an essential document that reflects the “commercial” agreement of the operation and allows the parties to be placed “on the same page”. Normally it is not usually a binding document, but it usually reflects the price, operation structure and gives the other party a period of exclusivity when completing and closing the operation.
There are various theories or methodological aspects by countries or companies where the position of the dealmakers is reflected, where some prefer shorter LoIs and a more in-depth discussion in the contract discussion and others prefer a more content LoI than the contract discussion -Sale Purchase Agreement (SPA) – be lighter. In my professional experience, the second option is preferable, since the detailed discussion should start early in the process, avoid surprises and invest too much time in a transaction with a problem later on.
4. Determination of the structure of the operation
The structure of the operation is often as important as the price. In this structure, relevant aspects are agreed, such as the legal form of the transfer of ownership of the company, type of operation (assets or shares), cash or deferred payment of the price subject to conditions (or not), among others. How are potential contingencies going to be dealt with, recl