Time and Milestones in Letters of Intent
Strategic and Tactical Considerations of Preliminary Transaction Documents in SMB Interest Transfers – Part 3 in a series.
The financial particulars are the main course of a Preliminary Doc; reminiscent of Rod Tidwell’s enthusiastic exhortation to “Show Me the Money!” in the movie Jerry Maguire or that famous question memorialized by Wendy’s spokes-granny, Clara Peller—“Where’s the beef?”
There’s no question about it, the financial component of a Preliminary Doc is a real attention grabber, but it represents just a portion of the important business issues discussed in a Preliminary Doc.
While the previous installment of this series covered the “purchase price package” portion of a Preliminary Doc, this edition rummages through the “other business issues” that can be included with an emphasis on the ones that pertain to timeframes and milestones. Drafting and specific language will not be discussed in this article because that is appropriately the domain and responsibility of a buyer’s legal counsel.
The “Other Business Issues” of Preliminary Docs
In order to better frame the strategic and tactical application of a Preliminary Doc, we have organized the “other business issues” into six categories. Please note that the following six categories do not necessarily correspond to the order and way in which they will be presented in the actual Preliminary Document drafted by your legal counsel:
- Timeframes and milestones.
- Disclosure and management of information.
- The level of mutual commitment.
- Business operations during the “active” time period.
- Open issues or conditions to be finalized in order to close the transaction.
- Setting the stage for negotiation of key contract terms (aka “buzz-kill issues”).
Timeframes and Milestones
Time is finite. Time can’t be stored or recovered. Time presents opportunity and risk. Managed correctly, time serves as an ally. If managed poorly, time can undermine the confidence that holds a contemplated deal together and increase the risk that it will fall apart.
A time-space is used herein to describe the constraints, prior commitments and other mission-critical activities that the buyer and seller are facing and the interplay of these elements in working toward a satisfactory outcome of the contemplated transaction.
There are three time-spaces to consider when developing a Preliminary Doc. This first time-space belongs to the buyer. The second belongs to the seller. The third time-space is the one that is presented in the Preliminary Doc.
- is framed by the buyer’s target dates for revenue and earnings targets, partner/investor requirements to meet investment objectives, staff availability, and tax and reporting periods. There are also major events that can conflict with the timing of the deal and/or the availability of needed resources.
Post-deal assimilation and integration, while not central to the drafting of the Preliminary Doc, are important time considerations. How much time do you need to identify the key issues of an integration plan, assign responsibilities, and develop a plan so that you are ready to hit the ground running once the deal closes?
The seller’s time-space is framed by the seller’s timetable for attaining personal goals, need for personal liquidity, concern about the future of the business, constraints due to health and seasonality or business cycle. Other factors can include accounting periods and the seller’s business tax year as well the tax year in which they want the transaction to occur.
The deal time-space is shaped by the various events and milestones that need to take place in order for the contemplated transaction to close. When the buyer’s and the seller’s respective time-spaces are aligned, the transaction process can follow a more natural path.
When approaching the issue of time, vigilantly keep the focus on the business outcome and not the specific transaction date. If things should go faster or slower than expected, the parties can adjust their timeframes, provided that there is good communication and a focus on the desired business outcomes. Consider making the outcome for both buyer and seller (their business vision and strategic goal) the central focus of the deal rather than a myopic focus on the “transaction details.”
With that in mind, the key milestones in the transaction time-space that typically find their way into a Preliminary Doc include:
The expiration date of the Preliminary Document:
- A Preliminary Doc is not open-ended. It needs to have an expiration date for acceptance. If the seller does not sign and return the Preliminary Doc by that time, it expires. A buyer doesn’t want a seller to come back in a month and say: “OK, I want to go ahead with your deal.”
How much time is enough time to give the seller to accept the deal concept?
Naturally, the sellers need enough time to digest the document and discuss it with the control group and key advisors.
If the offer is “out of the clear blue,” the seller might need more time to consider the offer. If the buyer and seller have been discussing deal concepts and find themselves in general concurrence over key details and the deal concept is congruent with those discussions, then less time might be needed to review the Preliminary Doc.
It’s not unreasonable to ask the seller’s representative how long it will take to respond to a proposal before you submit it. Let them know if their timeframe doesn’t align with yours and see if you can walk them toward your schedule.
Timeframe for due diligence and target closing date: The amount of time needed for due diligence depends upon the complexity of the business, the structure of the deal, the availability of information, the cooperation of the seller, and the resources a buyer has available to conduct the investigation and analysis. Time can be compressed by increasing the money and skilled people-power that is allocated toward “deal work,” but that can get expensive.
Has the information provided by the seller to-date been current, provided promptly, accurate and complete (at a level that is appropriate to a preliminary evaluation)?
Before specifying a date in the Preliminary Doc, consider the scope of the review along with the level of completeness and accuracy of the information provided to date. Before locking into a timeframe, consider the likely issues that may arise and leave time to do the work diligently.
The target date for presenting a definitive agreement: Most transaction attorneys have preferred contract templates for various deal structures. In addition, some of these templates favor the buyer, the seller or are evenhanded. Since no two deals are the same, there will be a need for extensive additions and revisions to these templates in order to address the specifics of the situation.
The biggest issues will present themselves during the due-diligence process. It is not uncommon for even the seller to learn new things about his or her business by going through a rigorous due-diligence review.
Presenting a draft definitive agreement before the due-diligence review is complete can lead to protracted negotiations, extensive revisions and unbudgeted professional fees. So, the target date for presenting the definitive agreement is after the expected conclusion of the lion’s share of diligence.
A target date to “present” or prepare a definitive agreement still provides time to negotiate and finalize that agreement provided that it all takes place before the target closing date. A target date to “complete” or “enter into” a definitive agreement provides less room to maneuver.
The target date for closing the transaction: The closing is the grand finale, the goal toward which the members of the transaction team direct their efforts. For the sellers, closing the transaction means that they will be paid, the uncertainty and disruption of the selling process will be over, and they can get on with the next chapter in their business and/or personal lives. So, this is naturally a date of considerable interest to the seller.
The targeted closing date is likewise very important to the buyer. Will the buyer be ready to take over ownership and control on the closing date? Will there be a plan intended to preserve and leverage the existing value as of that key date?
By the time the target closing date arrives, the buyer needs to have completed the post-deal integration or assimilation plan. The buyer needs to be ready to hit the ground running on closing day when the post-deal plan goes live and operational.
The termination date and unwinding: Eventually a contemplated transaction will either be consummated or the parties will go their separate ways. The time for getting the deal done runs out on the termination date. However, the parties can give each other more time by extending the date.
If a buyer gives themselves insufficient time to properly perform due diligence, negotiate and draft a definitive agreement, obtain necessary approvals and secure funding, there may be pressure to cut corners.
If the seller loses confidence in a buyer’s ability or capability to get the deal done, they might be tempted to look for the exit sign. The seller might also have that same concern if the buyer requests an unreasonably long period of time to complete the deal. Anything that indicates weakness or inability to “get the deal done” on the part of the buyer is going to undermine the seller’s confidence and commitment to the process.
Certain items in a Preliminary Doc can survive the termination. These items typically address the disposition of any monies placed in escrow by the buyer and the protection of confidential and proprietary information.
One final note on the issue of time: Too much pressure can raise a red-flag. Too little and things tend to drag out and slip away. The art of dealmaking is like hitting fastballs, it helps to have a sense of timing.
The next edition will delve into the “other business issues” of information disclosure and management.
Robert B. Machiz
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