By Eugenio Micheletti for staffingamericalatina

If we had to describe a typical M&A (mergers & acquisitions) process, we would say that it starts with the buying and selling parties getting to know each other, evaluating the deal from each perspective, negotiating around their expectations both the company value, the percentage of the company to be sold/bought and the form of payment, as well as the direction of the transition between seller and buyer (and the eventual management contract of the seller).

Once these points have been agreed upon, the transaction begins, the instrumental part of the agreement through the letter of intent, the due diligence and the conclusion of the sale and purchase agreement (SPA), up to the negotiation of adjustments, if any, and the signing of the contract and payment.

However, as important as the above mentioned aspects and the achievement of each stage of the process, is the time required for each one of them, and how the process is coordinated and how the beginning of a task is concatenated with the successful completion of the previous one.   The efficiency of this coordination and time management with each of the parties is an added value provided by the advisors involved in the process, and many times, this is the key to the deal.

In markets such as the United States, from the signing of the NDA between the interested parties and the signing of the share purchase and sale agreement, it normally takes approximately 45 days.   This means that in 6 weeks the companies met, agreed on the conditions of the purchase, the purchase audit was carried out, the contract to be signed was agreed upon, and the contract was signed with the corresponding payments.   These terms for an operation in Latin America can be up to 6 months.

In any case, the delay of a stage beyond what is defined as “reasonable term” can complicate or ruin the negotiations, even rethinking or relativizing what has been agreed up to that moment.  For example, if the purchase audit takes longer than a month, the seller may feel that he is spending too much time and in a context of uncertainty may request the termination of the negotiations.  Another common example is the delay by lawyers in negotiating some contractual clauses.   Both parties should instruct their legal advisors as to the risks that are “acceptable or assumable” as they are considered inherent to these processes (and therefore each party has already decided to assume them), bearing in mind that there are innumerable options to resolve each case minimizing the contingencies for both parties.

We define “momentum” as the time that both parties understand as “appropriate” to carry out each of the stages that bring us closer to the main objective (closing the deal).

It is interesting to contemplate the critical moments in each one of the stages, it is in the following moments when delays take away the interest of the other party, or may even break the negotiations:

• Presentation of the selling company, and relevant information to be evaluated for the purchase (seller): when a potential buyer accesses a target, either by an internal search or through a consultant or broker, the expectation is to have updated information within 72 hours to a week.   Delaying the delivery of information may be viewed with distrust by the buyer, both because of the possible manipulation of the information and because of the target company’s apparent inability to prepare periodic reports with accurate information for decision making.
• Analysis of the information received, feedback to the issuer, visit to the target company, start of negotiations (buyer): being interested in a company as a potential investment does not mean buying it immediately, but the communication of the progress, the next steps and a schedule of tasks allows the parties to know whether the negotiations are successful or not, and at what stage of the process they are at.
• Submission of the economic proposal (buyer): when the buyer has confirmed interest and communicated it to the target company, after having received the necessary information to evaluate a proposal, it is reasonable that the proposal will be submitted within approximately 15 days.   While all time frames are relative, extending the proposal beyond two or three weeks may indicate that the buyer has moved on to another investment option, or is not in a position to close.
• Acceptance of the economic proposal (seller): the prospect must know his expectations beforehand, and negotiate genuinely.   If, having received the proposal from the buyer, he does not respond, either he does not know how much his company is worth or perhaps he is speculating; in both cases the buyer will desist from maintaining the proposal.
• Signing a mutual commitment, through a Letter of Intent or Memorandum of Understanding (either side): this is a key moment, and financial and legal advisors play a key role.   Delays at this stage can dilute the negotiations, if it is not clear that both parties have given direction to their advisors to move forward to close the negotiations favorably.
• Purchase audit – Delivery of information (seller): the information must be adequately prepared in advance and made available to the auditor.  Delays generate suspicions, give auditors arguments to increase contingencies, and scare off buyers.
• Purchase audit – Audit report (buyer): both the accounting audit and the statutory audit have a reasonable timeframe of between two and four weeks, depending on the size of the target company.   Stretching these deadlines makes the audited company uncomfortable, as it expects to invest as few hours as possible in the audit, and that the adjustments proposed by the auditors are smaller.   This can be seen as an unnecessary waste of time, and can hinder agreements between the parties.
  Analysis of the Sale and Purchase Agreement (SPA) (both parties): again, financial and legal advisors play a critical role, which can facilitate or impede any agreement.  Buyer and seller must work with their teams, and convey their will for or against, clearly and quickly.

It is common to underestimate the importance of momentum and allow unjustified delays or procrastination.   Both parties must be committed to the process and have the resources (advisors, money, information, time, etc.) necessary to move forward efficiently at each stage.   Having agreed on key issues such as company value and form of payment, the deal may fail because it does not give sufficient importance to this strategic concept.