April 2019 - The Easy Truth; It's all Difficult

In my professional experience, one of the hardest things to articulate and convey to clients and all market participants is how truly difficult it is to actually close an M&A transaction. To actually get a deal all the way across the finish line is incredibly complicated and difficult.

Use any analogy that you want – winning a sports championship, climbing a mountain, running a marathon, earning straight A’s – they all apply and they are all the same. If they were easy, everyone would do them. If they weren’t so challenging, we wouldn’t make such a big deal, when they happen. We wouldn’t throw parades and make medals and trophies, if they happened every day and if everyone accomplished them.

The same is true with closing a deal. It is not commonplace. Why not? Because it’s not easy; closing deals is difficult. Everyone doesn’t do it because everyone doesn’t have what it takes to go all the way through with closing a deal; Not everyone has what it takes to get there. That is a sobering reality, but it is the truth.

Why don’t deals close in 60 days? Ha! Where do I start! A million reasons that all boil down to the same conclusion. Every step of the closing process has the potential for hurdles and stumbling blocks. Basically, every step is hard. They are all difficult. Not one of them is easy.

Raising capital – how hard could it be to find the right partners? You run a process, have some calls to introduce the deal to them and then select the group that provides the best terms. Right?

…Oh really, so that’s it huh? Listen, getting a term sheet is a great accomplishment, to be sure, but it means that at best, you are 50% of the way home, probably more like 25-30% of the way home to actually closing a deal. We call this the ‘front-end’ of the process and while it is important and can present some challenges, it is only part of the process. Negotiating terms, scheduling and performing due diligence, underwriting, building rapport with the new financial partner, choosing legal representation, coordinating the mechanics of the new credit facilities, revising the capital structure, assembling the corporate paperwork, preparing and executing legal documentation, revising a financial model (5, 10, 15 or 20 times), flow of funds, scheduling payments, funding all the various tranches of capital, etc., etc., on and on, ad infinitum…

There are deep and significant differences between the way equity investors and lenders view the world and view deals. They are coming from completely different vantage points. Equity investors are primarily focused on return and lenders are primarily focused on risk. Equity wants growth and debt wants repayment.

There is also a tremendous amount of nuance and flavor within each of those classes of equity and debt. Early-stage, venture capital equity investors view deals much differently than institutional and later-stage equity investors. And there is a heck of a difference between the risk appetites of mezzanine lenders and banks. Asset-based lenders have quite a different focus than cash-flow lenders. And so on with the many different styles and sizes of market participants.

Understanding and navigating these differences between the tranches of capital and the different types of capital provider and somehow combining all of these folks together in a deal, like ingredients to a chef, requires a painstaking amount of effort and detail. It is extremely complicated and difficult. One small mistake at any step and the whole deal can go awry, in an instant. Just like any misstep with ingredients or preparation can ruin a culinary masterpiece. It takes years and years of experience and often many mistakes and broken deals to learn painful lessons of how to finish and close.

Finally, let’s not forget the reality that at the end of all of this – we’re dealing with people. Never underestimate the human element in getting a deal closed. As we try to remind ourselves weekly, the old axiom is that people make credit decisions and people make investment decisions. Lenders, banks, equity firms, family offices, mezzanine lenders, etc. are all run by people. And people are funny (aka crazy). People make decisions for all kinds of reasons. And because of these axioms, the deal business truly is a people business. People are complicated and that also complicates the process of getting a deal done. People have emotions, bias, pet peeves, style differences, etc. Let’s face it, people can act pretty darn crazy when they are in the midst of closing a deal.

So, this month’s soapbox moment is just a reminder to ourselves and to everyone else that closing deals may happen all the time, but that doesn’t mean that it is easy. On the contrary, it is quite difficult. And that’s what makes it so special and newsworthy when any of us actually get a deal closed and funded.