LOI Strategies: Stress-testing a Deal

LOI Strategies: Stress-testing a Deal

Doug McCullough, McCullough Sudan, PLLC

mccullough@dealfirm.com

I regularly work with clients who are selling their company or acquiring another business. During the first conversation new clients usually ask me for an estimate of the legal fees for representing them in a the sale or acquisition. It’s very difficult to estimate the legal fees for an M&A deal. We have plenty of experience that we can draw upon to say that a deal of a certain size usually fall into a certain range. However, we always caution our client that there are many things beyond our control that will ultimately determine how long the deal process may take and how much legal fees will be incurred. 

For instance, we might be negotiating opposite another attorney who is inexperienced, contentious, or intentionally trying to drag out the process to justify their own higher legal fees. Or, we may be dealing with another party who is creating delays for some tactical advantage. We may also run into unanticipated issues like undisclosed environmental issues, questions about intellectual property, or other matters that require more due diligence and more problem solving. The reality though is every client’s worst fear about doing a deal is that they incur substantial legal fees over the course of months of negotiations and due diligence only to see the deal to falter in the end. No attorney can guarantee that a deal will close, and you wouldn’t want them to do so in any event. Although it may seem painful, sometimes the prudent thing is to simply walk away from a deal. But in our experience, we’ve learned to take an approach that we should front load as many thorny issues as possible. 

We often advise our client to “stress test” their deal early by negotiating the key terms at the letter of intent stage. We advise against kicking the can down the road and hoping that over time those issues will somehow be easier to resolve. By addressing contentious issues early –  either by coming to terms on those particular issues, or at least agreeing to an analytical framework for how those decisions will be made – both parties can have greater confidence that the deal will eventually close.

This is one way we use our experience as corporate transactions attorneys to mitigate your risk that a deal might not close after substantial investment in professional services and the loss of your valuable time.