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Establishing strong connections with a target company is essential in M&A. Securing deals can be challenging, but a strategic approach can result in mutually beneficial outcomes. Join us for the third session of our 'Conversations to LOI' series, featuring Michael Frankel, Founder and Managing Partner of Trajectory Capital, as he shares his approach to deal-making.
“Never put an LOI in front of somebody that’s horribly disappointing because then you lose their attention, and it's hard to come back from that.” - Michael Frankel
Step 1: Warm Introduction
Instead of resorting to traditional cold-calling methods, the key to successful outreach lies in building connections with individuals that have existing relationships with the target leadership. This approach is highly effective as it allows the target to feel more at ease and open to sharing valuable information.
Furthermore, if you have an established relationship with a target, you will stand out from the countless other outreach efforts that a well-established company will receive. Establishing credibility through a trusted introduction can be the deciding factor in securing a successful conversation.
Step 2: Listen
When initiating that crucial first conversation, listening is key. To successfully acquire a target, a deep understanding of their priorities is necessary. Ask well-crafted questions that encourage them to open up and share valuable insights about their business.
Instead of dominating the conversation, take a step back and allow them to speak. While listening and learning, begin to craft a vision that aligns with their goals and will be truly compelling to them. Remember, the more you know about their business, the better positioned you'll be to make a strong case for acquisition.
Step 3: Paint the picture
Clearly convey the acquisition’s projected vision and how it can benefit both businesses. By painting a compelling and conceptual picture of the potential deal, you can entice the target to want to learn more without delving into sensitive information.
The key is to emphasize the added value that the acquisition can bring to both parties and how it aligns with the target's goals and objectives. This approach will help to build trust and pave the way for further discussions.
Step 4: NDA
Emphasize to the target that a clearer understanding of the acquisition can only be achieved with more information. To achieve this, a non-disclosure agreement (NDA) is necessary to provide a level of comfort for the target to share sensitive information.
Additionally, it's a best practice to request exclusivity during this stage of the process. This ensures that the target is fully committed to engaging in one-on-one conversations, and can accelerate the process of reaching a letter of intent (LOI).
Step 5: Involve Key People
Michael has a strategic approach to due diligence, focusing only on the key areas that have the potential to significantly impac the acquisition’s valuation. Instead of conducting a comprehensive review of every aspect of the business, he prioritizes the most critical factors and ensures that the necessary experts are involved in the process.
At a minimum, two key individuals must be engaged during the preliminary due diligence and approaching the letter of intent (LOI) stage to gain a deeper understanding of the business. These include:
- The business leader - the individual who will ultimately be responsible for the profit and loss (P&L) and championing the transaction. They have to fully aligned and committed to the deal from the start.
- The specialists - These individuals are critical to the success of the acquisition. For example, if the deal involves technology, the tech leader must be involved, or if the acquisition is targeting a specific customer base, the salesperson must be engaged. Their expertise is essential for understanding the business’s specific nuances and evaluating the acquisition’s potential impact.
Step 6: Model assumptions
The business leaders who will be inheriting the business post-close need to take ownership of the large-scale assumptions. This ensures that they are fully invested and understand the potential impact of these assumptions on the future of the business.
For the other assumptions, the corporate development team needs to have the experience and expertise to simplify the process by making strategic assumptions. This can speed up the process and ensure that the most critical information is captured.
“No amount of diligence is going to eliminate inaccuracies in your projection model. You could diligence a company for 10 years, and your projection model still wouldn’t be exactly right once you close the deal.” - Michael Frankel
However, arriving at an accurate bid is not possible until the deal closes. To navigate this uncertainty, provide a price range to the seller and make sure they understand the implications of the bottom and top of the range. The offered range should be narrow enough to be realistic, but wide enough to provide some flexibility. Additionally, the lowest bid on the range should still be attractive enough to entice the seller to continue discussions.
Step 7: Testing the waters
To gain a better understanding of the seller's expectations and create a more successful outcome for both parties, engage in informal conversations and explore various ideas.
This allows you to gain valuable insights and understand how to create value in ways beyond price. There may be other factors that are important to the seller, and documenting them can be helpful during negotiations. By taking the time to understand what makes the seller happy, you can position yourself to craft a mutually beneficial deal.
Step 8: Draft the LOI
Take time to reflect on the negotiations and work closely with legal counsel, particularly when crafting creative terms. The messaging used throughout the process must be carefully crafted to maintain a tone of trust and respect for the seller's business.
To further build trust, structure the letter of intent (LOI) based on the concerns and priorities that the seller has previously addressed. This shows them that you understand and respect the value of the business they have created and are committed to finding a solution that works for both parties.
Step 9: Delivering LOI
When delivering the letter of intent, present it personally and walk the seller through each item. The legal language used in these documents can be difficult to understand, so take the time to ensure that the seller fully comprehends the terms. Be open to feedback and willing to address any concerns they may have.
Avoid setting a rigid deadline for the finalization of the document, as it can create unnecessary pressure and uncertainty. Instead, be reasonable and provide the seller with ample time to review the document and set a schedule for finalization that works for both parties. This approach demonstrates a commitment to finding a mutually beneficial solution and builds trust in the negotiation process.