Managing Board and Investor Expectations

Gary Circle

Gary Deutsch
M5 Networks

When a deal negotiation heats up – whether in the run-up to signing or during the push from signing to closing – your ability to set and manage the expectations of the Board and major investors may mean the difference between a sultry Nordic sauna and a full-on forest fire.

As a deal gets close, Boards and investors will obsess over many things beyond headline deal price:  escrow amounts, distributions by security type, money-multiples by security type, tax treatments, closing costs, cash-stock payout mixes, working capital adjustments and look-backs.  Seemingly small issues and disputes over small amounts may get blown out of proportion when viewed as a percent of the marginal deal value in play rather than as a percent of total deal value.

Navigating the pitfalls on the path to closing requires both a keen technical understanding of the deal terms and your capital structure, as well as an attuned sense of the emotions and personalities around both sides of the negotiating table.  With a mix of quant skills and EQ, you have the best chance of setting expectations accurately so the deal ends on a high note.

A good and detailed waterfall model is essential to answering all the technical questions by assessing how deal terms correspond to distributions for investors.  Have the model in place early in the process, because there will be little time for thoughtful analysis as terms change and your constituents want to know immediately what it means for them personally.

On my most complex deal, we had a Board with big personalities and strong points of view.  This reality – combined with the deal price being right on many of their do/don’t thresholds – meant that I felt great pressure to communicate the financial impact of each round of negotiation.  If I sandbagged my estimates, I could kill the deal.  If I was too aggressive, I stood to facilitate a deal where the keys were taken from enraged sellers.  For a period of a few weeks, I felt like I was releasing public earnings estimates on a cycle of every few days – very stressful!

I did my best to jump inside the minds of all the parties, but I found that nothing was more important than keeping a clear head through some hot emotional interactions so that I could rely on the cold facts of my waterfall model.  When the deal finally closed, it gave me great pleasure to announce final payout facts and figures that looked remarkably similar to estimates I had pointed the Board and investors to during the weeks leading up to the close.