A recent edition of The Old Farmer’s Almanac posits: “Vegetables need good soil for healthy growth and harvests. Well-prepared soil is the foundation of your entire garden—and gives you a jump-start on the season...Gardening does not start with a seed in the ground. It starts with the soil...”
In my last Searchfunder article (https://www.searchfunder.com/post/post-acquisition-advice-retaining-the-previous-owners-dos-donts), I introduced potential pitfalls which may arise following the close of an acquisition and the transition from a previous owner to new leadership. The way to minimize these potentially-catastrophic distractions is to proactively prepare for the transition well in advance of closing – just as one would with the planning of a garden.
Too often incoming owners will wait until the sharing of purchase documents (Asset Purchase Agreement, etc.) to introduce metrics, milestones, goals and other post-close expectations. I assert that the time to introduce one’s intentions is much farther upstream than the APA. I encourage aspiring owners to start preparing the soil – the new ownership culture and expectations - within the Letter of Intent (LOI) or even earlier. The APA should be used to codify - not introduce – expectations.
But, one might counter, the purpose of the LOI is to simply express a serious intention to purchase. It is not legally binding and merely sets out to express interest between two or more parties to strike a deal. It is not the time to emplace milestones and measurables intended for life after the close.
To which I say, essentially correct. The LOI should not incorporate metrics and explicit expectations. However, like a well-planned vegetable garden, the soil for success should be prepared well in advance of planting.
I encourage aspiring new owners to optimize the success of the acquisition process by instilling their philosophy, culture and expectations early and often. Even within the LOI, I suggest inserting words (not metrics) that begin to permeate and nurture their soil; their plan. Words such as “opportunity” and “transition” as well as “process” and some of the other “Ten P’s” that I exercise during the Due Diligence phase of the acquisition. Once these notions are introduced through the LOI, they should be repeated regularly at meetings and discussions to imbed them in the minds of all involved – particularly the current owner(s). If an owner, for example, is to remain with the company – on an employment agreement or consulting contract – the use of key words and concepts, deployed consistently and intentionally, will begin creating a quantifiable sense of expectation. This fertile soil will then be ready for planting. Whereas many use the APA or other purchase vehicle as the initial introduction of measurables, it should instead formalize and enumerate what has already been introduced and prepared throughout the Due Diligence process as a direct result of careful preparation.
In addition, the inclusion of key notions and ideas early in the acquisition process helps to establish what the military calls the Rules of Engagement. While the ROE in a military sense are used to delineate when, where, how, and against whom military force may be used, they are useful in the investor world as well to ensure limits and expectations are aligned towards a common – and successful – objective. Time spent early in the process to gain agreement on the ROE is not time wasted.
That being said, throwing out words and concepts is meaningless if not employed carefully and according to a plan. A new – or repeat – buyer must take the time necessary while preparing the LOI to ensure the cultivation process is mapped out and clearly understood by all involved. Otherwise, the result will be confusion and ineffective communications.
Many believe the purpose of the LOI is to express interest in an acquisition. It should, however, also begin laying the groundwork for the new owner’s culture and expectations. This will enhance the effectiveness of the Due Diligence process and allow for a logical - yet aggressive - presentation of the APA. And, as importantly, it will minimize misunderstanding and disillusionment post-closing as the glitter of the transaction begins to fade and the reality of transition sets in. I recommend taking the proper steps early in the spring of one’s purchase process to ensure an abundant and beneficial result. Happy Gardening!