Things Fall Apart, Part III

This is the third in a series using the blog post describing the recent breakdown of Backblaze's M&A process to explore common mistakes made in M&A for mid-market companies.

At this point, Backblaze has received an offer from a potential buyer that they find somewhat attractive.  The company has decided to reach out to other potential buyers, but faces a question about how to best handle approaching them.

There is a natural inclination to say, “We have another offer - do you want to make one? Move quick!” However, almost all experienced executives will simply walk away from this because they are likely too late in the process and do not want to waste their time engaging.

This is a great point.  It's why running a structured process where there is a level playing field for all buyers is so valuable.

Critically, with an initial offer from one buyer in hand, there is time to reach out to other possible buyers and allow them to participate in a structured process.

Sometimes potential sellers worry that if a buyer has made an initial offer, they can't slow things down.  In fact, strategic buyers looking for a truly synergistic acquisition--in other words, buyers that are not merely bargain-hunting--will stay interested while a seller brings in other potential buyers.  The key is to clearly communicate what is happening and to move quickly.  Other buyers can be ramped up in 1-2 months, or less.  A highly motivated buyer will not go cold over that time frame.

On the other hand, there are buyers out there who reach out to many possible acquisition targets looking for bargains.  They take a portfolio approach, contacting dozens of targets and assuming that a few will take their below-market offers.  This type of buyer will, indeed, not wait 1-2 months.  They won't ever participate in a competitive process.  However, when most sellers realize this, they don't want to engage with a buyer of this type for obvious reasons.  Nobody wants to be the guy that sold their company on the cheap.

We had offer letters from Spacely and Cogswell that were pretty close to “done” and both were anxious to sign.

This is a critical moment, and it appears that Backblaze had a sub-optimal strategy.  Every buyer wants the seller to sign the offer (the LOI, or Letter of Intent) because it will always include a binding clause expressly forbidding the seller to talk with other buyers.  This means the seller forfeits its most important negotiating leverage--the ability to have competing buyers.

A seller should never rush into giving a buyer exclusivity.  With two offers on the table like this,  a seller should try to keep the two buyers in the process as long as possible, negotiating the LOI more deeply and at more favorable terms.

Woohoo! Pop the champagne! Well, actually, it was around 2am at this point, so it was more like “woohoo, go to bed”. But, with some trepidation about the decision, we were all excited to have signed and to move on to the next step.

Signing the LOI is not time to pop the champagne.  The signing of an LOI is an important and positive milestone on the way to closing a deal, but it's by no means time to celebrate.  Many deals break down between a signed LOI and a close.  Reasons include problems arising in due diligence (accounting, legal, and business issues can all derail deals), exogenous factors such as another deal coming along that the buyer prioritizes more, and gamesmanship on the part of buyers.