[cj]

> I was advised that 50% of signed LOIs actually close. I bet it’s less. You will see the LOI and dream of trading stress for riches. Remember: Less than 50% chance of closing.

100%

Which is why I hate that exclusivity is industry standard.

It feels exploitative that acquirers can demand exclusivity in a deal when the chances of it closing are less than 80%.

Imagine selling a house and taking it off the market because you got an offer with a 50% chance of actually closing 3 months later.

Even worse, most acquirers will say “nope” if you ask them to cover your legal fees if they back out of the deal.

This happens because sellers of companies only sell 1 or 2 companies in their lifetime, while buyers of companies typically do dozens and dozens of transactions. There’s an extreme power imbalance in favor of acquirers. Most sellers learn these lessons the hard way.

[paulddraper]

> There’s an extreme power imbalance in favor of acquirers.

1. Sellers can tank the deal as well for any reason, e.g. if they feel the deal is not going as fast as they like (and I recommend agreeing on a general timeline).

2. Sellers generally don't get very many offers, so the opportunity cost is often not as high as you might suppose.

3. Sellers can negotiate more friendly terms (e.g. closing sooner), but usually choose to concentrate 100% of their leverage into the price.

4. Due diligence is expensive for both parties, but the seller can easily re-use much of their side. Non-exclusivity would mean the seller could easily entertain many costly offers simultaneously.

No buyer in their right mind would agree to non-exclusivity, though they can agree to a reasonable window for that exclusivity.

[tptacek]

These are definitionally the most sophisticated buyers and sellers in the entire economy. Organic market norms dictate what the industry standard is; it doesn't make much sense to think about protections. If you're selling, and you want some kind of protection, structure the dealmaking or negotiate the deal to get what you want.

[cj]

> it doesn't make much sense to think about protections

Why?

If I’m going to put my business on hold for 3 months to entertain your offer to buy my company, why would it not make sense to make sure the buyer is serious enough to offer something they shouldn’t need to ever pay out if they are serious about their offer?

> structure the dealmaking or negotiate the deal to get what you want.

You usually have lawyers doing a lot of the legal strategy for you. It’s easy to say “negotiate what you want”, but realistically this negotiation happens via redlines back and forth between lawyers who consult the buyer and seller who both make concessions. Whether or not you make a concession is often influenced by what’s most commonly occurring in other deals.

What’s most common in other deals doesn’t automatically equate to what’s the most fair and balanced transaction terms.

[paulddraper]

tptacek was referring to mandatory legal protections.

Typically, those are only created for unsophisticated parties who don't know what to negotiate for.

---

> If I’m going to put my business on hold for 3 months

I've had a failed LOI before (as a seller). Very rarely should an LOI ever fail after 3 months of exclusivity.

The LOI is "hey we'd like to dig deep into this, but we want to be sure we aren't wasting our time." Competent parties shouldn't take much more than a month to figure out whether it works or not. (Funding logistics, or SEC approvals, etc can stretch that out.)

[lazide]

I’ve anecdotally heard of sellers being strategically strung along to distract them/tie them up, to help their portfolio company get additional market traction.

This is by some less than ethical Chinese investors.

That said; it could also be (unsuccessful) sellers remorse.

[ibejoeb]

Absolutely. You can get squeezed by a potential buyer. You're exposing your books, and if the buyer is particularly shrewd, it can manifest a very unfavorable position, especially for small companies. They squeeze, back out, and come back in 6 months if you're still around. If you're looking to sell your company, you need to know this and set up milestones to mitigate this.

[paulddraper]

Acquisition by competitor is a quite dicey affair...beyond a concern for resources, the information transfer itself is also concerning.

[lazide]

Yup. Also a common situation.

[tptacek]

Because we assume, reasonably, that businesses are sophisticated enough to navigate these transactions themselves.

[cj]

If you're talking large M&A transactions where you have bankers and investors and advisors and a well built out team supporting the entire transaction process, absolutely.

But the volume of deals that happen in the $3-50 million range is very high (especially if you include non-tech companies, like PE's buying up a veterinary clinics or dentist offices) -- this segment of companies generally are not "sophisticated" re: M&A by any means.

To be fair this article is talking about a $100m+ transaction, so maybe that's the segment your head is in. I'm coming at it from the perspective of a < $50m transaction.

[tptacek]

By way of example, the accredited investor standard, which has the same motivation we're talking about, has an asset threshold of $1MM.

[linuxdude314]

You don’t suspend bizops because you’re selling a business.

That sounds like a great way to cause your biz to not sell at all.

[lazide]

Having the owners distracted can cause marginal businesses to implode/slow down. At a minimum it’s almost always distracting from something important.

Is that business valuable in that case? Probably a lot less than they’re trying to get for it, for sure hah.

But it can happen.

[aidos]

Not to diminish your point, but you’ve described the UK housing market where that’s exactly how it works.

[zik]

Coming from Australia the way London house sales work seems like such a complete disaster. It seems like you can make your buy contingent on selling your old house, which creates chains of buys and sells which fail the instant anyone pulls out. I can't imagine how anyone can operate in that environment.

[mythhabit]

That is quite normal in Denmark as well. Part of the reason is that the bank cannot approve of the deal, if you have not sold your old house. So either you sell your house and move into a rented apartment, or you commit to buy a house if you can get your old sold in some specified timeframe. Usually the sellers realtor advice the seller if the house is likely to sell or not at a given price.

[sokoloff]

You can make your offer contingent on selling your old house (or on an inspection, or anything else you want). Sellers are also free to not accept such offers. Both of my house purchases were from submitting a no financing contingency offer with significant earnest money, and I think that helped me win both bids.

[brianwawok]

Yes, for sure. Even if you are coming in 10k or 20k under others, having a 0 contingent offer is so much more clean and more likely to get approved. My last offer I went even further and added a note "I know both the roof and HVAC are old and ruined, I will not ask for either to be fixed as part of closing" and I won the house despite not being the highest bid.

[dboreham]

Perhaps different today, but back when I lived in the auld country it was totally different in Scotland (still in the UK, I believe).

[xnorswap]

As I suspect you know, Scotland has a distinct legal system from England & Wales, and large differences to England in laws around house buying & selling in particular.

[another2another]

There's still the 'offers over xxx,000' blind auction, but gazumping which is allowed in England (still I believe) is not in Scotland, and a good thing too.

[argiopetech]

That's how it works de facto in the US as well. Agents don't show houses under contract, and a significant percentage of contracts fall through.

[donor20]

They do take backup offers. We got our place that way. We didn’t want to beat the winning bid, but had a no contingency offer. We let them know if first fell through we’d still be interested at our price with a quick close. Someone missed some deadline and they were quick to call.

[cj]

Sounds like the US and UK housing markets, as well as startup M&A, suffer from similar problems.

In a free market, you should be able to market what you’re selling until the moment it’s officially sold.

[ska]

> In a free market, you should be able to market what you’re selling until the moment it’s officially sold.

That's not what free market means. In a free market (which this is an okayish example of) buyers and sellers are free to set their own terms, rather than having them externally imposed. So you are free to try and negotiate a lack of exclusivity, it's just that likely nobody will take you up on it.

SEC oversite and similar mechanisms, by comparison, is an external imposition on the market.

Ironically, what you seem be suggesting (exclusivity terms "not allowed") could only be enforced by regulation, therefore making the market less free.

[cj]

I agree. Free market was a poor choice of words

[jahewson]

That’s not fair though because it takes a few weeks for a broker to close on a mortgage whereas a cash buyer can pay immediately.

[sokoloff]

What part of that is not fair? If someone else has more ready access to funds, and a seller wishes to prioritize highly for that, they should be able to. It would seem to me to be unfair to a seller to say "you must wait an extra N weeks on all sales because some buyers will need that long to get funds together".

[MrPatan]

The world is easier to understand when you replace "fair" with "good for me and mine in the shortest of terms"

[postexitus]

We should look at why they don't close. How often is it because the seller misrepresented their product/company? And don't forget information asymmetry - theoretically seller knows 100% and buyer knows very little. TBH I find it amusing where people take that kind of risk at all - let alone paying for the trouble. It reminds me JPMorgan's acquisition of Frank - no wonder JP did all kinds of due diligence on this stuff, it is extremely hard to differentiate forgery from reality without being an insider.

[mbesto]

As a seller, not going exclusive is an absolute PITA.

Based on anecdotal experience, I'd bet that most of the "50% of signed LOIs" don't actually close because the seller misrepresented themselves.

> There’s an extreme power imbalance in favor of acquirers.

Buyers do NOT like dead deal fees (it doesn't get paid out of the LP fund), so there is little incentive for them to play games there. So, no, this is not true.

[cj]

> So, no, this is not true.

I don’t think you’ve provided any evidence other than “buyers like to make as much money as possible at others expense” which everyone knows to be true which doesn’t bear much weight on a skewed power balance existing.

[tptacek]

Buyers do like to make as much money as possible. That is why they purchase companies. Sellers also want to make as much money as possible. That is why they negotiate. If they can't agree, the transaction doesn't take place, which is usually for the better.

[mbesto]

> doesn’t bear much weight on a skewed power balance existing.

What's your proof that a skewed power balance exists? Just because buyers have experience buying 100s of companies? Well then my experience advising 500+ companies tells me otherwise. So who's right?

Also, you're saying there is a power imbalance because. I was specifically commenting on that power imbalance affecting the poor (50%) success rate.