Success Factors in a Company Sale: Managing Client Introductions During Due Diligence

Put yourself in the shoes of a buyer – you are about to purchase a collection agency that has performance-based contingency contracts that are cancellable within 30 days.

Wouldn’t you want to talk to the key clients before you purchase the agency?

Buyers will typically require discussions or meetings with all clients whom they deem to be significant (20% or more in revenues, or multiple at this level) before consummating a transaction. They do this in order to understand the following:

• Clients’ perspective on seller’s performance
• Client-level management changes on the horizon
• Contingency fee rate changes
• Expectations of future placement volumes
• Pending or future operational requirements to maintain client business (SAS 70, near-shore/off-shore capability, etc.)
• Opportunities for new business or service offerings

Don’t be alarmed by this requirement. Meetings with clients typically occur as one of – if not the – last items of the due diligence process. Due diligence begins after the buyer and seller have executed a non-binding letter of intent, which details the purchase price and terms of a transaction, and ends at a closing when a definitive purchase agreement is executed and funds change hands. In other words, the seller should already know that the buyer is satisfied with the results of the rest of due diligence before making client introductions. An experienced advisor will push for this clarification up front and strive to minimize business risk.

It is also fairly common in the letter of intent for a buyer and seller to agree to the timeline and protocol for the client discussions. This enables the seller to have some control over that part of the process and helps to limit the liability of such discussions taking place in the event that a transaction does not occur.

Scripting client interaction is critical

Toward the end of the due diligence process, the buyer and seller should determine which clients to approach, what information the buyer needs to obtain from each client, and what message they wish to convey to the clients regarding their relationship going forward. Once this is understood, the next step is to agree upon the script and agenda for each client discussion, and who will deliver the message.

In many instances, agency owners and their sales people have both personal and working relationships with their key client representatives that span years, and the fact that they are selling may come as a shock to the clients. This is why many owners prefer to introduce their clients to buyers face-to-face as opposed to over the phone. Instead of saying the agency is being sold, sometimes an owner will characterize the acquirer as a financial partner who is going to help facilitate the growth of the agency, or they will describe the pending transaction as a merger which is going to increase its services and overall capability. This will typically alleviate any concerns the client may have with regard to the seller’s commitment to servicing them going forward.

The buyer may require that the seller not participate in the client discussions. This is not unusual, but does necessitate that both the seller and buyer are in complete agreement about the agenda for each client discussion.

Client interaction can be the catalyst to close a deal

We advised on a recent transaction where, toward the tail end of due diligence, the selling agency’s CEO was planning to accompany the executives from the buyer to meet certain key clients and describe the merger of the two entities. In this particular deal, getting the key client meetings scheduled was a logistical nightmare, as clients were located across the U.S. and it was difficult to accommodate vacation schedules. The seller was concerned that this would delay the closing, so we made sure all outstanding issues were addressed quickly, in advance of the meetings, and used the extra time to develop well-planned agendas. When the meetings finally took place with the key clients, they viewed the merger as a huge positive, as the combined company would be able to offer additional services beyond collections. The positive momentum from the client meetings was a spark both sides needed to move the deal quickly to a successful closing.

Confirm all “deal breaker” issues are resolved before client interaction

Once the client discussions take place, you have essentially let the cat out of the bag. Therefore, it is critical to have a line of sight to the execution of the definitive purchase agreement and funding of the transaction. If there are still “deal breaker” issues in front of you, consider pushing back client interaction until everything has been fully addressed, so that a deal will be consummated by the date originally set forth in the letter of intent.

Michael Lamm manages M&A transactions and valuations for Kaulkin Ginsberg. Michael can be reached at 301-907-0840 ext. 119 or by email.