How purveyors of inexactitude can negatively affect the M&A process
By Bill Snow
Completing an M&A deal is challenging enough even when the details of the deal are specific. Valuation, cash at closing, contingent payments, seller financing, earn outs, employment agreements, non-competes, and more can make the process fraught with complexity and confusion, but what can make all this complexity and confusion even worse is when a would-be deal maker dangles what I call the nebulous carrot.
The nebulous carrot is simply an ill defined plan (or aspect to the plan) that a “dangler” dangles in front of the target. At first glance, the nebulous carrot seems enticing…and that’s the goal of the nebulous carrot: To get the get the target to jump at an offer without really offering anything.
In reality, the nebulous carrot is nothing but air. Worse, the nebulous carrot is often something the recipient already has. A nebulous carrot is merely a phantom, an apparition, something that isn’t real. The nebulous carrot is a device to get the target to do something without offering anything in return.
Characteristics of the Dangler
To have a nebulous carrot, you first need a dangler. Danglers often can be glib, charming, and engaging people. They pump the ego of the target by lauding the target’s skills and abilities and accomplishments. This is merely a misdirection play, designed to take the recipient’s eye off the prize (a deal that makes sense) and instead, to get the recipient to wallow in her own accomplishments.
Another word for this is flattery.
Now, granted, just because someone is outgoing and gregarious does not mean they’re a dangler of nebulous carrots. It just means you need to pay attention to anything they offer.
Characteristics of a Nebulous Carrot
In the M&A world, a nebulous carrot is simply a soft offer to provide something in the future, after the deal closes, when ill-defined conditions are somehow better. The recipient thinks he’s getting something of value, but in reality, all he’s getting are empty words.
Speaking of empty words, here are a few examples of them:
- We’ll take care of you in the future…
- We’ll make you whole when…
- We’ll do [insert benefit] unless we face some sort of “extenuating circumstance”…
- We have a plan to make all employees shareholders when profits improve…
Offering to buy a company at a low valuation (perhaps with little or no cash down) plus an offer to “take care of” the seller in the future once outsized profits develop, is a nebulous carrot. Offering something after the deal closes with no details of when or how the offer will be executed, is a nebulous carrot.
Even if you have an agreement with a dangler, the use of phrases such as “extenuating circumstances” without defining what constitutes an “extenuating circumstance,” is nothing more than a nebulous carrot. After all, without defining these “extenuating circumstances,” the dangler can cite anything as an extenuating circumstance, thus rendering the agreement moot.
If you’d like to me to rephrase the nebulous carrot in the form of a recipe, it would go something like this…
- Start with a grand idea
- Stir in excessive words of praise
- Mix in some total lack of specificity
- Add a pinch of “we’ll take care of you”
- And you’ll have a delicious looking nebulous carrot*
* Warning: Contents of the nebulous carrot look bigger in the abstract than in reality
What to do?
Quite simply, get it in writing. Further, make sure you fully understand and define all terms and aspects of any offer. If something in an offer doesn’t make sense or doesn’t work, put together a reasonable counter offer. In fact, you are under no obligation to take the first deal offered. I always recommend the following courses of action when putting together a deal:
- Don’t be afraid to negotiate.
- Make sure each side has a full and complete understanding of duties and responsibilities to each other.
- Pay attention to details – reduce the “moving parts” of a deal and nail down all loose ends.
- Don’t give anything away – get compensated for all resources, assets, and benefits you bring to the deal.
- Keep other options open – don’t jump in until you fully understand the deal.
Danglers will run for the hills when you start sorting through all the details and asking for specifics, so don’t be alarmed if conversations and negotiations suddenly stop. This is a good thing. Danglers are time wasters. Demands of specificity will chase away the time wasters.
While deal making often enters the “sausage making” phase (that is to say the individual steps can be messy but the end product is wonderful), a deal will only make sense if you are truly getting something in exchange for giving up something else. And that will only make sense if you take the time to carefully, completely, and exactly detail what you’re getting and what you’re giving up.