Crude Observations

In Closing…

As some of you regular readers know, I have a thing against conferences, especially pretentious and hypocritical ones attended by the world’s wealthy and elite. I did my COP26 blog early because I knew if I did it during the actual event it would just make me mad. And you know what? It made me mad despite that.


S0 I’m going to take a moment, and a deep breath, and through stream of consciousness and likely distorted memory dump a bunch of sound bites of the contradictory and contra-indicating nonsense going on in and around this conference before moving on to the actual subject matter of this week’s missive which if you wait for it, ain’t half bad!


Carbon neutral haggis – I’m kidding, but not kidding. The menu at this conference gives a carbon footprint for each item. Never mind that 60% of the menu was meat based, which of course they are trying to eliminate. I have to ask myself, do I really care? Should I care? Do I even like haggis enough to want to track its carbon footprint? Is a cricket sausage a worthy substitute?


400 private jets. That’s right. Look, I know people need to get around, but seriously? I read that one attendee flew 31 miles. Who are these people?


A 300-person strong Canadian delegation. Why did we need 300 people? Seems like a lot of taxpayer dollars spent on this. I am guessing a bunch of them flew commercial which is great. But really – 300? On the other hand, not one attendee from the Alberta governing UCP. Sorry guys, this one you needed to go to.


$130 trillion for net zero. That’s right, future Prime Minister Mark Carney and the UN has managed to strongarm and shakedown a consortium of banks and asset managers into their net zero finance cult. Never mind that like so many climate commitments, these are vague and unenforceable. But someone, somewhere, tell me what this sentence actually means…


“SBTi said it’s exploring three broad approaches for how financial firms can reach net-zero emissions: reducing so-called financed emissions consistent with the 1.5 °C decarbonization pathways for each sector; aligning “all financing activities with relevant net-zero pathways such that each individual asset achieves a state of net zero”; and making it possible for financial institutions to “contribute to net zero in a way that ensures transition financing for both decarbonization activities and an explicit shift to finance more climate solutions.”


When the finance sector decides to pay fealty to international organizations and their own infallible hubris instead of their clients or shareholders, we have reached a tipping point. I’m sorry Mark Carney and the divest, defund and destroy crowd, who actually anointed you with the authority to make these unilateral (and admittedly wishy-washy and unenforceable) decisions?


OPEC+ says back off Biden.


One of the more amusing spectacles this week was the White House and Joe Biden trying to play tough with OPEC ahead of their November 4th meeting, attempting to get them to increase supply in order to lower US fuel costs.


The cognitive dissonance of Joe Biden on the one had railing against fossil fuels at COP26 and the need for netzero by yesterday at lunch while the White House actually threatens OPEC+, blaming them for high gas prices while begging them for more production is unconscionably hypocritical and, dare I say, a bunch of hokum and malarkey.


If you take a look at gas prices, and you take a look at oil prices — that is a consequence of, thus far, the refusal of Russia or the Opec nations to pump more oil.


I’m sorry. What in the actual fart is he talking about? Does he not know that his actual country is the largest producer in the world and that the current rig count is down more than 50% from its peak? There are mysriad reasons for that, but they include his own damned energy policies and, ironically, the knock on effects of the last time Russia and KSA decided to “pump more oil”.


Oh, and here’s another gem. The US didn’t even sign on to the commitment to eliminate coal-fired electricity. Who do they think they are? China? India? Russia?


Don’t even get me started on the free for all on international visitors that is the muggings happening in the mean streets of Glasgow.


Wait, there’s more. Back in the US, a referendum in Maine voted against a transmission line being built by HydroQuebec to get clean power to Massachusetts. Oops! Get your damn hydro out of my backyard


Hey, did you heat this one? Oil demand is projected to be 103 mm bpd in 2022.


Stop it. I can’t take it anymore.


We have become a parody of ourselves.


The pious, moral superiority exhibited by this “Conference of the Parties” is precisely why these initiatives attract so much scorn and mockery. It doesn’t matter anymore if the objective is needed. It’s all too much meaningless theatre. From Janet Yellen getting Bono’s autograph to Justin Trudeau jawboning maskless with Prince Charles (we need a military approach to climate change) and Bill (5G vaccine hawker) Gates, this entire gathering is nothing more than Davos on steroids.


Rich and privileged people, on our dime, hobnobbing about what we need to change before hopping on their private jets back to whatever green mansion they crawled out of while the great unwashed are forced to pick up the pieces of increased costs, needless economic dislocation, scarcity, and whatever other scourge fits into the “just transition” scenarios these earnest prophets of doom can’t define, explain, implement or actually care less about.


There is no just transition. It’s going to be a win for these people because the entire movement has managed to figure out how to sustain itself on limitless government largesse and doge-coin like hype. And it’s going be a shitburger loss for the rest of us who have to pick up the pieces and figure out how to make it all happen.


Let us all eat cake.


I guess I can just give up and get some subsidized solar panels. What’s that? Oh. That’s too bad.


“The US solar industry’s supply crunch is deepening. New research from S&P Global firm Panjiva shows US solar imports fell 27 per cent in the third quarter, the largest quarterly drop since 2018. Imports are down 11 per cent from the same time last year.


A “perfect storm” of events has made it difficult for US companies to procure solar panels. Skyrocketing polysilicon and shipping costs have driven up the cost of modules. Rystad Energy predicts this cost inflation will threaten 56 per cent of global solar projects for 2022.”


Wait – is that transitory inflation? Or the other kind, what’s that called, right, persistent.


If only there was an inflation proof place to invest some cash aside from bitcoin, like a commodity business that makes actual “money”. Wonder where I would find that?



It all makes me so mad.



Phew – well glad I got that off my chest!


And now, rather than rage anymore, I’m going to talk about my favourite subject.


Deals and getting deals done.


More specifically, things one should and shouldn’t do during a deal and how to avoid so-called “deal-breakers”. And rest assured, there are many.


Anyway, why this and why now?


Well mainly because the deal market is hot, hot, hot but also because we have many transactions on the go and I need to remind myself how to do my actual job.


So here goes…


Deal Breakers


I suppose before I start, it should be specified that there are literally thousands of ways that a deal can fall apart, which in all reality isn’t all that surprising in an environment that is inherently fraught with tension and emotion as well as a bunch of money and who it belongs to.


Just to keep things on point, I am also going to concentrate on the larger and more predictable deal breakers (killers?) as they are the ones that might actually be avoidable and avoid commenting on Act of God /Biden/Kenney/Oil Price/ESG/Trudeau issues that all too often pop up and have caused my own deals to see the back side of a slamming door.


Working Capital


Can we all just agree that working capital is the 100% guaranteed deal killer? I mean let’s face it, no one knows what it is or how to calculate it, why it’s important or not, why an owner can’t keep it, why a going concern business might need it. Simply put, working capital is the hot potato in pretty much every transaction. Look at a standard Letter of Intent clause on working capital: “a normal level of working capital will be left in the business with a target to be determined prior to Closing”. Easy, right? Wrong. You could drive a truck through this and no amount of cajoling various accountants and lawyers is going to get a Vendor a straight answer. Here’s the basic dichotomy – buyers want as much as possible and vendors think it should be zero, because working capital represents their “profit” for the year. Wrong by the way, EXCESS working capital is profit. Normalized working capital is a going concern asset. Purchase price is a capitalized amount tied to this and subsequent years’ profits.


Makes sense right? Except I’ve seen $50 million deals fall apart over $50,000 in working capital.


Is there a solution for this? Preparation. Explanation. Calculation. Figure it out early and often.


Letting Issues Fester


Another way for deals to blow up is let issues develop and fester without addressing them. This is true on both sides of the deal. It may be related to performance of the business or it may be something as simple as someone acting in an off-putting manner or otherwise putting a nose out of joint.


Not understanding the deal


This happens way more often than you would think.


Private company deals can be complex with lots of moving parts including working capital, earn-outs, vendor notes, equity rolls, management contracts, non-competes – you name it. Surrounding this are a team of advisors and experts all throwing their two cents at a business owner who has probably not transacted in this manner before and may not ever again. Mix a little emotion into it and you have a recipe for disaster. Take the time to read and understand the details of the deal in the silence of your own home at your own time.


Thinking an LOI is the end


Wrong! A Letter of Intent is a great achievement, but this is nowhere near a closed deal. You’re probably only 80% of the way there. But too many owners take their eye off the ball at this stage and start acting as if the money is in the bank. They start sizing up vacation homes in exotic destinations. Then the business performance suffers and before they know it, they have hidden the underperformance for a while, the issue has festered and the buyer is looking to renegotiate a deal the vendor didn’t really understand in the first place. Your business is of interest to a buyer because you run it well and have created value. Until the money is in the bank, run it that way you normally would.




Second to working capital, the passage of time is one of the main deal-killers. People develop what we call deal fatigue. The inability to move at a proper pace to close or to set deadlines and expectations allows doubt to creep in, makes people think they should renegotiate and, predictably, reduces the likelihood of closing significantly. Once an LOI is signed, anything more than 90 days for due diligence to Closing is a recipe for disaster. Eye on the prize.


Giving People Who Don’t Have an Equity Interest a Veto


We see this a lot in transactions where an owner is exiting the business and there is a second tier of management that the buyer wants to retain through management contract or service agreement typically way overloaded with lunatic terms and a non-compete that would make anyone’s head spin. But they make it a condition of the deal. And then wait until a week before closing to drop it into people’s laps. Seems fine right? No. Because if everything has been agreed and this is the last piece? You’ve given that individual a veto over your deal. It never ceases to amaze me how often this happens. Look, I’m all for empowering second tier management, and getting key people under contract, but don’t do it at the last minute when everyone is freaking out, he’s probably never seen a management contract before let alone a non-compete and will require his own legal representation – even a fake lawyer like me would recognize the position of power you have put that individual in. Suddenly your $50 million payday depends on the guy you hired to run your shop signing an agreement that he probably doesn’t need and it all may fall apart over an extra week of holiday. Great.


Advice? Pay your people generously, treat them with respect. Tell the buyer that if they do the same thing, all will be well. But don’t give people who don’t have an equity interest a defacto veto over whether you can sell your business.


Hire Good Advisors


Look, this is totally self-serving and probably breaks 2,104 Canadian and US email anti-solicitation rules, but I won’t tell anyone if you won’t… Right?


Anyway, the lesson is that you can never underestimate the value of your advisory team. From lawyers to accountants to tax experts to whatever, each of these professionals performs critical tasks that helps to get a deal done. Sitting in the middle of this is your M&A advisor, your consigliore, the connection between the buyer and the vendor. The Quarterback of the team. I don’t do due diligence work, but I can coordinate it. I don’t draft legal agreements, but I can sure read them, understand them and in some cases explain them to you in a different way than your legal counsel. The M&A advisor is the backchannel to the other side, the person you go to when the deal gets sticky and the sh** is about to hit the fan. If you get a revenue or profit miss, your advisor gets to tell the other side and shelter you from the inevitable blowback while at the same time finding a solution that will move things forward.


Take a Step Back


While this may sound counter-intuitive given the suggestion that a vendor needs to understand the deal in order to help it succeed, the reality is that the vendor should attempt to minimize their direct day to day involvement in the minutiae of closing. Remember all those experts? You’re paying them so let them do their job. A vendor who inserts themselves too aggressively into the point-by-point discussion loses the ability to be the voice of reason and becomes part of the conflict instead of the solution.


Whenever possible, let the advisors absorb the body blows and be the bad guy – we are more than happy to be thrown under a bus if the deal gets done to a client’s satisfaction. One thing vendors often forget in the heat of the moment is that they will be working with a buyer post close – starting that relationship off on the wrong foot can be a disaster, especially where there is an earn-out or rolled equity involved. There is nothing more useful to me in a negotiation than being able to coach my vendor through a direct conversation with the senior execs of the buyer – reminding each of the business rationale for the deal and making them realize that Section 4, paragraph(t), subsection (iii) really doesn’t matter that much.


Final Comment:


Show the F Up!




All this discussion reminded me of something that happened earlier in my career when I was selling a business with multiple shareholders. So here we are, at the end of some months of fractious negotiation, all the issues solved and there is a boardroom table with all the closing docs laid out for signature. It’s a beautiful thing, it’s after lunch, the buyer has signed – I’m already cashing my completion fee…




I’m missing a shareholder. And it’s 3 PM, close of business fast approaching.


What. The. Actual…


Call the Buyer – zero flexibility – he apparently hates my client at this point.


Sign and close or the deal is done. I make some calls – no answer. Aaarghh! Suddenly I have an inspiration – this guy is known to have the odd pop so I tell the rest of the shareholders to stay put or risk painful death and rip out of the office into downtown Calgary and start going in and out of pubs.


Sure enough, stop #3, there he is, putting away a few wee drams celebrating his successful deal that HASN’T CLOSED, AND WON’T CLOSE unless he makes his way up to my boardroom. After some cajoling, and a paid tab, I’m ready to go but buddy had just ordered a fresh pint, the cats were at risk of de-herding, so at great personal risk, I drained his pint, said it was time to go and almost forcibly walked my client out of the bar to the boardroom to sign the documents that would ultimately fund his retirement.




Are there any final nuggets to be drawn from this? I don’t know. Every deal is unique. There is no way going into a transaction to pinpoint what issue or factor is going to be the one that can trip you up, so there is no universally appropriate answer. The best advice is to be prepared, have people on your side who can anticipate and mitigate concerns and stay focused on the why you are doing this, because there was always an end goal. Know what the deal breaker concerns are and have a strategy for each of them.


Always be closing.

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