Whether you’re selling or acquiring a marketing agency, the due-diligence and negotiation process can take even the most experienced CEOs and company owners on an emotional rollercoaster.
If paranoid feelings of distrust and suspicion emerge at the wrong time, they could seriously alter the outcome of your acquisition or sale to the point of a deal collapsing. Not to mention the negative ripple effect if plans come unstuck or reach an unsatisfactory conclusion for both parties.
By accepting the premise of a paranoia curve, you can be more open to suggestions of how best to navigate it.
What is the paranoia curve?
The paranoia curve is something that Spark, the M&A advisory that I co-founded, has consistently identified and managed in most of the transactions we have handled over the last few years, as the emotions of an agency buyer and seller change during the sale/purchase process. On average, this process can take around six months. However every case is different: it depends on the parties involved and their internal decision-making protocols.
What does not change though, is the direct correlation between the emotional intensity and the steepness of the curve: the closer to the day of signing the contracts and paying the money, the more paranoid both parties become.
Same fact, amplified reaction
If, during the due diligence process an issue is disclosed to the buyer early on, it has a good chance of being amicably resolved during collaborative discussions between the parties. This is because the early, low-level point of the paranoia curve is the most conducive in which to discover or disclose potential issues.
Both parties are in the honeymoon period and excited about the deal on the table.
However, move forward in time and if the same issue is disclosed later in the process (and higher up the curve), the significance of the issue will be amplified and met with a much more intense emotion from the other party. It could even cause the deal to collapse. Especially if the issue is discovered rather than disclosed.
The importance of this is that the facts are the same, but the reactions (and potential outcomes) could be completely different.
Late disclosure ripple effect
A late disclosure or discovery not only has to be dealt with during a time of heightened emotions, but also risks setting the tone for the remainder of the process if, indeed, the issue is resolved.
Don’t forget that, because this is about selling/buying agencies, there is almost always an earn out, so the curve continues past the point of completion. The time it takes for the paranoia levels to settle back down can be affected by what went on before.
Different journeys on the upward curve can have an impact beyond deal day. Issues disclosed or discovered in the ‘positive zone’ during the initial due-diligence and negotiation process should result in a positive ending post deal day. Conversely, if something is revealed in the ‘danger zone’ this could have an ongoing negative effect, and it is possible that the relationship could be negatively affected for a long time after the deal is done.
The art of paranoia prediction
Whether you’re selling, buying or are an advisor to either party, you’ll have your own part to play in the way information is shared either during the due-diligence process or later along the curve.
In our experience, most sellers tend to be the only party in transactions who are doing it for the first time. Generally, the buyers and the advisors of both sides are experienced and will have seen most things before. So if you’re acting as an advisor to the seller, it’s a critical role.
Keeping the paranoia curve in the back of your mind throughout the process can bring clarity of thought. The key is to, as much as possible, give the issues to your advisors to address, so keeping the conversations between the seller / buyer as positive and constructive as possible.
Due diligence is an opportunity for the counterparties to develop their relationship and understanding of each other’s businesses further. A well prepared and organised data room will always give buyers confidence in what is being disclosed; as it is seen to reflect on the way of working of the agency.
The advisors should go as far as to help anticipate issues that may be of concern, so first-time sellers know what to expect and they are ready when these points are disclosed or discovered. Done correctly this should avoid the deal breaking down and mitigate any potential issues with valuation.
For large deals when both parties have teams of experienced advisors, the dynamics of the curve tend to be reduced, but paranoia can still creep in without any warning signs, so it’s worth bearing this in mind.
By simply understanding and consciously thinking about the curve and the relevance or importance of issues when faced with difficult situations, the effects can be mitigated.
Jeremy Keith is the co-founder of M&A advisor Spark International.