Just over one year. A smidge over 12 months. 52 weeks and change. 367 days. 8,808 hours. 528,480 minutes. 31,708,800 seconds. Seems like a lot, but really it hasn’t been that long in life terms. At any rate, that is the approximate amount of time (wrong as soon as I wrote it) that has elapsed since Donald Trump stunned the universe (and by universe I mean the Democrats) and won the presidency.

 

Amazing isn’t it? And in the face of such an anniversary, you’d think I’d be all over writing some pithy review of his first year in office, complete with epic sarcasm about the many crises the Trump administration has been through and continues to deal with. The misoginy, the bumbling and stumbling around white supremacy, the comedic spectre of Don Jr and Eric (what is with those guys anyway?), the lack of policy achievement, the anti-NAFTA absurdity, the tweets, the mocking, the bullying, the serial golfing, the massive tax give-away to the 1%, the failure to repeal and replace and, of course, “L’affaire Russe”.

 

You’d think I’d be all over that… but you would be wrong!

 

Why?

 

Because also one year ago, I wrote the first of many “mail it in” or “cop out” column, taking something from earlier in the week and rehashing it because I thought it was interesting. So here goes…

 

Earlier this week, I had the opportunity to participate at a conference dealing with business transition and sit as a panelist in a discussion on the subject of “deal breakers”. Given that this is one of my favourite topics, I thought I would share some of my thoughts on this based off my notes and some of what I heard from my fellow panelists on their stories and some of the risk management processes you can put in place to avoid chaos in a deal.

 

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 so fraught with tension and emotion and deals so much with 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/Obama/Trump/Trudeau issues that have popped up and 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 deal. 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”. Great, 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 these 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.

 

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. Deal with these issues if you want your deal to close.

 

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 under-performance 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.

 

Time

 

Time is the killer of all deals. Every extension and delay contributes to and builds deal fatigue. Set a schedule. Stick to it. It will fall apart, but a deadline focuses effort.

 

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. And 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. The individual in question has 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. Your $50 million payday now 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 let your GM decide if you can sell your business.

 

Lessons?

 

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. Your own personal freaking TOM BRADY!!!! OK, I exaggerate, but almost. 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 back-channel 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 blow-back while at the same time finding a solution that will move things forward. They enable and facilitate closing, which is what we all want.

 

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. If at all 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 likely 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(ss), sub-bullet (c) really doesn’t matter that much.

 

Final Comment

 

Show the F Up!

 

Seriously. 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… Except… I’m missing three shareholders. And it’s 3 PM, close of business fast approaching. What. The… Call the Buyer – zero flexibility – he apparently hates my client at this point. Sign and close or the deal is done. Make some calls to the one cell phone these guys apparently have – no answer. Aaarghh! Suddenly I have an inspiration – these guys are known to like 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’s the boys, putting away a few wee drams celebrating their successful deal that HASN’T CLOSED, AND WON’T CLOSE unless they make their way up to my boardroom. After some cajoling, and a paid tab, two of the guys are ready to go but the third 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 forcibly walked my client out of the bar to the boardroom to sign the documents that would pay him $5 million.

 

Show. Up.

 

Final thought on actual stuff happening this week

It was quite a weekend and week in Saudi Arabia wasn’t it? I haven’t seen this type of power consolidation in a long time.

I had long been wondering what the net result of the burgeoning bromance between Russia and Saudi Arabia was going to lead to. At first I thought it was going to be oil price manipulation and cooperation, little did I think it was going to be Benign Despot Training 101.

Last week was for sure vintage Putin.

“So Mr Putin, I am looking to consolidate power in my country, what should I do?”

It is easy, this “power”. First, you make mass arrest, find rich people, put them in jail. Then, fire many from government, more is better. Show no favourite. If possible, have important ministers get killed – if possible in dramatic helicopter crash near war zone. Then rattle saber at neighbours. To keep the masses at bay, throw bone – maybe let women drive or go to soccer stadium. Finally – let Americans get rich by buying into important company. That work. It work in Russia.

 

Prices as at November 10, 2017 (November 3, 2017)

• The price of oil stayed strong during the week on Saudi instability (wink)
  • Storage posted a increase
  • Production was up marginally
  • The rig count in the US was up
• Natural gas rose smartly during the week

 

• WTI Crude: $56.86 ($55.65)
• Nymex Gas: $3.216 ($2.982)
• US/Canadian Dollar: $0.7889 ($ 0.7839)

Highlights

• As at November 3, 2017, US crude oil supplies were at 457.1 million barrels, an increase of 2.2 million barrels from the previous week and 27.9 million barrels below last year.
  • The number of days oil supply in storage was 28.7 behind last year’s 31.2.
  • Production was up for the week by 67,000 barrels a day at 9.620 million barrels per day. Production last year at the same time was 8.692 million barrels per day. The change in production this week came from an decrease in Alaska deliveries and a slight rise in Lower 48 production.
  • Imports fell from 7.571 million barrels a day to 7.377 compared to 7.442 million barrels per day last year.
  • Exports from the US fell to 0.869 million barrels a day from 2.133 and 0.410 a year ago
  • Canadian exports to the US were 3.201 million barrels a day, down from 2.933
  • Refinery inputs were up during the week at 16.305 million barrels a day
• As at November 3, 2017, US natural gas in storage was 3.790 billion cubic feet (Bcf), which is 2% lower than the 5-year average and about 5% less than last year’s level, following an implied net injection of 15 Bcf during the report week which marks the end of the injection season.
  • Overall U.S. natural gas consumption was up 2% during the week, influenced by increases in residential demand
  • Production for the week was flat. Imports from Canada were down 5% compared to the week before. Exports to Mexico were up 4%.
  • LNG exports totalled 14.4 Bcf.
• As of November 6 the Canadian rig count was 190, 138 Alberta, 21 BC, 29 Saskatchewan, 2 Manitoba. Rig count for the same period last year was 160.
• US Onshore Oil rig count at November 10 was at 738, 9 more than the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was flat at 169.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• Offshore rig count was flat at 18
  • Offshore rig count at January 1, 2015 was 55

• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%

Drillbits

• Premier Rachel Notley annouced plans to go on a tour across Canada promoting pipelines in general and the TransMountain in particular.
• Word on the the street is that TransCanada is looking to change its name to lose the Canada anchor since as we all know, no one invests in Canada.
• Earnings season is on and it has been overall a very profitable quarter for the oil patch. Some notables:
  • Encana reported cash flow from operations of $357 million in Q3-17 versus $186 million in the same quarter last year
  • Keyera reported EBITDA of $138 million for Q3-17 versus $148 million in Q3-16
  • TransCanada reported EBITDA of $1.667 million in Q3-17 versus $1.886 million in the same quarter last year
• Trump Watch: It’s off to Asia for the Donald. We wish him luck. Stuff back home really sucks so it’s pretty good to get away.