pressure is to set a deadline by which the deal must be completed, so that the negotiations are concluded before the issue starts to arise. BurnRate’s management, when they recognised the problem, did so - but the investor regularly took several days to review and respond to versions of the agreements.
When the deal deadline arrived with completion still some way off, BurnRate’s management gave the investor a few days’ grace – and another few days when that expired. A deal was eventually concluded shortly before BurnRate’s money ran out, on terms that were well below the
“worst acceptable case” that had been identified when BurnRate was planning its fundraising. On its face the imposition of a deal deadline should have prevented this occurring – but BurnRate’s management were unable to convince the investor that the deadline was genuine.
Part of the issue was that, having started the process later than expected, the gap between the deal deadline and the date on which funding was expected to run out was too small for BurnRate to close an alternative investment deal. The investor examined BurnRate’s books as part of its due diligence, and likely knew this and rightly concluded that the deadline could therefore safely be ignored.
Trying to enforce a deadline when the company has no reasonable alternative, or the other party has no particular commitment to the will rarely if
deal, ever be successful.
BurnRate’s management finalised the deal in the face of negotiation pressure and perhaps also reduced credibility with the investor.
InTheRoom Ltd.
InTheRoom Ltd. used a deal deadline to much better effect. InTheRoom was in a similar position to BurnRate - they had raised money from a number of funds and were looking to conclude a trade sale of the business. InTheRoom could have gone back to its investors for more funding, but the dilutive effect of that financing on management’s value would have been significant.
InTheRoom began their process much earlier than BurnRate had done. This in itself is a good tactic to avoid negotiation pressure, but doubly so in the context of a deal deadline. Management were able to set a deadline far enough in advance of the date on which funding would have been exhausted
that there would have been time to conduct an alternative process before the money ran out.
This meant that
the credibility of the deadline was not undermined.
InTheRoom’s
supported the deadline’s credibility with interim deadlines for
management also the
completion of due diligence, signature of the termsheet and various other milestones in the process (and instructed their lawyers and other advisers to work to them and highlight them to buyer’s advisers).
As well
as emphasising the the time-critical nature of the deal, this also went some way to preventing work spreading out, and therefore mitigating the cost of the longer timetable.
Crucially, InTheRoom management’s message to the buyer was consistent and cohesive – they were keen to do the deal, and would work exclusively
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