Don’t sign an LOI with a Vietnamese buyer

It’s not a matter of country (well, sometimes it is), it’s a matter of experience.

If you talk to enough people about sales processes, they all end up giving you some kind of preventive advice.

“Never, ever sign with Vietnamese buyers.”

“They were a direct competitor, saw all the information and dropped out halfway through.”

“With corporates it’s always the same: everything is bureaucracy, too many people have an opinion, and in the end the deal falls apart and no one really knows why.”

Over time, I’ve developed a very clear personal pet peeve, and it’s independent of nationality, sector, or buyer type. The profile I like least in a sales process is the first-time buyer.

In my personal experience, they are without a doubt the type of buyer most likely to see a deal fall apart after having signed an exclusivity agreement. Fortunately, they’re also among the easiest to identify. You just need to ask what deals they’ve done before or run a search on PitchBook or MergerMarket.

Those of us who work in M&A (financial advisors, in-house M&A managers at acquiring companies, specialist lawyers, private equity fund managers, CEOs and CFOs of acquiring companies) operate under rules that aren’t written down, but that everyone accepts.

When a buyer signs an LOI and requests exclusivity, it is understood that they:

have a genuine intention to go all the way to closing
have the actual ability to finance the acquisition
will not renegotiate terms without a very objective reason after due diligence
will conduct a full and thorough due diligence, on time and properly, using top-tier providers
will negotiate warranties and representations in good faith, based on the findings and real risks

For their part, the seller understands that, once exclusivity is signed, they:

will not seek another buyer
will renew exclusivity as long as negotiations continue in good faith
will provide all necessary information for due diligence, complete, on time, and with full transparency
will not attempt to renegotiate the terms agreed in the LOI without a very objective reason

It’s important to understand that, in most cases, the seller is a first-time seller (percentage-wise, few entrepreneurs sell more than one company in their lifetime).

With a bit of luck, they have found good financial and legal advisors to help them through the process.

Now, if you put together a first-time seller with a first-time buyer, the combination can be deadly.

First-time buyers, in many cases:

don’t know the rules of the game and can’t distinguish between what is standard and what is exceptional
question market practices that exist for a reason
don’t understand that contracts manage risk; they don’t make it disappear
change their criteria halfway through the process
have no frame of reference, nothing to compare against, and don’t know whether a position is reasonable or extreme. When you tell them that a clause or requirement is “not market” or particularly aggressive, they’re surprised
back out at any moment due to lack of financing, sudden changes in priorities, or fear, without understanding the damage they cause to the seller, who in many cases has rejected other offers to sign with them

When is a deal with a first-time buyer more likely to succeed?

When, even if the company has no prior acquisition experience, the CEO has previously led companies that made acquisitions, or has hired an M&A professional to lead acquisitions as part of an M&A strategy.

Or when the company is backed by a private equity fund and the fund itself coordinates the acquisitions.

In fact, if you ask me who my favorite buyer is for a lower mid-market company (which is what we usually sell), it’s precisely private equity–backed companies. Private equity funds dedicate themselves fully to buying companies and executing roll-up and build-up strategies. They are experts at acquisitions, they care about their reputation, and they respect the market’s unwritten rules. They have processes and providers ready, they know what needs to be done and how to do it quickly. And, crucially, they have capital and a very clear idea of how to finance an acquisition.

Obviously, every buyer who is not a first-time buyer today was one at some point. If no one had sold them their first company, experienced buyers wouldn’t exist.

I understand it, I agree with it, and I accept it.

That said, let that first purchase be someone else’s company, advised by someone else. My clients—if I can choose—better not

By Joshua Novick, partner at Bondo Advisors

Source: https://www.joshuanovick.com/p/no-firmes-una-loi-con-un-comprador