Upon completion of the majority of due diligence, frustration with the transactional process has generally started to set in, at least for sellers. However, the process is far from over. If a purchase and sale agreement has not already been signed, the real negotiations begin at this stage. It may also take time to draft other major transaction documents such as employment contracts and forward-looking operational agreements such as operating agreements and shareholder agreements.

It is extraordinarily important for parties to review all documents, or at least changes to those documents, as those documents and changes are prepared. The parties should discuss the documents with their attorneys and accountants so that they understand the financial and legal implications for each document as well as the purpose of each document. The role of accountants, attorneys and similar advisors is to provide advice, counsel and guidance during the negotiation process; however, all decisions are ultimately up to the parties. Consequently, the parties must understand the implications and nuances of each term and condition in the various documents.

During the document drafting and negotiation process, there will be many decisions to make and many times where each party will have to decide whether a term or condition is acceptable or whether it is a true deal breaker. It is at these points that Deal Fatigue can be the most dangerous, so…

Know When to Hold ‘em and Know When to Fold ‘em

At each decision point in the transactional process, it is important that the parties do not give in or walk away from the deal due to frustration with the process or the other side. A party must force itself to go through a good decision making process by taking the following actions and asking the following questions:

• Discuss and analyze the particular issue with the parties’ attorneys, accountants and applicable advisors.
• What are the financial risks?
• What are the legal risks?
• Who has or had control over the risks?
• What is the probability of the liability, obligation, damages, losses, etc. occurring?
• What is the worst case scenario?
• Can the party live financially and mentally with the worst case scenario?

If the answer is no, then the party should not walk away from the deal just yet but rather explore the following: Is there a creative solution such as a liability cap, time restriction on the liability, or an escrow for a potential liability?

If so, the parties should negotiate and agree upon that creative solution.

If there is no creative solution, then it becomes a question of knowing when to hold ‘em and knowing when to fold ‘em.

This is the point in the transaction when Deal Fatigue is most the dangerous. The parties have put time, resources, effort and usually substantial amounts of money into the transactional “pot.” The question for the parties is ultimately: do I walk away from everything I have put into the pot (“fold ‘em”) or should I forge ahead with this deal (“hold ‘em”)?

The answer to this question should be based on the probability of the worst case scenario, the parties’ ability to withstand such a scenario, and the parties’ willingness to take the risk of such worst case scenario. If the probability of the worst case scenario is high and the party cannot financially or mentally withstand such a blow, it is time to fold ‘em. If the probability of the worst case scenario is low, and/or the party can control and/or withstand the impacts of the worst case scenario and is willing to do so if it comes to fruition, then the party should probably hold ‘em.

Under no circumstances, however, should a buyer or seller agree to a term or condition in a deal (or walk away from a deal) simply because “I just want this to be over.” Any such decision is a result of Deal Fatigue. At the very least, such a decision will likely be regretted and, at the worst, it could have disastrous financial and legal consequences.