Negotiations are one of the most complex aspects in the M&A process and will determine if our deal can be completed. If you think that negotiations only take place towards the last phase of the M&A process, then you are mistaken. Negotiations already start from the moment you send the mandate agreement and begin to negotiate fee structures and mandate conditions with the soon to be client. Additionally, during the approach phase you must mutually agree on the non-solicitation period and jurisdiction of an NDA (Non-Disclosure Agreement) in order to get the Information Memorandum.
These two examples clearly demonstrate that negotiations take shape in all forms and are prevalent throughout the entire M&A process. However, let us focus on the two key milestones of any transaction where negotiations matter the most. These occur during the Term Sheet phase (also called Memorandum of Understanding) and of course upon execution of the transaction documents, which is known as “signing”.
No matter if you are on the sell side or the buy side, there comes a point after the indicative bid, where you are faced with the dilemma of “should you negotiate a Term Sheet, or just move directly to drafting and negotiating the transaction documents (purchase agreement) towards the end of due diligence?”. All too often several advisors tend to skip this phase and move directly into phase II on the grounds that it saves time and cost. From a mid-market advisors’ view, a Term Sheet is worth the upfront investment of time and cost, as it lays out the general framework of the deal with regards to the deal price, payment form, transaction structure, critical terms and conditions.
Even though a Term Sheet is non-binding, this initial agreement confirms the commitment from both parties and as a result eliminates the exposure to any major deal killers upfront. More importantly negotiating the same Term Sheet with one or more bidders gives advantage to the seller as they can aggressively leverage their negotiation power to select the best conditions.
How the Term Sheet is negotiated has significant consequences for both buyers and sellers. For example, sellers risk leaving substantial economic value on the table and compromising on strategic deal terms, whereas buyers can lock themselves into positions that need to be reversed in phase II and expose themselves to legal risks that may prevent them from walking away from the deal.
Usually, such Term Sheet negotiations are carried out through mark-ups sent via emails. Divided opinions on key items are in most cases discussed and negotiated over telephone conferences or personal meetings among principles, whereby in most cases a mutual agreement in form of alternative solutions are established.
The second phase of the M&A process includes due diligence and the drawing up of the transaction documents, known as the SPA (Share Purchase Agreement) or APA (Asset Purchase Agreement) depending upon the nature of the deal. Due diligence gives the buyer an opportunity to drive down the price offered in the Term Sheet through finding faults in the company as well as identifying risk exposures, which can either be rectified through further price reductions or through indemnities. The best strategy to discuss and negotiate these topics from a buyer’s view is to intelligently implement these findings into the transaction document. By providing the contract mark-up to the counterparty, the so-called final negotiation process is initiated.
Key commercial, business, legal, tax, intellectual property, employment and liability issues are addressed and negotiated between the parties, whereby the legal jargon is then transcribed between the legal teams. The best way to keep the negotiation momentum going is to setup a physical meeting after the first mark-up is exchanged. The key strategy of such a meeting is to flip through the mark-up together and develop a list, which highlights the most important issues arising from the contract. Both parties should develop their stance to each of the key points and rank their importance separately. In the next negotiation round the seller should tactically let the buyer start with providing feedback on the issues list and at the end the seller can either agree on the feedback or provide their counter position. In the end both parties will have to give into some points depending on positions that are important to them and their willingness to successfully execute the transaction.
In conclusion, it is evident that the element of negotiation is prevalent throughout the entire M&A process and is a tool that one can tactically apply from the very start of the process, in order to skillfully maximize stakeholder value and get the deal done.