Here Are the Most Important M&A Deal Terms
As with every element of How To SELL Your Business, we stress that we are not providing legal advice and urge you to consult with experienced M&A counsel and a tax expert to provide you general and specific advice about your transaction. But we take the opportunity to point out key provisions of the PSA that especially merit your attention and thorough examination with your attorney and tax expert.
Stock or Asset Purchase Transaction. Discussed above, this is a gateway provision that affects so many other elements of the transaction.
Representations and Warranties. Called “reps and warranties,” these provisions describe precisely what is being represented by each party. Seller’s reps and warranties are generally more extensive than the buyer’s, given the seller knows a lot more about the details of the business than the buyer. And, in purchasing the business, the buyer is relying on what you represent about the business.
One example of a rep and warranty you might make as a seller is that it is being sold free and clear of any lien or encumbrance. Another might be that you are aware of no event or condition that has threatened or might threaten a customer or vendor relationship. The list, for good or bad, goes on and on. As boring as they might be, they are absolutely critical to the transaction, and ultimately your ability to enjoy life beyond this sale transaction. You don’t want to be sued for what a buyer might claim to be a breach of a rep or warranty.
And be prepared for a significant amount of negotiation over these reps and warranties. There will undoubtedly be a lot of give-and-take. You will likely provide more reps and warranties than you prefer, and the buyer will likely settle for less than they would like.
We will add that there is something called “Rep and Warranty Insurance” (“RWI”). Usually only available in institutional transactions (i.e., those worth at least $10 million and generally over $20 million), this is insurance that will cover most liabilities you might have as a seller for a breach of your reps and warranties. It operates to lower, and sometimes eliminate, the amount of the transaction proceeds that are held back by the buyer at closing to insure against any breach of reps and warranties. It is not inexpensive, but the cost of it is often shared by the buyer and seller.
Repayment of Debt. Make sure that upon closing the buyer has assumed your debt and you are free of the obligation, or the debt has been paid off.
Holdbacks. You should negotiate for the fewest and smallest holdbacks as possible. Unfortunately, sellers always seem to be disappointed in the way their holdbacks are managed and often reduced or eliminated.
Earnouts. We don’t like earnouts. It seems like something always arises that prevents the earnings threshold from being met, and hence the earnout from being paid. Our advice is to clients is, “Only agree to an earn-out that you will be satisfied not receiving.”
Consulting Agreements. Are you willing, if the buyer requests, to stay around in some capacity for some period of time after the closing? And how much do you need to be paid for that commitment.
Seller Financing. Are you willing to take a note for part of the purchase price and, if so, what are the key terms of that note (e.g., amount, interest rate, term, amortization, priority of debt in the buyer's entity)?
Covenants after Agreement, but Pre-Closing. These describe what you and the buyer must do in that intense period between the time you sign the PSA and the time you finally close the transaction, which can often be a month or several months later. An example might be your agreement to maintain your accounts payable at a certain level so that the buyer does not inherit a bloated payable balance caused by you collecting on all your receivables and leaving payables unattended. Or to operate the business in a normal manner to protect its operations. Or to not assume any extraordinary liabilities. Another might be the buyer’s agreement to not contact your customers prior to closing. You can avoid much of this if you insist on a simultaneous close, meaning the PSA and funding occur simultaneously.
Closing Conditions. These describe exactly what must be accomplished by both you and the buyer as conditions to closing of the transaction. They might include approval of a licensing authority, a lender consent, a landlord consent, or even a unilateral approval and acceptance by the buyer of the historical financial statements.
Covenants after Closing. These describe what you and the buyer are promising to do after the closing of the transaction. They might include a non-disparagement clause that prohibits either or both of you and the buyer from making any disparaging comments about the other party. They might include a commitment by you to not solicit your employees or customers.
Non-Compete. A clause that comes up in nearly every transaction is a non-competition agreement, or a “non-compete.” The buyer might demand that you sign an agreement to not compete for a period of time in the business conducted by the business you are selling. If you have no interest in working again, or at least no interest in working in this type of business again, signing away your right to do such work should not be a problem. But if you want to reserve the right to work in that business, this will be a point of negotiation. If you are absolutely forced to sign a non-compete, try to restrict it in terms of time and scope of activity as much as possible.
I have not covered the multitude of issues that can arise in the sale of less than the entire business. While sales of partial interests are common, the issues they engender are extensive and often complex. An M&A lawyer should be enlisted to assist in these situations.
GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market. Visit us here.
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