In the world of business, mergers and acquisitions (M&A) are not just transactions but strategic decisions that can redefine the future of the companies involved. Welcome to our series devoted to the importance of process through the complexities and nuances of M&A.
While the economic terms and transaction structure are crucial, the process followed to get to the closing is often misunderstood or overlooked. This series aims to offer a deeper understanding of the M&A process in middle-market and small-market deals and its impact on both buyers and sellers. A well-planned and executed M&A process contributes to a smooth and efficient transaction, maximizes value for sellers, and ensures a seamless transition and future growth. Conversely, a poorly executed process can lead to misaligned expectations, value deterioration, and operational inefficiencies.
Join us as we explore each stage of the M&A process, from assembling a deal team to post-closing deliverables. Stay tuned as we roll out the rest of our series in the coming months ahead.
- Part 1 – The Importance of Process: Crafting Success in M&A Transactions
- Part 2 – The Art of NDAs, Initial Discussions, and LOIs
- Part 3 – The Power of Letters of Intent and Term Sheets in M&A
- Part 4 – Bringing it Home: Negotiating the Deal Documents
- Part 5 – The Last Lap: Strategies for a Smooth M&A Closing Process
- Part 6 – After the Ink Dries: Understanding Post-Closing Deliverables
Part 4: Negotiating Deal Documents
We’re back with the fourth post in our series on the M&A process for small and middle market transactions. Part 1 discussed the proper preparation for a transaction, in part 2 we described the initial discussions and the role of letters of intent, and in part 3 we covered due diligence and the disclosure schedule. This post will focus on the steps involved with the negotiation of the primary deal documents.
In parallel with due diligence, the purchase agreement is drafted. The buyer’s team almost always prepares the initial draft. Purchase agreements in M&A transactions tend to include a combination of highly customized and boilerplate terms. Depending on the complexity of the transaction, purchase agreements in middle market deals can be lengthy, in some cases reaching nearly 100 pages. The initial draft of the purchase agreement should track the terms agreed to in the letter of intent.
The delivery of the purchase agreement signals the beginning of what can be a lengthy negotiating process, but if the parties have invested their time and effort into a fleshed out and well drafted letter of intent, those efforts will pay off and reduce the number of issues that are open to negotiation.
The negotiating process largely follows a back-and-forth process. The seller receives the initial draft and it and its lawyers review and discuss recommended revisions. There may be one or more “internal” drafts that are distributed just to the seller’s team, and once the seller is satisfied with the revisions, it is passed back to the buyer, who in turn may follow the same process of generating a new draft back to the seller. This process may be iterated numerous times before the closing. The goal with each “turn” of the purchase agreement is to whittle away at open issues until the parties agree that the purchase agreement is final.
While the purchase agreement is the primary document in the transaction, there may be other agreement that are nearly as important. Examples can include the operating agreement of the buyer if the sellers will be rolling equity into the company post-closing, agreements related to stock consideration, and employment agreements for sellers that will continue with the business. The process described above applies to these transaction documents as well, however, buyers may be less willing to negotiate many of the terms.
All of the transaction documents are negotiated in parallel with the goal of finalizing all of the agreements prior to the target closing date. That being said, sometimes key agreements are negotiated up to, and on the closing date. While not ideal, organized deal teams can handle these situations and stand ready to close on time.
In our next installment, we’ll discuss the closing process.
About The Author: Vaughn Marshall
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