M&A deals are usually complex transactions, and the purchase agreement acts as the roadmap for the entire process. While many provisions are standard, specific clauses can become hot-button issues, sparking intense negotiation between buyers and sellers. Here, we explore three of these key provisions and the considerations for each:
1. Representations and Warranties (R&Ws): These are essentially seller’s guarantees about the target company’s financial health, legal compliance, and operational status. The number of R&Ws can range from 20 to over 100, and their significance is undeniable. According to a study by Deloitte, over 70% of M&A disputes centre around R&Ws . Here’s the tug-of-war:
• Buyers: They seek extensive R&Ws to minimize post-deal surprises. Detailed warranties covering financial statements, intellectual property, and environmental compliance offer a safety net.
• Sellers: Extensive R&Ws translate to greater liability. They may push for limitations on the scope and survival period (how long these guarantees last after closing).
2. Indemnification: This clause dictates who pays for breaches of R&Ws or unforeseen liabilities. It’s a crucial safety net, especially if post-deal issues arise. Here’s the negotiation dance:
• Buyers: They seek broad indemnification provisions, ensuring the seller covers any costs associated with breaches or hidden problems.
• Sellers: They aim to limit their financial exposure by proposing caps on indemnification amounts or excluding certain types of liabilities.
3. Closing Conditions: These are the hurdles that must be cleared before the deal officially closes. They can include regulatory approvals, financing secured, and completion of due diligence. Striking a balance is key:
• Buyers: They want minimal closing conditions to avoid delays or deal collapse.
• Sellers: They may seek to include “outs” – conditions allowing them to walk away if unforeseen circumstances arise (e.g., a significant downturn in the target company’s performance).
Finding Common Ground
Negotiating these hot-button provisions requires a collaborative approach. Open communication, a clear understanding of each party’s goals, and a willingness to compromise are essential. Experienced M&A advisors can play a vital role in navigating these complexities and bridging the gap between buyer and seller expectations.
By carefully crafting these provisions, companies can significantly reduce the risk of post-deal disputes and ensure a smoother M&A journey.