Page 27 - PWM2024_November EBook

BETTER BUSINESS

that the parties agreed to proceed Managing the process
with the deal on the basis of the The M&A process isn’t a quick fire
terms”. The document therefore process. Rather, it takes time because
makes it much harder for the buyer buyers will want to conduct due dili-
or its lawyers to argue about the basis
of the sale when the official docu- gence and as Taylor highlights, “the
mentation is drafted. timing of this exercise will depend on
Naturally, centre-stage of any the buyer’s level of urgency, the
transaction is money and those look- amount of information to review and
ing to make a clean exit will likely be the materiality thresholds the buyer
looking for the buyer to make a single might have set for such review.”
cash payment upon completion. But as Kavanagh notes, it’s impor-
However, as Taylor has witnessed, tant for sellers to recognise and navi-
those intending or are required to gate any obstacles found; they need
remain with the business following to “ensure there are no ongoing
completion, may see the buyer sug- issues after the transaction has been
gest a different consideration struc- completed. Record keeping is crucial
ture. to this, as accurate records will
In fact, he’s often seen “provisions
that link a target – say profit or reve- ensure the correct information is fed
nue – to the price that is payable at a to the buyer, speeding up the process
future date… there are a myriad of and hopefully avoiding any nasty sur-
other potential consideration struc- prises or liability in the future.”
tures that may be proposed, depend- Worryingly, Kavanagh has seen “a
ing on the motivations and finances tendency for sellers to downplay cer-
of the buyer”. One example he comes tain complex aspects of their busi-
across in private equity transactions ness or processes, which may have
is where the buyer expects sellers to grown organically over time and not
stay on with the business and must be properly recorded”.
reinvest a portion of their proceeds It should be said, as Taylor
into shares or loan notes within the explains, “that due diligence does
buyer’s organisation.
market and so the value of the shares is used to dictate the value of the busi- But often there are obstacles to be open up a company’s innermost
ness. But for private companies, other metrics may be used to calculate the overcome that buyers will need secrets. It also risks the public, cus-
likely value of the organisation.” resolved ahead of completion; signif- tomers or suppliers learning of the
He continues: “Business valuers can benchmark the business against deal itself before it completes. On top
recent transactions for similar-sized companies in the same sector. The sec- icant issues uncovered by, or of this are worries if the potential
tor may have its own preferences when it comes to selecting a metric, but revealed to, the buyer via the dili- buyer is a competitor or within the
typical examples include multipliers of earnings before tax, turnover and/or gence and/or disclosure processes same line of business.”
profits, renewal contracts, recurring revenue and so on.” are relevant here. No matter what is
And Taylor thinks along the same lines, precisely because there is no open found, Kavanagh says that once iden- It’s because of these risks that
market for their non-traded company shares which makes it difficult to tified, they will be incorporated into Taylor recommends that sellers enter
determine a valuation. This is why he recommends the use of external advis- the contract, together with protec- into a confidentiality or non-disclo-
ers to value a business. tive clauses including warranties sure agreement (NDA) at the outset
He go on to explain the main options for sellers: “With a ‘locked box’, the (statements of fact) and/or indemni- to “provide some comfort that poten-
price is locked on a particular date and any leakage out of the company to the ties (to provide for compensation) to tial buyers will keep the information
sellers and connected persons from then is owed to the buyer. But with com- help ensure the terms are adhered to. they learn during the deal process,
pletion accounts, the price is subject to adjustment once accounts have been By extension, all of this means that and the existence of the potential
prepared and finalised following the completion date to reflect the true posi- accuracy and fairness are central to deal itself, confidential.” Both sides
tion at the date that the buyer acquired the company.” Taylor tends to see the contract. And “if,” as Kavanagh need to keep in mind that, as
the locked box route as being more preferable for sellers. has seen, “the terms of the warranty
Irrespective of the route chosen, key terms that are important to the seller are broken – statements about the Kavanagh tells, an NDA “prohibits
should, says Taylor, be “documented by way of a letter of intent or heads of company made by the seller prove either party from divulging any
terms”. incorrect – the buyer has legal rem- details covered by the terms of the
He says that “while such a document generally won’t be legally binding edy to seek damages for breach of agreement.” It’s not a one-sided obli-
(barring certain specified provisions such as confidentiality), it will record contract”. gation.

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