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