In this play, learn how to negotiate the share/asset purchase agreement and all its ancillary documents.
Immediately following due diligence or while due diligence completes, the parties start negotiating the share/asset purchase agreement and all its ancillary documents. This often includes a transitional service agreement (“TSA”), that is, if the document is in a sufficiently advanced state in drafting.
The attorneys of the seller would prepare the first draft of the transaction documentation, and with its (final) bid each bidder must hand in a first markup of such documentation.
The attorneys of both sides usually negotiate one or two further rounds via markups before the parties sit together to discuss and negotiate open topics.
Other than purchase price and the purchase price calculation mechanism, the most important negotiation topic are the representations, warranties, and indemnities. While the seller must guarantee the full, unrestricted, and unencumbered ownership in the shares to be divested, the warranties and representations are dependent on the negotiations between seller and buyer.
The seller shouldn’t accept a purchase price offer before knowing the representations, warranties, and indemnities the buyer would want to get in exchange.
In order to further control liabilities, sellers should always try to insert liability limitations into the liability sections, in particular, an overall financial cap.
Deal negotiation is the one area of deal-making which has the most significant impact on value and risk, yet it is the one part of M&A that often suffers the least amount of preparation, strategy and structure. Negotiation is an art, and to become a good negotiator, requires both talent and experience.
In larger organizations, M&A departments occasionally have special negotiators who come in at a particular point during the deal to discuss the issues and make decisions. More commonly, negotiation is seen as just another part of the M&A Manager’s (Deal Lead) responsibility, typically supported by senior decision-makers who will come in and negotiate the final stages of the deal.
The most experienced and successful managers are not necessarily the best negotiators. Fewer than 4% of managers reach win-win outcomes when put to the test . Some senior decision-makers do not have the time to absorb all the detail required in a negotiation. Another aspect of seniority and success is that it can lead to overconfidence, resulting in more unsuccessful deals. Therefore, make sure the negotiator is an expert, with trained and proven skills.
Executive sponsor, separation manager and deal team
Meeting Agenda, Whiteboard, Strategy Documents
Spend one day or more to prepare materials for a two hour play.
There are three choices: 1) Use dedicated negotiators 2) The M&A manager negotiates 3) The CEO or senior executive negotiates.
When dedicated negotiators are used, the question of efficiency arises. If they did not follow the deal from the start, do they understand all the subtle nuances that are necessary for the negotiation?
When M&A managers negotiate as well then they may not have the training and experience. This might be a concern to many executives who decide to step in themselves.
When executives negotiate the deal the issues, there are no further escalation points, nor are there options to ‘hot-swap’ them for someone else. Also, senior decision-makers usually come late into the process and are unaware of subtle nuances that have evolved earlier in their absence. Once senior executives take over, the negotiators are automatically downgraded to footmen, and they lose any ability to lead or influence negotiations afterwards.
A solution to these issues is to have a negotiation expert (usually from external corporate advisory) take care of the bargaining and let the owner make the strategic and ultimate decisions. Such experts need to be involved from the beginning of the project and attend all meetings with the other side to catch all the nuances and information that will make the difference during the bargaining process.
Successful negotiation starts with thorough preparation. Structure and strategy throughout the negotiation process is a must. This means having a pre-agreed strategy before each negotiation session.
There also needs to be a negotiation team. An ideal team consists of one negotiator and one observer. The observer assesses the counterpart, collects quotes and arguments and analyses their motivations and BATNA (Best Alternative To a Negotiated Agreement)- while the negotiator either listens actively or bargains. Every negotiator will have a natural preference in style.
A good negotiator will be able to adapt to the circumstances and guide the other side towards a collaborative style that allows the best outcome for both sides. The cyclical structure every negotiation should follow (before each negotiation session) as depicted below. Be aware of the typical negotiation mistakes:
Collect and document the outcomes from the negotiation session and assess status. This will considerably help prepare for the next session.