Top 5 sales side Mistakes in M&A transactions

Best alternative to a negotiated agreement (BATNA) is a tremendous tool for the seller when they find themselves having to take some tough decisions on key issues

“Mergers and Acquisitions” (M&A) is a complex phenomenon involving several steps, stakeholders and challenges and if not properly planned and implemented, it can lead to an adverse outcome for the parties involved, including abortion of the M&A transaction itself. In this article, I seek to set out the five commonly made mistakes by sellers in M&A transactions.

1. Bringing specialised M&A advisers too late

One of the most common errors which the sell side often falls into is commencing discussions with the potential buyer and agreeing on broad commercial terms, including structuring and timelines, and then memorialising it into a term sheet without seeking advice from specialised M&A advisors. The biggest downside of this is that once M&A advisors are introduced into the picture and they question the viability of the terms pre-agreed between the principals from a legal or tax standpoint (or even from what is “market”), it leads to erosion of trust between the principals.

2. Poorly crafted term sheet

Another mistake often committed is that the term sheet is sought to be made either too long-winded or too short, or the entire term sheet is made binding. The optimal approach is for the term sheet to only reflect the broad heads of terms which the parties have agreed, at a very high-level. Term sheet is not the stage to get into minutiae, as that will completely stymie the momentum which the principals have built. The detailing should be left for the definitive agreements.

Also, a term sheet should ordinarily be “non-binding” given that the discussions are still very preliminary and high-level stage. Only terms like confidentiality (so that the seller's information which it shares with the buyer during due diligence or otherwise is well protected) and governing law and dispute resolution mechanism (to give teeth to the enforcement of breach of confidentiality provision) should be binding in nature.

The buyer would also ordinarily expect an exclusivity period during which it would want the seller to negotiate exclusively with the buyer. This is also ordinarily a binding provision. The sell-side should take special care and not concede to a very long exclusivity period to the buyer.

3. Inefficiently running “due diligence”

Some of the common mistakes committed by the sell side is not having a well-populated virtual data room in place, not identifying the people who will be in charge of responding to buyer’s queries or not doing any homework on its company to “dress up the bride” or missing the opportunity to carry out a vendor due diligence.

It is critical to have a virtual data room organised, where one can easily keep a track of the information requested for by the buyer and information shared by the seller, and a record of who has accessed that.

In an auction process or where the seller has a “hot” asset and has multiple buyers interested in it, it is highly recommended for the sell-side to get a vendor due diligence exercise carried out and then share the report with the potential buyers rather than allowing multiple buyers to do full blown due diligence, at the same point of time, which will result in consuming management bandwidth in a substantial way.

Even in non-auction deals or deals where there is only one buyer in the fray, before exposing the target company’s data, information and condition to the potential buyer, the seller must do some elementary due diligence and homework and identify issues and non-compliances to try and address them beforehand. This minimises ground for a buyer to take a position that the company is overvalued and should be valued at a lower price given non-compliances and issues identified in a diligence.

4. Not having a disclosure letter/scheduled in advance

A disclosure letter/schedule is meant to qualify the representations and warranties which the buyer seeks in the transaction document. Preparation for a disclosure letter is often seriously undermined by the sell side and is taken up at the fag-end of the deal when the transaction documents are nearly final. Unfortunately, it is too late in the day and the sell side will be rushed and this can often lead to the sell side cobbling together a disclosure letter which is neither comprehensive nor accurate, and thus, seriously weakening their “shield”. It is vital that the sell side get this exercise started as early as possible in the deal process.

5. BATNA

Best alternative to a negotiated agreement (BATNA) is a tremendous tool for the seller when they find themselves having to take some tough decisions on key issues. In many instances, the sellers commonly lose sight of what their BATNA should be if the deal falls through. Sometimes the buyer may play hardball on numerous issues and the seller should always juxtapose those issues against any alternate position it can take and assess how it is placed. For instance, let us consider a scenario where the seller gets an offer from a buyer for USD 100 million which will be paid in three tranches. Whereas, it also has an offer from another buyer for USD 80 million which will be played in one tranche. The seller must then assess whether it is better off in receiving the entire purchase price in one shot rather than taking on the uncertainty of non-payment of some part of the purchase price in the future if certain deal conditions are not met.

Conclusion

While there is no one-size-fits-all approach for the sell side to take care of issues which may arise in any M&A transaction, the five areas discussed above are the most common aspects where sell side can trip up and end up with a suboptimal M&A transaction (or worse still, no deal whatsoever) and thus, lose a great opportunity. If these areas are pre-empted and well taken care of, the sell side will have taken a very positive step towards ensuring that they have covered most bases to pull off a successful M&A transaction.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.