18 June 2020

Doing the Deal - What might be different now?

As the deal market starts to pick up and buyers, sellers, investors and advisors engage in discussions for new deals, what might be different now in negotiating your M&A deal?

While it is difficult to make accurate predictions and much will be driven by bargaining position in each transaction (and to some extent what becomes “market”), I consider some of the differences that we might expect to see in deal documentation and deal terms (as opposed to differences in the early stages of M&A which I’ve considered previously).

  • MAC clauses and termination rights: this is worthy of consideration as separate topic in itself, but I would expect parties to spend more time setting out what events might lead to the ability to pull out of a transaction. Always a sensitive area as deal certainty is often uppermost in a sellers’ mind but I can only see this being much more scrutinised than ever.
  • Valuing the business: much of this will, as it usually does, from financial due diligence, and what is to be included in valuation? Many businesses may be sitting on large tax losses – will a vendor pay for those? If a business has some key customers, what value on their future business and spend? What is a realistic multiple to earnings to base a valuation on?
  • Bridging the value gap: developing the above, I would expect to see an increase in anti-embarrassment clauses being included and for a longer duration than previously. Earn-outs will most likely constitute a larger percentage of an overall consideration package, but more than ever will need really detailed and well thought out drafting to identify what will be the focus of the earn-out payout? Some buyers may also be keener to offer up deferred consideration to allow their own cash flow not to be overly affected when making a purchase. (Taking tax implications into account for all consideration models will be critical).
  • Key staff and management: many staff may have options and incentive plans that offer little if a valuation has dropped as a result of a downturn in business. Buyers will need to look at re-setting options or offering alternatives to incentivise staff during and after a deal process. Debate and argument about value of tax losses and paying for those?
  • Locked Box v Completion Accounts: most commentators expect that completion accounts with suitable adjustments (with ever more detailed accounting policies and exceptions) will become the norm, as it will prove to be too risky to both buyer and seller to rely on an historic balance sheet.
  • Escrow and guarantors: I would expect that there will also be a push for the use of escrow accounts if deferred consideration increases in particular but also for buyers to be confident that monies may be available if there is a claim (assuming that insurance isn’t used to cover that risk). Sellers may also be more alive to considering whether they should seek a guarantor for consideration and will look closely at the buying entity and perhaps even the buyer’s approach during the lockdown as to how they acted with other third parties on financial payments matters.
  • Warranties and Indemnities: I expect we will see a push for more items on an indemnity basis including specific COVID-19 protection for matters such as use of furlough and other government grants, and for employee claims in event of redundancy rounds. Insurance cover is also likely to considered more often as sellers may not be able to be as comfortable as previously that their business won’t have any issues. Closer examination of accounts warranties is almost certain.

In the short term, I believe we will see changes to the way a deal is negotiated and documented but that a transaction will still look and feel substantially the same as it has done. The one area of most change I would predict is more complexity in mechanism for calculating and paying consideration.

Stuart Hatcher is a Partner in our Corporate Group.

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