Negotiating an M&A term sheet in ten questions
Following preliminary discussions with a view to selling your company, a potential buyer suggests that you negotiate on the basis of a document presenting the major characteristics of the operation being considered. This document is known as a term sheet.
It plays a role before the finalisation of audits and the negotiation of a detailed sales contract, and is essential to help you defend your interests during the sale under consideration, as you can use it to negotiate key elements of the operation with the potential buyer.
The following ten questions will require your attention:
Does the offered price meet your expectations?
What is the proposed price? Is the price fixed or can it be adjusted? In this case, what are the adjustment variables? What is the nature of the remuneration you will receive (cash and/or shares)? How will the price be financed (own resources and/or loan)?
What are the payment and price adjustment mechanisms?
If the price depends on certain financial aggregates (most often, net debt), a provisional price will be paid to you at the time of sale, on the basis of the estimated valuation of these aggregates.
This price will be adjusted when the real level of such aggregates at the time of sale will have been jointly determined by both the buyer and yourself.
Is there a price complement?
A sometimes significant price complement can be paid to you depending on the performance of the company after the sale.
Pay attention to the definition and the measurement of performance criteria, as well as the potential influence of the buyer on these criteria post-sale.
What happens to dilutive instruments (stock-options, BSPCE, BSA, etc.)?
Anticipate the consequences of the sale on the instruments giving access to capital, in particular the continuation of existing plans or the exercise of securities at the time of sale.
The mechanism retained will depend on the terms of the plans and the taxation applicable to bearers.
Is the potential buyer asking for exclusivity?
The buyer generally wishes to enjoy a period of exclusivity during which you will not be able to enter discussions with other candidates.
This exclusivity is however sometimes only granted at a later stage, after holding a competitive process to increase the bidding price between several potential buyers.
In any event, exclusivity must be properly governed and limited in time.
What are the consequences on employees/key staff members?
If the buyer wants to maintain or review the employment conditions of certain people (e.g. non-competition clause), think about discussing this as soon as you start negotiating the term sheet.
The buyer may offer a profit-sharing scheme (as a bonus or management package) to encourage keeping on key employee positions.
What are the conditions for finalising the sale?
The sale of the company can be subject to legal conditions (in particular if it requires the approval of competition authorities).
The buyer can also keep open the possibility of not finalising the sale if certain conditions are not met, or if unfavourable events come to pass. For instance, the buyer can condition the purchase to obtaining bank financing or receiving a satisfactory audit report.
To secure the sale, your objective will therefore be to confine these suspensive conditions as far as possible, and to identify those that may not be possible.
What are the buyer’s compensation mechanisms?
The buyer will look to obtain compensation for damages that may occur after the sale but that may result from your management of the company up until the sale.
You will most often be required to agree to declarations and guarantees to the benefit of the buyer (on the ownership of shares, the company’s business, the lack of disputes, the respect of tax and employment regulations, etc.). If any of these declarations is incorrect, you will be required to pay compensation to the buyer.
It is therefore in your interest to limit this obligation to compensate the buyer, as far as possible as regards scope, amounts and duration.
To guard against a potential risk of non-payment of compensation, the buyer will generally ask for a guarantee, which may take the form of holding back part of the purchase price (in which case the price effectively paid on the date of the sale is reduced by the amount held back) or a bank security (payable by you).
Where several buyers are involved in the acquisition, the compensation payable to of each buyer to must be discussed.
What timeline are we talking about?
A sale process requires a significant amount of work by the selling company, and uses many resources (e.g. organisation and monitoring the audit, negotiating documentation). It is therefore essential to set yourself a realistic timetable that is sufficiently well defined. At the very least, the term sheet must indicate that it will lapse automatically if the final documentation is not signed within a certain time frame.
What about the level of commitment?
Depending on whether the term sheet is binding or non-binding, the parties will be more or less committed to conclude the operation.
The buyer will generally prefer a non-binding document, which can nevertheless be backed by a firm offer (with conditions precedent) once the audit process is complete, but before drafting the final documentation.
Please note that, in all cases (even if the term sheet is non-binding), the parties are required to negotiate in good faith and may be held liable in the event of wrongful termination of negotiations.