Guidelines for sellers in M&A deals

Selling your company or part of its business can be a cumbersome process if not carefully prepared for in advance. Sellers should be aware that a significant amount of work must be dedicated to the pre-sale process, especially to the due diligence investigation conducted on the target company

July 2010 - From the Print Edition

The aspects summarized below may guide you in organizing such process in a manner that facilitates the negotiation of a sale-purchase agreement and increases the likelihood of a successful and timely transaction.

Seller’s due diligence

Ideally, a seller’s due diligence investigation should be performed on the target company before the commencement of the buyer’s formal inquiries. This gives you the opportunity to identify issues of concern before the buyer finds them and also the chance to remedy some of them early on in the process. Such due diligence can serve a preventive role for the health of your transaction and may reduce the buyer’s negotiating power. Generally, the findings made by the buyer during the due diligence investigation may lead to price renegotiations and/or requests for specific indemnities or, depending on their gravity, may give the buyer a reason to walk away from the deal.

Memorandum of Understanding/Term Sheet. Non Disclosure Agreement

Once you reach an agreement in principle with the buyer (usually on a non-binding basis, by signing a Memorandum of Understanding or a Term Sheet), you are expected to allow the buyer and its advisors to commence the due diligence investigation on the target company. To such purpose, the buyer should sign a non disclosure agreement with regard to the confidentiality of data to be disclosed to the buyer and its advisors during the due diligence investigation.

Data Room

The buyer expects you to organize a data room where relevant documents and information regarding the target company (and its group, if applicable) are made available for review. In order to reduce the disruptive effect of the due diligence process on the company’s day-to-day operations, you may wish to form a due diligence team, which should be coordinated by a person with a good overview of the target company and its business. Nowadays, virtual data rooms are more often put in place by sellers, especially in M&A deals where several bidders perform investigations on the target company. In addition to being accessible to all bidders’ teams 24/7 over the allowed period, a properly organized virtual data room helps the buyer to assess the target company more accurately and in a timely manner. Practice shows that better information closes more deals at higher prices.

Buyer’s due diligence

During the buyer’s due diligence, the buyer’s advisors will present you with a detailed questionnaire with a view toward obtaining as much information as possible about the target company and its business. The buyer normally has the opportunity to ask for further information or clarification and, in certain instances, you may be requested by the buyer to organize management presentations.
It is essential that all answers and documents supplied in response to the buyer’s questionnaire are reviewed by your advisors and are properly indexed before being delivered to the buyer’s advisors. Such documents and information are vital, from an evidentiary perspective, with regard to all aspects regarding the target company which are deemed to be disclosed by the seller to the buyer prior to the signing of the sale-purchase agreement.

Negotiation of the sale purchase agreement

The draft of the sale-purchase agreement, usually prepared by the buyer, reflects the commercial terms agreed upon with you and also addresses the major issues or risks identified during the due diligence process. Following the review of such draft sale-purchase agreement, you should assess, together with your advisors, to what extent the risk allocation proposed by the buyer is commercially acceptable. As a general principle, the risks should be allocated to the parties best able to manage them. The main purpose of negotiating the sale-purchase agreement is to reach a fair and balanced risk allocation between the parties.
You will be required to give certain warranties in the sale-purchase agreement with regard to the current condition of the target company, its business and liabilities. You must ensure that all warranties are accurate; otherwise a breach of warranty may entitle the buyer to claim damages.

Disclosure Letter

The Disclosure Letter is a critical document since it should contain all aspects which would, or might, give rise to a breach of warranty. You should carefully conduct the disclosure exercise since, by disclosing certain aspects to the buyer, you will pass on to the buyer the risk associated with such aspects.
Needless to say, the assistance of advisors could alleviate the burden you face while putting the above guidelines into action.

Ancuta Delia Leach
Partner
Wolf Theiss si Asociatii SCA
Str. Gheorghe Polizu No. 58-60
Floor 13, Sector 1, Bucharest
Tel: +40 21 308 81 00
Fax: +40 21 308 81 25
www.wolftheiss.com