Key Commercial Considerations in M&A transactions: A Buyer and Seller Guide

Engaging in a mergers and acquisition (M&A) transaction for your business can offer unique opportunities for growth, market expansion and diversification of clientele. However, these transactions are often complex and require careful consideration of the numerous legal, financial and commercial elements before engaging in detailed negotiations. This article focuses on the key commercial aspects that businesses should be aware of when engaging in an M&A deal, whether it be from a buyer or seller perspective.

Due diligence

Prospective buyers will want to carry out a degree of legal, financial and accounting due diligence on the target company’s commercial activities before negotiating and engaging in the formal transaction documents. The legal due diligence exercise involves the prospective buyer and its legal advisors carrying out an information gathering exercise to understand where the target’s business stands in a competitive landscape. The buyer will use this information to inform its decision about whether the proposed transaction is a sound commercial investment and to mitigate potential risks or liabilities.

Commercial due diligence, more specifically, will involve comprehensive and thorough reviews of the target’s documentation, which may include:

• Customer and supplier contracts – reviewing for change of control provisions which may trigger termination by either party, other potentially onerous termination rights and indemnity provisions
• Competition and regulatory compliance – assessing whether the transaction could lead to an anti-competitive outcome in the relevant market
• Anti-bribery matters – reviewing the target company’s existing anti-bribery / anti-slavery policies in place and assessing how applicable they are to the business
• Intellectual property rights – examining the target company’s registered and unregistered intellectual property assets including trademarks and copyrights, reviewing the relevant contracts to understand existing obligations and looking into any existing, previous or pending intellectual property disputes
• Information technology – evaluating the target company’s IT systems in place including hardware and software, identifying any potential IT risks including cyber threats and rights of access
• Data protection – reviewing the target company’s protocols and assessing its data protection regulatory compliance.

The due diligence task will also involve the wider commercial team including the Employment team to undertake a review of all employment policies including benefits and compensation and other employee relation documentation such as pension cover and the Real Estate team in order to understand what property is owned / leased or otherwise utilised by the target company.

Once the due diligence exercise is complete, the information will be summarised in a due diligence report which includes all of the findings from the investigation and provides the prospective buyer with an in-depth overview of the intricacies of the business, allowing them to make well-informed decisions about the target company and assess the commercial viability of the potential investment. It will also help to highlight risk areas, identifying which risks are manageable and which are more significant.

Risk allocation and indemnities

Both buyer and seller will need to think carefully when considering how the various risks (legal, financial and operational) will be allocated between the two parties; effective risk allocation and indemnity provisions will play a pivotal role in the M&A transaction. The risk allocation process will aim to ensure that the risks associated with the target company’s business are fairly distributed between the buyer and the seller, based on their respective bargaining power and the parties’ relative knowledge of the target’s business.

Often, the seller will be expected to provide certain warranties regarding the target company such as the condition of the business and how it operates in light of the due diligence findings. The buyer may also seek specific warranties that address more detailed commercial risks, such as the validity and enforceability of key contracts, and the potential impact of key customer or supplier disruptions. In the event of a breach of these warranties, the buyer may be entitled to seek indemnification or other remedies such as compensation. Indemnification provisions can assist to allocate responsibility for certain types of risks and liabilities. The buyer will likely ask the seller to indemnify for specific breaches of the warranties, such as liabilities relating to pre-transaction closing activities. The seller, in turn, will want the indemnities to be limited, either by time or by a capped amount.

Exclusivity agreements can also play a vital role for risk allocation in the M&A process; many buyers (especially larger ones such as private equity investors) seldom negotiate without one in place. If the seller agrees to exclusivity, it will not negotiate with other potential buyers for a set period of time. This allows the buyer to complete the due diligence task without risking the seller leveraging other offers to their advantage. These exclusivity agreements can form complex standalone agreements or relevant exclusivity clauses may be inserted into the main ‘Heads of Terms’ document exchanged between the parties. The time specified for exclusivity will usually be negotiated depending on the competition involved in the process and the level of detail required within the due diligence.

M&A transactions involve a wide range of commercial considerations from both buyer and seller perspectives. From the due diligence process to the risk allocation, each stage of the transaction requires careful analysis and structured negotiation to ensure risks are mitigated and both parties can derive maximum benefit. It is crucial to navigate the commercial legal aspects with consideration and diligence to ensure business interests are protected. If you would like further information please contact us.