Pub­li­ca­tions

The Art of the Deal Sheet: 10 Key Nego­ti­a­tion Points

Deal sheets, terms sheets, heads of agree­ments, let­ters of intent, mem­o­ran­dums of under­stand­ing, deal mem­os – what­ev­er you call them, these typ­i­cal­ly short and sim­ple doc­u­ments play a vital role in the direc­tion and out­come of a cor­po­rate transaction.

From our expe­ri­ence, when nego­ti­at­ing a poten­tial deal and putting togeth­er a terms sheet for the trans­ac­tion, the fol­low­ing 10 items should help to ensure a smoother and more robust process dur­ing the sale negotiations.

1. Struc­ture

All too often the par­ties to a trans­ac­tion get caught up in the excite­ment of clos­ing a deal that they over­look key struc­tur­ing decisions.Whether a trans­ac­tion is struc­tured as an asset sale or share sale can have sig­nif­i­cant tax and risk impli­ca­tions. The pro­posed pur­chase price should take into account the poten­tial tax lia­bil­i­ties and oth­er risks aris­ing out of a par­tic­u­lar struc­ture, so it is impor­tant to link the pro­posed price to the deal struc­ture (and seek appro­pri­ate tax advice). 

2. Price

How and when the pur­chase price is to be paid, whether it com­pris­es cash and/​or shares, whether a deposit is required, whether there is an earn-out involved (and the para­me­ters for cal­cu­lat­ing it) and what adjust­ments (if any) there will be to the pur­chase price (eg for out­stand­ing lia­bil­i­ties of the busi­ness and accrued employ­ee enti­tle­ments) need to be care­ful­ly con­sid­ered and artic­u­lat­ed in the terms sheet.

3. Due diligence

The extent of any finan­cial, legal or oth­er due dili­gence and the process for it should also be agreed ear­ly, includ­ing what cat­e­gories of doc­u­ments are to be dis­closed, how long infor­ma­tion will be avail­able to be accessed and what staff will be avail­able to respond to ques­tions raised dur­ing the due dili­gence process. There is no one-size-fits-all approach to due dili­gence – the size and struc­ture of a pro­posed trans­ac­tion and the tar­get busi­ness will deter­mine what is appro­pri­ate in the circumstances. 

4. War­ranties

It is not uncom­mon to find par­ties address this impor­tant point with a throw-away line that the doc­u­men­ta­tion will include war­ranties of the kind usu­al­ly found in a trans­ac­tion such as this’. Unfor­tu­nate­ly this may not ade­quate­ly pro­tect your inter­ests and is open to inter­pre­ta­tion (and cost­ly dis­agree­ment) when it comes time to pre­pare the doc­u­men­ta­tion. If there is a spe­cif­ic mat­ter or fac­tu­al posi­tion that you need cer­tain­ty on, make it clear that a war­ran­ty or indem­ni­ty sup­port­ing this posi­tion will need to be provided.

5. Restraints

Restraints and non-com­pete pro­vi­sions often play a major role in pro­tect­ing the val­ue of a busi­ness. An astute pur­chas­er will want the terms sheet to express­ly state the extent, loca­tion and dura­tion of any restraints / non-com­pete pro­vi­sions that their offer is based on, whilst a sell­er should also want cer­tain­ty on this as the price they are will­ing to accept for the pro­posed trans­ac­tion may be affect­ed by the restric­tions they will be sub­ject to fol­low­ing completion.

6. Intel­lec­tu­al property

Iden­ti­fy­ing pre­cise­ly what intel­lec­tu­al prop­er­ty forms part of a pro­posed trans­ac­tion and where it lies is a vital dis­cus­sion point. If a tech­nol­o­gy plat­form or com­put­er soft­ware is key to the via­bil­i­ty and/​or val­ue of a busi­ness, ensur­ing the sell­er valid­ly holds the intel­lec­tu­al prop­er­ty or has robust licence agree­ments in place ensures its val­ue to the busi­ness is able to be pro­tect­ed and transferred. 

7. Employ­ees

Peo­ple are often the most valu­able asset of a busi­ness, par­tic­u­lar­ly ser­vice-based busi­ness­es. Depend­ing on which side of the trans­ac­tion you sit, you may need to spec­i­fy in the terms sheet which employ­ees (if any) are vital to the busi­ness and how the par­ties plan to keep these employ­ees com­mit­ted to the busi­ness mov­ing forward. 

8. Con­di­tions prece­dent / post-com­ple­tion obligations

If there are cer­tain things which need to occur before the trans­ac­tion can com­plete these should be clear­ly expressed in the terms sheet. For exam­ple, you might need to obtain the con­sent of a third par­ty to the trans­fer of a key con­tract or obtain reg­u­la­to­ry approvals.The amount of work­ing cap­i­tal to be left in the busi­ness and pre-com­ple­tion div­i­dends from the tar­get com­pa­ny to the sell­er (com­mon areas of dis­putes) should also be dis­cussed. Sim­i­lar­ly, any post-com­ple­tion oblig­a­tions you wish to impose on the oth­er par­ty (such as any post-com­ple­tion adjust­ments and any tran­si­tion­al arrange­ments for inte­gra­tion) should also be includ­ed to avoid these poten­tial­ly becom­ing deal-break­ers’ when the trans­ac­tion doc­u­ments are being prepared.

9. Trans­ac­tion documents

Once the key terms are agreed, you should then turn your mind to the doc­u­men­ta­tion which will be required to effect the trans­ac­tion and who will be respon­si­ble for draft­ing these doc­u­ments. One all-encom­pass­ing agree­ment might seem like a log­i­cal choice, but it might be prefer­able to sep­a­rate ele­ments of the trans­ac­tion into dis­creet doc­u­ments for legal, account­ing or reg­is­tra­tion pur­pos­es. The par­ty prepar­ing the doc­u­ments tends to have greater con­trol over the direc­tion of the trans­ac­tion and is also often best placed to con­tain costs.

10. Bind­ing or non-binding

A crit­i­cal but often over­looked aspect of terms sheets is whether the par­ties intend for them to be legal­ly bind­ing. If a pro­posed trans­ac­tion is sub­ject to the par­ties enter­ing into for­mal legal doc­u­men­ta­tion, this must be clear in the terms sheet. If it is not, the par­ties may inad­ver­tent­ly com­mit them­selves to com­plet­ing the trans­ac­tion just by sign­ing the terms sheet. It is com­mon for only some parts of the terms sheet to be legal­ly bind­ing (eg con­fi­den­tial­i­ty and exclu­siv­i­ty) and the rest to be sub­ject to for­mal legal documentation.

By address­ing the above points dur­ing the ini­tial deal nego­ti­a­tions you should be able to save con­sid­er­able time, expense and aggra­va­tion over the course of the trans­ac­tion. The key deal terms may extend beyond the above 10 points, so you should always seek appro­pri­ate advice to ensure the terms sheet is tai­lored towards your spe­cif­ic needs.