It is often said that pricing drives all deals, but never forget structure and terms. Pricing and structure are some of the most important, but not the only terms to watch out for:
- Usually, a deal is first written up in a term sheet, followed by some period of exclusivity during which the buyer and seller negotiate the key terms. How long will this last? Can either party maintain discussions with other parties, or is the seller or both buyer and seller negotiating exclusively with the other?
- Price can be defined in many ways.
- Is price specified and paid per share of seller stock, is it an aggregate amount for sellers’ asset(s), is it simply for the transaction
- Is the price denominated in cash, securities, or other property? Be specific.
- Is payment of the purchase price made at closing or at some later period of time?
- Is it conditional or guaranteed?
- What happens if the buyer fails to pay?
- What happens if the seller defaults on some covenant?
- Is there an “earnout” or other contingent payment upon the achievement of a milestone? Who controls the company during the earnout or contingent period during which the seller is still trying to prove the earnout?
- Is the buyer indemnified by the seller if the buyer discovers a patent or latent defect in the seller’s business after closing?
- Does the buyer hold back some amount of the purchase price as security for the indemnity, and if so, how much?
- Will a third party insure the seller’s representations and warranties?
- Will seller agree not to compete with buyer after the transaction, and not to solicit its employees, customers, suppliers or contractors?
- Who drafts the definitive agreement? Is it buyer or seller’s counsel?
- Who pays for the fees and expenses of the buying and selling parties? Who pays for the selling stockholders and buyer stockholders if they have expenses?
- If there is a staggered period between signing, closing, and payment of guaranteed or contingent purchase price, who controls the seller in that window, and when does the seller have to ask the buyer to consent to certain actions?
- Will seller founders, management or employees be required to join the buyer or stay with seller post-closing, and for how longer?
- What will be the employment terms for continuing employees of the business?
- Do seller employees need to get new hire and new equity packages?
These are only a small survey of the many terms that will need to get spelled out, ideally in the term sheet before seller goes exclusive with buyer.