Important considerations in M&A Transactions: How to Plan

Confidentiality and Exclusivity Agreements

The best place to start with any transaction is with a confidentiality and exclusivity agreement. These deal with a variety of early concerns that a buyer might have.

A confidentiality and exclusivity agreement will:

• Ensure that all parties involved keep matters relating to the transaction as well as the transaction itself confidential, without it there is no obligation for parties to do this.
• Allow important information to be disclosed to the purchaser, without there being a risk of this being disclosed to third parties.
• Reduce the risk of wasted time and money, typically these agreements set out an exclusivity period, in which time the seller is only entitled to discuss any sale or investment with the buyer. This timescale helps to focus everyone towards a completion date and encourages the seller to commit.

Heads of Terms

Heads of terms outline the basic structure of the deal. Terms agreed in the heads of terms are not binding and can be changed down the line. However, you will reduce time and costs later on in the transaction if you are careful over the preparation of the heads of terms as it can cut down the drafting time.

Heads of terms can also serve to flush out potential problems down the line and allows parties to iron out any disagreements.

The heads will include:

• The purchase price: the purchase price agreed in the heads will be subject to due diligence and the purchase agreement.
• The timeframe for completion of the transaction.
• Targets and earn-out terms: If there are any earn-out or deferred consideration provisions, these should be outlined in the heads of terms. Often there will be requirements for key members of the business to remain employed to ensure business continuity.
• Shares: whether the sellers will retain any shares as part of the agreement, as well as the requirements for holding and transferring shares.

Finance requirements: if the purchaser requires bank approval then the requirements of the bank may be outlined within the heads of terms and any existing loans outstanding for the company may need to be paid down on completion.