In this AlphaTakes video, Matt Storms discusses the most common types of deal structures for a company sale transaction.
Here are the key takeaways from this video:
A common misperception is that all Confidential Disclosure and Nondisclosure Agreements (NDAs) are virtually the same. In other words, many people think that it doesn’t matter whether an NDA is for a vendor, customer, employee, strategic, or potential sale transaction—a standard NDA should be sufficient. The truth is, they are and should be different. This is especially true in the company sale context.
Here are some ways that company sale NDAs can be different:
The description of what constitutes confidential information in typical NDAs does not include a number of things that a seller often wants kept confidential in the sale context—most notably, the fact that the seller is considering selling the business or that the buyer and the seller are interested in a sale transaction.
A general use restriction seen in “standard” NDAs is often insufficient as a limitation on use of confidential information shared in the company sale context. Moreover, if the buyer is in private equity or is another type of financial sponsor, a limitation on using the confidential information only in connection with the consideration of a potential acquisition of the seller may not be adequate. It often does not limit the disclosure of confidential information to other potential buyers as part of a “clubbing” deal, which sometimes is counter to the seller’s desire to create competition among suitors.
Many NDAs typically restrict disclosure of information by the recipient to those within the recipient’s organization who “need to know” for the stated purpose. Often, in the company sale context, buyers need to also share that information with financing sources, investment bankers, transaction consultants, lawyers, and others.
While it is uncommon to see restrictions on solicitation of a party’s employees and customers in the typical NDA, it is more common to see the matter covered in a company sale NDA as those relationships are more vulnerable in the sale context, especially if the employees and customers know that the seller is interested in selling.
If the buyer is a competitor, provisions and processes should be included that address antitrust concerns.
It is somewhat common to see an individual within the seller’s organization designated as a point person for whom the buyer must work through to obtain confidential information. The intentional procedural bottleneck is designed to ensure that relevant people within the seller’s organization are appropriately briefed, that certain people within the seller’s organization are not contacted by the buyer, and to some extent, keep track of the confidential information that is disclosed.
A common issue in many commercial transactions is whose form NDA should be used. In the company sale context, however, use of the seller’s form of NDA is the norm. Also, it is more common to see the NDA in the form of a letter, countersigned by the potential buyer, rather than the standard form of two-party agreement.
Because of some of the unique issues that arise in company sale transactions, sellers should craft the form of NDA they use with those unique issues in mind and not rely on forms or templates used in other contexts.
Executives who have not led a sale or merger of a company before are often caught off-guard by how much work goes into due diligence. For many who are successful, the building of the business crescendos and culminates in a sale. The term sheet is signed, you smell the money, and perhaps even book your post-closing vacation, but you may not realize that you’ve just signed up to run a muddy obstacle course race while also running your business. Your next several weeks, maybe months, will be consumed by responding to page after page of information and document requests from your potential acquirer. You will be questioned about all aspects of the business. Because you want to keep the pending transaction under the radar and limit the impact on your business if the deal does not go through, you assemble the smallest employee team possible to help you with the transaction. You may find yourself requesting files and summaries from various employees in the guise of another business need, copying after hours, and arranging off-site meetings with the acquiror.
To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence. Continue reading →