Examples of deal breakers in contract negotiations for company purchase agreements
In M&A practice, agreement is usually reached on the following topics during the negotiation of the sales and purchase agreement (SPA). In general, a good and detailed Letter of Intent (LoI) simplifies and accelerates the negotiation of the SPA. Professional preparation of the seller for the due diligence and good preparation of the due diligence documents also facilitate the contract negotiations: the buyer does not find any significant things ("skeletons in the closet", deal breakers) in the course of the due diligence to reduce the purchase price or to change the transaction structure.
Typical examples of deal breakers in company purchase agreements are (if the letter of intent was formulated in detail and the due diligence did not reveal any significant new findings - otherwise you will find many more deal breakers):
- Share of purchase price immediately and share of earn-out as well as the earn-out regulations
- Warranty catalogue (buyer wants extensive warranties, seller wants to enter into as few warranties as possible)
- Extent of the seller's liability in the sale of the company (knowledge of the seller of things, allowances, maximum amount for liability, limitation of liability, ...)
- Adjustment of the purchase price (definition of "financial liabilities", the item "cash", provisions, working capital, etc.). The seller prefers the locked-box model, the buyer will insist on the cash free/debt free rule and will want to define as many items as possible in order to reduce the purchase price.
- Competition clauses to protect the buyer against the formation of a new company with the same business purpos
- MAC clause (Material Adverse Change clause): We cover the background to the MAC clause in a separate article
- Escrow Account (The buyer will aim to allocate the highest possible amount of the purchase price to the Escrow Account)
- Costs and taxes (seller expects buyer to pay notary fees etc.; buyer tries to negotiate this aspect; costs for own advisors are usually borne by each side)
- Withdrawal clauses for buyer (frequent)/seller (very rare)
- ….
Of course, in exceptional cases it can happen that in the sale of a company the buyer is accommodating towards the seller in contract negotiations, this usually happens in the following cases:
- Purchase price significantly above market prices ("strategic purchase price")
- Many potential buyers are in competition in a bidding process and therefore accept a seller-friendly company purchase agreement
KP TECH Corporate Finance Beratung, Munich, Frankfurt/Main, Berlin, Duesseldorf
As an owner-managed and independent management consultancy, we specialise in M&A and corporate finance consulting. Our clients benefit from more than 20 years of experience in international M&A and corporate finance consulting. The focal points of our consulting are the topics: Company sale, company acquisition, company valuation, company succession, private equity consulting.
