M&A deals come and go. Some successfully complete, while others fall over at varying stages. Failure to complete a deal, particularly once it has progressed to the final stages, can leave one or both deal sides feeling frustrated by the time and money lost.

This doesn’t have to be the case, and we often work with our clients around implementing mitigation strategies to limit the fallout of premature deal detonation.  These strategies include:

• ‍Running a competitive process: It’s always good to have options as a seller.  Not only does running a competitive process improve the chance of improved deal terms for a seller (including consideration), but it can also give a seller options, including potentially a Plan B buyer to step in and run with if negotiations with Plan A go awry.  Seirra Legal has collaborative relationships with a number of corporate advisory firms who are experienced in running these competitive processes, and we are happy to connect parties as appropriate to facilitate the best outcomes for our clients.‍
• Due diligence: This isn’t just for the buyer to do!  If you are the seller, you should seek assurances that the buyer has financial capacity to complete (assuming a cash deal).  For both sides, you should also understand early who the key decision makers of your counterparty are; what the approval process looks like for your counterparty; and what time and action hurdles need to be overcome for the deal to complete: the more time or actions required, the greater risk of failure to complete.
•  Identify the leverage: Understanding the key drivers for each party to undertake the deal and the landscape backdrop in which they operate, may also help you strategically navigate the deal to your timing and requirements, and avoid deal detonation.  For example, if one party has continuous disclosure obligations and the circumstances are such that the failure of an M&A deal would need to be disclosed to the relevant financial market, then this may apply reputational pressure on the disclosing entity to get the deal done.  As another example, if a counterparty has specific reporting obligations and deadlines, this could give you more certainty on the deal timeline and importance placed on deal completion by that counterparty.‍
• Term sheet, non-binding indicative offer (NBIO) or other similar document: This is the road map for the deal and having one agreed by the parties as an initial upfront step is often a quick way to identify deal makers and breakers.  It can help both sides work out relatively quickly (and usually cheaply) if there is a deal to be had or lost and the key terms important to each party.  While term sheets, NBIOs and other similar documents are often expressed to be non-binding from a legal perspective (except in relation to matters such as confidentiality and exclusivity), they can be a good way to get all parties on the same page and therefore reduce risk of a deal falling over at a later stage.  ‍
• Termination fee: While not very common in private M&A deals, it may be possible for a seller and buyer to agree on the payment of a non-refundable termination or break free as a binding provision in a term sheet or other relevant transaction document.  To improve the chance of agreement on this and reduce the risks of claims it is not enforceable, this termination or break fee should be a true and reasonable reflection of anticipated sunk costs.  Asking for a termination or break fee to be paid in certain circumstances where a deal falls over can also be a good gauge of the other party’s deal intentions and authenticity. ‍
• Escrow funds: For some deals, it may be appropriate to require any termination fee and/or part of the purchase price to be held in an escrow account for greater certainty of financial capacity and payment, including in the event of deal detonation.  Escrow arrangements do not need to be expensive or complicated.  Sierra Legal is happy to assist as escrow agent in appropriate transactions for its clients and including an escrow arrangement can be a seamless component of the deal.
• ‍Exclusivity period: Imposing standard ‘no shop, no talk’ provisions and the requirement to let the other side know of competitive approaches during the exclusivity period, help keep both sides committed and on task.  Similar to asking for a termination or break fee, the willingness of parties to agree to an exclusivity period and the length of that period can be good gauges of deal intentions (and vulnerability) and authenticity.‍
• Payment structure: While more common in smaller M&A deals, a seller could request that an upfront deposit be paid by the buyer, and which is only refundable in very limited circumstances.  This can obviously help motivate the buyer to complete the deal.  Similarly, staged payments of the purchase price (including earnouts) can be used to incentivise the seller to equally stay committed to the process and see it through to the end.    

Conclusion

Deal detonation and the sunk costs of lost time and money can often be avoided if some of these strategies are implemented early in the deal timeline. The team at Sierra Legal has extensive M&A experience with a variety of clients from differing industries and differing deal sizes.  Contact the team at Sierra Legal today to explore how we can support you with your M&A activity.

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