M&A Essentials: A Practical Guide for Buyers, Sellers and Advisors -

Mergers and acquisitions (M&A) are rarely limited to the negotiation and signing of a share purchase agreement. An M&A transaction is a multi-stage process involving the preparation of the target company for a potential sale, preliminary negotiations between the parties, due diligence, valuation and purchase price discussions, the allocation of risks between buyer and seller, negotiation of the transaction documents, and ultimately signing and closing.

Understanding how these stages interact is important for both buyers and sellers. Decisions taken at an early stage of the transaction may directly affect the purchase price, the contractual protections requested by the buyer and, in some cases, whether the transaction can be successfully completed.

Harvey Arasan’s M&A Essentials: A Practical Guide for Buyers, Sellers and Advisors provides a practical overview of the principal stages, documents and mechanisms commonly encountered in an M&A transaction.

What Are the Main Stages of an M&A Transaction?

Although the structure of each transaction depends on the target company, the parties and the industry concerned, an M&A process will generally involve a number of identifiable stages.

For a seller, preparation may begin well before a potential buyer is given access to information about the company. The shareholders must first determine the scope of the proposed sale, including whether all or only part of their shares will be transferred. Where existing shareholders intend to retain an interest in the company following the transaction, the parties may also need to negotiate their future relationship through a shareholders’ agreement.

The seller may also conduct a vendor due diligence exercise before approaching potential buyers. Identifying issues relating to contracts, employees, licences, intellectual property, corporate records or other areas at an early stage gives the seller an opportunity to address potential risks before they become issues during negotiations.

Depending on the structure of the sale process, an information memorandum may then be prepared to introduce the target company, its business and its financial and operational characteristics to potential buyers.

Preliminary discussions between the parties may lead to a letter of intent (LOI) or term sheet, followed by the buyer’s due diligence review, negotiation of the transaction documents, signing, satisfaction of any conditions precedent and closing.

Why Is Due Diligence Important in M&A?

Due diligence is one of the central stages of an M&A transaction.

From the buyer’s perspective, due diligence provides an opportunity to examine the target company before completing the acquisition and to identify legal, financial, tax, operational and other risks associated with the business.

The scope of the review will depend on the characteristics of the target company and the transaction. Legal due diligence may cover, among other matters, the target’s corporate structure, material contracts, employment relationships, licences and regulatory matters, intellectual property rights, real estate and ongoing or potential disputes.

The findings of due diligence are not relevant only to the decision of whether to proceed with the acquisition. They may also influence the purchase price, transaction structure and contractual protections requested by the buyer.

A risk identified during due diligence may, for example, result in a specific indemnity, a condition that must be satisfied before closing or a request for additional representations and warranties from the seller.

For a more detailed overview of the scope and key areas of a legal due diligence review, see our article “Key Elements of Legal Due Diligence”.

What Are the Key Documents in an M&A Transaction?

An M&A transaction typically involves several documents, each serving a different purpose at a particular stage of the process.

A Non-Disclosure Agreement (NDA) may be entered into before commercially sensitive information about the target company is disclosed.

A Letter of Intent (LOI) or term sheet may then set out the principal commercial understanding between the parties. Although an LOI is often largely non-binding, certain provisions — particularly confidentiality, exclusivity and costs — may be intended to create binding obligations.

The principal transaction document in a share acquisition is generally the Share Purchase Agreement (SPA). The SPA sets out the terms on which the shares will be transferred and regulates matters including the purchase price, conditions precedent, representations and warranties, indemnification mechanisms, interim-period obligations and closing.

Where the seller or other shareholders will remain shareholders following completion, a Shareholders’ Agreement (SHA) may also be required to regulate the parties’ continuing relationship and the governance of the company.

How Is the Purchase Price Determined and Protected?

Determining the value of the target company is a commercial and financial exercise, but the manner in which the agreed value is translated into the purchase price is also an important part of the transaction documentation.

The parties may agree on different mechanisms for determining or adjusting the final purchase price. Depending on the transaction, the purchase price may be affected by matters such as debt, cash, working capital or the financial position of the company at a specified date.

The parties may also need to determine whether a locked-box mechanism or completion accounts approach is more appropriate for the transaction.

In some transactions, part of the consideration may depend on the target company’s future performance through an earn-out mechanism. Such mechanisms can help bridge differences between the buyer’s and seller’s expectations regarding valuation, but they require careful drafting of the relevant performance criteria and calculation methodology.

The appropriate mechanism ultimately depends on the commercial agreement between the parties and the characteristics of the target business.

What Happens Between Signing and Closing?

Signing the SPA does not necessarily mean that the transaction is immediately completed.

Certain matters may need to be resolved before the shares can be transferred. These are commonly addressed through conditions precedent.

Conditions precedent may include operational matters, such as obtaining missing licences or settling certain liabilities, as well as legal or regulatory requirements.

For example, material contracts of the target company may contain change of control provisions allowing the counterparty to terminate the agreement following a change in ownership. Where such contracts are important to the business, the buyer may require the relevant counterparty’s consent before closing.

Transactions in regulated industries may also require approval from the relevant regulatory authorities. Depending on the nature and size of the transaction, competition law clearance may also be required.

The period between signing and closing therefore requires careful management to ensure that the agreed conditions are satisfied and that the target company continues to operate in accordance with the terms agreed between the parties.

How Are Risks Allocated Between the Buyer and the Seller?

One of the principal functions of an SPA is to allocate transaction risks between the parties.

The seller will typically provide representations and warranties regarding the target company. These statements may concern matters such as the company’s corporate status, financial information, contracts, employees, assets, intellectual property, compliance and litigation.

The disclosure process allows the seller to identify exceptions to those representations and warranties and provide the buyer with relevant information.

Where a particular risk has already been identified, the parties may agree on a specific indemnity rather than relying solely on general representations and warranties.

The SPA may also contain limitations on the seller’s liability, including financial thresholds, caps and time limits for bringing claims.

Negotiating these provisions requires a balance between the buyer’s need for protection against risks relating to the period before the acquisition and the seller’s need for certainty regarding its potential liability after closing.

What Should Buyers and Sellers Consider During an M&A Process?

An M&A transaction involves legal, financial and commercial considerations that are closely connected.

For sellers, preparation can be particularly important. Identifying potential issues before the buyer’s due diligence begins, organising the data room properly and ensuring that information provided to potential buyers is accurate can reduce uncertainty during negotiations.

For buyers, the due diligence process should focus not merely on identifying issues but on understanding how those issues may affect the value, structure and contractual terms of the transaction.

For both parties, maintaining a clear distinction between genuinely material risks and issues that have limited practical significance can help negotiations remain focused and facilitate an efficient transaction process.