M&A Transactions Are Hard
The M&A process can be unexpectedly difficult, particularly if you are buying or selling a company for the first time.
Everything starts out fine: Meetings filled with pleasantries and shared optimism. Negotiations around purchase price. A signed letter of intent. Due diligence requests.
And then the lawyers get involved.
Before you know it, you’re flipping through 100s of pages of purchase and sale agreements, and your deal seems to have devolved into prolonged negotiations around “reps”, “scrapes”, “tipping baskets”, and other mystical legal creatures.
When you finally make it to closing, you’re happy. BUT there may be a bit less goodwill between the parties, the legal bill is enormous, and you’re absolutely exhausted (and still have a long to-do list to actually integrate the businesses).
Better Term Sheets
There’s a better way. And it begins with better term sheets.
One of the reasons M&A transactions can be so hard is because term sheets often omit some of the most hotly negotiated terms of the deal. Sure, term sheets always include the purchase price, closing conditions, and a no-shop clause. But buyers and sellers often tend to “kick-the-can” on many other issues.
If you want your M&A transaction to go as smoothly as possible, the term sheet should cover all the major deal points.
Consider this: You wouldn’t hire someone to build a house unless you knew they were working from a detailed blueprint. Can you imagine the result if your builder’s approach was as follows?: “We’ll figure out the ceiling height later”. Or, “Maybe we’ll add another bathroom, we’ll see how it goes”. This isn’t going to end well, is it?
Think of your term sheet as the blueprint of your transaction. If you have a great blueprint, then the lawyers can simply follow that blueprint to efficiently “build” the purchase and sale agreements. If your blueprint is missing key details, don’t be surprised when the lawyers circle back again and again and again to confirm these details – a process that often includes spirited discussions about “what’s market”, and plenty of redlines.
To ensure you have a great blueprint for your transaction, involve your lawyer as early as possible in the M&A process.
The Atlassian M&A Term Sheet
Recently, software company Atlassian released the M&A term sheet it uses when it acquires companies. It’s unusual in that the term sheet (1) is relatively even handed (even seller-friendly), and (2) is very detailed.
Over the course of 20+ acquisitions, it seems Atlassian has learned that more detailed term sheets yield much better M&A transactions.
Here’s a link to Atlassian’s M&A term sheet in various formats: (PDF | Word | Google Docs).
And for the real law geeks out there…
Note how the Atlassian’s M&A term sheet includes a matrix outlining the indemnification terms. This feature alone could save more than a week of negotiations and revisions. See below:
|Type of Claim||Tipping Basket Applies?||Cap||Survival Period|
|Breach of General Rep||Yes||Seller’s pro rata share of Escrow Amount||15 months|
|Breach of Fundamental Rep / Other Indemnity||No||Seller’s pro rata share of Purchase Price||Later of (i) 6 years and (ii) 60 days after the expiration of the longest applicable statute of limitations (as it may be extended).|
|Breach of Covenant||No||Seller’s pro rata share of Purchase Price||15 months for covenants to be performed at or prior to Closing.
Covenants to be performed after Closing survive until fully performed, and any claims for breaches of those covenants will survive 15 months from full performance of those covenants.
|Fraud||No||Seller’s pro rata share of Purchase Price, except for any Seller who committed, participated in or had actual knowledge of fraud (“Bad Actor”). No limitation on the liability of any Bad Actor.||Later of (i) 6 years and (ii) 60 days after the expiration of the longest applicable statute of limitations (as it may be extended).|