Experienced M&A advisors arm themselves with relevant, timely market data to ensure they are finding and negotiating the best deal for their clients. This includes using M&A deal terms and post-closing claims data not just for informed negotiations but also smoother due diligence. The due diligence process, including preliminary due diligence (aka sell-side due diligence), is crucial for M&A advisors and their clients to drive maximum value and avoid transaction pitfalls for their M&A transactions.
A clear understanding of “what’s market” for deal terms can help M&A advisors ensure successful negotiations and efficient due diligence for their clients; it is easier to win the war when you can predict the battles. While there are many sources of information to support these endeavors, including regulatory developments and industry news, this article articulates how robust deal terms and claims data provides unique insights on market trends and post-closing issues that can impact how due diligence information is organized, prioritized, and presented to potential buyers. Knowledge of deal terms and claims data can provide a competitive advantage to M&A advisors and their clients alike.
Preliminary M&A Due Diligence
Prior to term sheets and negotiations with buyers, and even pitchbook development and bid solicitations, diligent M&A advisors begin by gathering the target company’s information and documents, ideally via a secure client portal or virtual data room. The seller’s advisors will then typically go through these materials before presenting them to third-parties. Bankers and lawyers will do this to educate themselves about the company so they can intelligently answer questions from potential buyers. These advisors will also want to be aware of and get ahead of any potential issues a selling company may have to mitigate the risk of any subsequent surprises. If issues are sufficiently problematic, a banker may even delay taking a company to market until they are resolved. It is also important that sell-side parties ensure the virtual data room is thoroughly populated and vetted prior to providing access to potential buyers.
This process is “pre-due diligence.” A buyer’s review of the due diligence information drives their behavior when negotiating terms like seller representations and warranties and indemnification terms. While initial due diligence requests of target companies are broad and somewhat predictable, experienced M&A advisors and deal counsel fortified with deal terms and claims data can better anticipate and prepare for the buyer’s specific follow ups, deep dives, and areas of concern that come out of their due diligence review. M&A market trends can affect the level of due diligence that the buyer will perform and where buyers will seek further details. A due diligence virtual data room that is well-organized and comprehensive makes (or breaks) the buyer’s first impression of the seller’s reliability, sophistication, and compliance. As outlined below, knowledge of deal terms and claims data helps accomplish just that.
Deal Terms and Claims Data Improves a Successful M&A Deal Outcome
Think of deal terms and claims data analysis as an early-warning system in preparation for a sale. For example, deal-terms data can indicate the rising use of a particular deal term or buyer- or seller-favorable trend, such as earnouts or indemnification claims. Getting ahead of these matters during the sell-side due diligence phase allows advisors to address these potential issues earlier in the deal process, which helps ensure a “clean” deal and reduces negotiation friction.
1. Prepare sellers for buyer due diligence using deal-terms data
M&A advisors should scrutinize sellers just as carefully as their potential acquirers will. Analyzing deal-terms data, especially market-driven, buyer-favorable trends, to predict potential buyer-identified matters can reveal strengths and weaknesses in a client’s business. It can also indicate which areas of the seller’s business a buyer is most likely to focus on, which will allow an advisor to ensure that the seller proactively gets ahead of those issues by ensuring the data room has especially robust information related to those topics. M&A advisors can then also quickly determine how businesses of similar sizes and in the same industries as their clients respond to deal terms such as representations and warranties, earnouts, and escrows. Further, market trends, as opposed to the specific circumstances of the target, may drive deal decisions. For example, potentially volatile aspects of the seller’s industry—such as risks of geopolitical disruption or common environmental issues—may motivate a buyer to push for a larger escrow or additional special escrows regardless of how careful and compliant the target company in question is.
2. Use deal terms data to help assess ideal buyers
Deal terms data can also be used for developing a short list of potential acquirer types. With deal-terms data, M&A advisors can review the characteristics of a potential buyer, such as whether they are a publicly or privately held company and use this information to help decide on buyer types and investment tiers to pursue. Knowing which types of buyers prefer buyer-favorable 10b-5 seller representations (i.e., the seller did not make any material misstatements or omissions during due diligence and negotiations), minimal materiality qualifiers in the seller representations (or materiality scrapes in the indemnification mechanics), or certain closing conditions can be helpful in deciding which potential buyers to approach and ultimately selecting the best bid.
3. Claims data helps M&A advisors and their clients plan beyond the closing
In addition to deal terms data, understanding how post-closing matters like purchase price adjustments (PPAs, aka working capital adjustments), earnouts, and indemnification claims play out can help deal parties assess the risks and perceived value of competing bids and anticipate and even avoid post-closing claims, which ultimately maximizes the value of the M&A exit for the sellers. For example, PPAs are present on nearly every M&A transaction, and more than 90% result in a post-closing adjustment, often payable to buyers, but sellers can recover significant value if certain review and dispute rights are included in the M&A agreement.
4. Develop pitchbooks grounded in deal-terms data
M&A advisors can use deal-terms information in deciding how to put together the pitchbook. In anticipation of engaging potential buyers, M&A advisors can use deal terms and claims data to strategically focus their pitch in a way that is most relevant and enticing to buyers. For example, knowing which subjects result in the most claims can give a clue as to which areas a buyer is likely to have a heightened concern, and the pitchbook can then proactively address how the seller has addressed this. Sellers aware of such information know to emphasize what drives the target company’s value specifically in the pitchbook.
5. Prepare negotiation strategies with deal-terms data
Finally, when it comes time for negotiations with buyers, M&A deal advisors who stay abreast of evolving deal terms, especially in the broader economic context, are well-armed from the first conversation and drive productive discussions that get deals done more effectively. Informed M&A advisors can get ahead of contentious deal terms, successfully avoiding or overcoming them. A “what’s market” view can infuse strategy discussions with a more holistic perspective.
Engage Experts in M&A Deal Terms and Claims
Relevant, timely deal terms and claims data provides useful insights to M&A deal parties—including target companies, strategic acquirers, and financial buyers—and their M&A advisors and counsel. M&A advisors equipped with deal-terms data better understand how deal terms are negotiated and structured, gaining insights into consideration types, earnouts, indemnification caps, baskets and escrows, closing conditions, and more. Furthermore, deal terms and claims data is used by skillful M&A advisors to prepare sellers for preliminary due diligence, streamline pitchbook preparation and buyer selection, anticipate buyer due diligence matters, and more efficiently manage the overall acquisition.
To help M&A advisors stay abreast of current deal terms, and what is market, SRS Acquiom offers a free interactive tool: SRS Acquiom MarketStandard®. Pulling from over 3,600 private M&A transactions, MarketStandard® allows you to filter deal data by characteristics such as deal size and buyer type to better align with the current deal on which you are working.