February 14, 2023
All You Need is Love: Seal the Deal in Today’s M&A Market.
By: Melissa Balocca, Esq.
“With this ring-binder, I thee wed.”
- Anonymous
The honeymoon period for middle-market deal making may be cooling, but love is still in the air for good quality investments. To capture today’s M&A opportunities, advisors need to be capable of structuring bespoke solutions to manage risk and move the transaction forward. All you need is love…and my checklist to Seal the Deal in Today’s M&A Market:
1. Establish a System for Due Diligence.
Due diligence has taken on increased importance in today’s market. Buyers are taking more time and digging deeper when it comes to evaluating the future performance of a business. It is more critical than ever to have a capable corporate legal team to act as the control center for the due diligence process. Competent legal counsel will establish systems for document review and distribution, as well as set the deadlines, spot any deal breakers, engage appropriate outside specialists, and much more. The right legal counsel is critical to ensuring the due diligence process is efficient and effectively communicated to management or third-parties such as investment bankers.
2. Structure an Earnout.
In today’s market, there is an inherent challenge in predicting performance. As such, advisors need to leverage mechanisms to mitigate the uncertainty of future earnings. One effective method is to calculate the purchase price by reference to performance after closing, also known as, structuring an earnout. Earn-out arrangements can vary widely because they must be tailored to suit the target company’s business and the parties’ expectations. Qualified legal counsel can help determine the earn-out targets (financial or non-financial), set the earn-out periods (length and timing), structuring the payments (flat, multiples, or percentage) and provide for a buyout or acceleration of the earn-out payments.
3. Consider Representation and Warranty Insurance.
With uncertainty being the name of the game, both buyers & sellers can benefit from obtaining representation and warranty insurance (“RWI”). RWI works by shifting some of the business risks of an acquisition to an insurer in exchange for payment of the policy premium, thereby resolving the risk allocation differences between a buyer and seller. Specifically, RWI may increase the scope of indemnification, extend the rep & warranty survival period, and provide additional security beyond any holdback, escrow, or other guarantee.
Professional advisors are working harder than ever to create value and provide clients the tools they need to grow. In spite of the volatility, there are still excellent opportunities in M&A for the creative deal maker. As corporate counsel, I get to know founders and executives at a more intimate level and understand the innovations that can be integrated into a deal. This understanding is at the core of deals being done today. If you or your clients need consistent and competent legal counsel to guide you through a deal in today’s market, please contact Balocca Law and become “Secure in the Knowledge.”
Questions or comments? Contact Melissa Balocca, melissa@baloccalaw.com.
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