M&A: Key Documents for Success

Mergers & acquisitions, or M&A, are complex transactions that require careful planning and execution. These deals involve either the consolidation of two or more companies to create a stronger, more competitive entity, or the takeover of one company by another. The process can be lengthy and intricate, involving multiple steps and negotiations, with legal and financial considerations. It is crucial for both the buyer and the seller to understand various stages involved in an M&A process and familiarise themselves with the documentation required at each step to ensure a successful transaction. In this article, we will explore the key documents involved in a typical M&A process, including NDAs, CIMs and SPAs. Understanding the purpose and contents of these documents will help parties to navigate the M&A process with greater confidence and clarity.

Source: Generational Equity

Investment Teaser

The investment teaser is the initial document that companies use to generate interest from potential buyers or investors. It provides a high-level overview of the company and its operations, highlighting the key selling points and potential for growth. The investment teaser typically includes financial metrics such as revenue, EBITDA, and growth projections, along with a brief summary of the company's products or services. Other details may include the proposed transaction structure, an indicative transaction timeline, key investment highlights and contact information. This is typically no longer than ten pages, and can be as short as a one-page summary. The teaser is mainly for pre-marketing purposes by the selling party, sounding initial interest from potential buyers investors in order to gauge who may be interested to proceed with the first phase of the M&A process. All marketing materials are typically prepared by the investment banking team that has been mandated as sell-side advisor.

Letter of Intent

The letter of intent (LOI) is a preliminary agreement that outlines the proposed terms and conditions of the transaction. The LOI is typically prepared after initial discussions between the buyer and seller and often includes essential details, such as the purchase price, payment terms, and any contingencies or conditions that must be met before the transaction can be completed. Although the LOI is not legally binding, it serves as a crucial milestone in the M&A process, setting the stage for more detailed negotiations between the parties. In addition to outlining the deal's basic terms, the LOI may also include provisions related to exclusivity, confidentiality, and the timeline for completing the transaction. Once both parties agree to the LOI, they can move forward with due diligence, which involves a detailed review of the target company's financial and legal records

Non-Disclosure Agreement

The non-disclosure agreement (NDA) protects confidential information exchanged between the buyer and seller during the due diligence stage. The NDA is designed to ensure that the buyer or investor will not disclose any sensitive or confidential information to third parties, thus safeguarding the seller's trade secrets, intellectual property, and other confidential information. The NDA is typically signed once a potential buyer is ready to move forward with their initial due diligence and requires detailed information about the business they are considering acquiring. The agreement may include provisions such as the scope of the confidentiality obligation, the duration of the obligation, and the remedies available in the event of a breach. An NDA is critical because it provides the seller with a level of assurance that the buyer will not misuse the information obtained during the due diligence process, while allowing the buyer to gain the necessary insights to evaluate the deal's viability. Without an NDA, the seller may be reluctant to share sensitive information, making it difficult for the buyer to conduct the necessary due diligence to make an informed investment decision.

Process Letter

Typically exchanged between the buyer and the seller, process letters outline the key terms and conditions of a potential M&A transaction. These letters serve as a roadmap for the entire M&A process and provide a framework for negotiations between the two parties. Process letters contain a detailed description of the scope of due diligence, exclusivity provisions, and other important provisions that define the deal's structure. Importantly, they outline further details of the M&A process, such as whether this will be a two-phase approach with the first phase culminating in non-binding offers and the second phase concluding with binding offers. They will also clarify as to whether this is an auction process with many bidders or a bilateral situation between two parties only. The letter should also clarify the details needed in any binding or non-binding offer submission from buyers, extending to the transaction perimeter, valuation, further due diligence requirements and financing sources.

Information Memorandum

The information memorandum (IM) is a comprehensive document that serves as a vital reference for potential buyers or investors considering entering an M&A transaction. The IM is typically prepared by the seller or their advisors and provides a detailed overview of the company being acquired. Typically, the IM includes an executive summary, which provides a high-level overview of the company's business, operations, and financial performance. The IM will then dive into further detail with sections dedicated to the market overview, business overview, operational strategy, financial overview, and the company's existing capital structure. The seller's management team or financial advisors may also present their business plan and financial projections, which includes their underlying assumptions and key sensitivities. This is typically the basis for most of the price negotiation between the buyer and the seller, as the assumptions used in the financial plan will determine the valuation of the company in question.

Non-Binding Offer

The non-binding offer (NBO) is a preliminary offer made by the buyer or investor, based on the information provided in the IM. The NBO is not a legally binding offer, but rather an expression of interest in the company. The NBO typically includes the purchase price, payment terms, and other important provisions. The NBO serves as a starting point for negotiations, allowing both parties to refine the terms of the deal. This allows for initial feedback from the seller to the buyer, and can also be used in competitive auction processes to funnel competitive bids from others when proceeding to the next phase of the M&A process.

Share Purchase Agreement

The share purchase agreement (SPA) is the final and most important document in the M&A process, governing the sale of the company's shares. The SPA outlines the terms and conditions of the sale, including the purchase price, payment terms, and other important provisions that have been negotiated by the buyer and seller during the due diligence and negotiation stages. This document is critical to the M&A process as it is a legally binding agreement that protects both parties and ensures that the transaction is completed smoothly. The SPA will typically include details about the payment structure, such as the payment schedule and any contingencies that need to be met before payment can be made. Additionally, the SPA will also contain representations and warranties from both parties, which are essentially promises made by the seller regarding the state of the business, its assets, liabilities, and financial performance. The SPA also addresses the allocation of risk between the buyer and seller, including any indemnification provisions for any breaches of representations and warranties or other issues that may arise after the transaction is complete.

Conclusion

M&A processes can be complex and time-consuming, requiring careful planning and execution. However, by understanding the key documents involved in the process, companies can navigate the M&A process with confidence. The investment teaser, letter of intent, non-disclosure agreement, information memorandum, non-binding offer, and share purchase agreement are all critical documents that play a vital role in the M&A process. By working closely with experienced M&A professionals, companies can ensure that their transactions are completed smoothly and successfully.