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Key Considerations for Buyers and Sellers in the Current M&A Market

November 2, 2017

Attorney Brian Bergstrom is firm president and chair of the mergers and acquisitions practice group.

Merger and acquisition activity in the Eastern Iowa Corridor remains strong in 2017 with both financial and strategic acquisitions occurring at a consistent pace. At Shuttleworth & Ingersoll, the goal of our mergers and acquisitions team is to help our clients finish deals on time and with terms that satisfy our client’s expectations. We see several consistent themes that, if present, help ensure success and, if not present, can create challenges for buyers, sellers, and their respective deal teams. Some of the themes and keys to success have been around for years, while others are new or have new twists. Earn-outs

As valuations remain strong due to increasing growth rates for target companies, we see earn-outs as an increasingly common method to maximize value, reduce discounts, and bridge the valuation gap between buyers and sellers. At the same time, earn-outs are the most common source of post-closing disagreements. Early alignment between buyers and sellers on top-line versus bottom-line targets and other risk minimizing strategies are keys to reducing the likelihood of disagreements over post-closing earn-outs. Representation and warranty insuranceWith valuations high, buyers increasingly want strong representations and warranties and post-closing escrows from the seller to help enforce deal assumptions and key metrics. The risk associated with those representations, warranties, and escrows often present more risk than sellers are willing to tolerate. Representation and warranty insurance obtained by the buyer regarding the target business is an increasingly common tool and method to bridge that tension between seller and buyer. Sellers and Buyers often negotiate who will bear the premium costs and the retention liability for the insurance product. Electronic data roomsThe use of electronic data rooms to facilitate due diligence review by buyers and investors is now nearly universal. As soon as possible and ideally well before starting the sale process, potential sellers need to start the process of collecting, reviewing, and organizing their key legal, financial, and business documents so that those materials can be easily and rapidly posted to an electronic data room.Technology has only increased the level of detail that buyers and lenders want to review regarding target businesses. Without advance work by sellers to pull things together, it is very difficult for sellers to facilitate and run a sale process while also continuing to run their ongoing daily business. Third-party consentsBusiness owners should try to draft their key customer, supplier, and licensing contracts so that third party consents are not needed when the company is sold. If one or more key customers or suppliers has the right to approve whether a contract can be assigned or whether control can be transferred to a buyer, that right or leverage can be very costly to a deal, both in terms of time delays and reduced purchase price. If at all possible, pay attention to your key contracts as they are drafted or renewed. Most suppliers and customers recognize that anti-assignment provisions should have exceptions for the sale of a business. Culture and employee continuityOwners of Iowa-based businesses are often very loyal to their employee base and to their key management team, and want their employees to be treated fairly by the buyer. For success regarding employee transition and culture considerations, it is critical that the buyer and seller start the conversation early about staffing, transitions, and post-closing goals and objectives. Deals are often kept confidential (other than to key executives and boards on each side) all the way up to closing, so the principals will often need to execute on alignment, communication, and implementation plans in a short time period, which means planning is key.This column was published in the October 23 edition of the Corridor Business Journal; a digital version is available on the Corridor Business Journal website (subscription required).

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