Mergers and Acquisitions: A Detailed Guide for Sellers of Privately Held Companies

Understanding Your Position

In a merger or acquisition, it's crucial to understand your leverage and negotiation dynamics. Consider the following factors:

• Desirability to both buyer and seller
• Availability of multiple bidders
• Willingness to exchange non-financial terms for a higher price
• Acceptability of post-closing indemnity risks
• Expertise of your M&A negotiator

Negotiating a Favorable Deal

Don't get trapped in the letter of intent stage. Ensure it outlines key deal terms, including:

• Purchase price and payment terms
• Exclusivity provisions (keep them brief)
• Non-binding nature (except for confidentiality and exclusivity)
• Indemnification terms
• Treatment of management and employees
• Other key acquisition agreement terms

The definitive acquisition agreement is paramount. Essential provisions include:

• Transaction structure
• Adjustments to purchase price
• Earnout triggers
• Indemnity escrow and holdback
• Conditions to closing
• Representations and warranties
• Covenant compliance between signing and closing
• Termination provisions
• Allocation of risk for non-closure

Employee and Benefits Concerns

Address sensitive employee and benefits issues:

• Outstanding stock options and equity allocation
• Vesting acceleration
• Re-vesting or rollover of equity
• Retention agreements and change-in-control bonuses
• Golden parachute concerns
• Employment agreements and severance packages

Legal Considerations

Secure experienced legal representation:

• Choose M&A attorneys and legal specialists in various relevant areas
• Consider hiring an investment banker to assist in the process
• Prepare for the buyer's due diligence investigation
• Ensure all books, records, contracts, and policies can withstand scrutiny
• Set up an online data room for convenient document access

Maintaining a Favorable Bargaining Position

M&A negotiations involve a balance of compromises. Establish rapport, keep discussions professional, and consider the following tips:

• Run an auction sale process to force potential buyers into making decisions on shorter timelines
• Prepare the team to articulate the company's value-add
• Appoint a lead negotiator experienced in M&A deals
• Identify and address potential regulatory delays

Conclusion

A successful M&A for a privately held company hinges on careful preparation and a well-drafted acquisition agreement. Follow these guidelines and maintain a collaborative yet assertive approach throughout the process.

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About the Authors:

Richard D. Harroch: Senior Advisor on M&A, venture capital, startups, and business contracts. Co-author of Mergers and Acquisitions of Privately Held Companies.

David A. Lipkin: M&A partner in Silicon Valley representing acquirers and target companies in complex transactions.

Richard V. Smith: Partner in San Francisco specializing in M&A, corporate law, and activist defense. Co-author of Mergers and Acquisitions of Privately Held Companies.