Joel Espelien (cont’d)
Dave Levine in Vancouver, Canada has this one. Dave?
Dave Levine
Complications arise when a seller's customer license agreement includes a change of control or assignment clauses. Since you can't revise existing customer contracts you need to negotiate with the buyer to minimize the impact of this assignment process. Structuring the deal as a stock transaction instead of an asset sale may circumvent the assignment requirement. If not, negotiate language in a purchase agreement to limit the approvals required before closing to a smaller universe of high-value customers, which the buyer's most concerned about anyway. The remaining assignment can come after the deal closes. Get out in front of your customers as early as you can and face to face if possible, to sell them on the virtues of the merger and why this is in their best interests.
Joel Espelien
Thanks, Dave. We've got a deal pending right now in which this has been a real challenge. Next, we go to Rob Griggs in Minnesota to talk about disclosure schedules.
Rob Griggs
The attachments or documents that come along with a contract always talk longer than anticipated. Those delays can kill a deal. Recently, we worked on two transactions where this was critical. One closed and the other did not. In one, the experienced PE buyer noted that disclosure schedules are always the longest pole in the tent.
We worked with legal to harvest a list of schedules from the draft purchase agreement and held hours of meetings with the client, setting up a realistic timetable, itemizing the needed tasks for over 100 pages of requirements with input from 11 people. Even swamped by due diligence and running the business, that deal closed on time and at the target valuation. In the other case, the buyer had a 45-day window to complete the transaction. The sellers were initially optimistic about the disclosure schedule. Then due diligence matters took priority. A week before closing, it seemed evident that it wasn't going to be possible to finish the schedule. We asked for more time, but structurally it wasn't available. The window closed and the deal fell apart.
If the disclosure schedules had been completed, then se would have closed that deal, too. So, get in early and push the buyer for an early draft of the purchase agreement. That will give you a disclosure schedule roadmap. Then get resources allocated early and get those schedules done.
Joel Espelien
Totally agree, Rob. As many of us have learned the hard way these things take more work than you think.
This is a segment from Tech M&A Monthly: Best Practices for Definitive Agreements in Tech M&A (August) webcast. For more information, please visit Corum Group's Software M&A Webcast Archive.