It’s a common misconception that after a buyer and seller sign a contract, everything is set in stone and done. The reality is that the deal isn’t actually closed, yet. After you sign the deal, there may be events out of your control that impact the value or other elements of the deal before closing.
We often say that nothing good happens between signing and closing. As time lingers on, there are many internal and external factors that can affect the deal, even though ideally many elements have been pre-negotiated in the LOI or term sheet.
We managed a deal two years ago, with a seller in France and a large public buyer based in Texas. The deal got locked in dollars. However, it was important to our client’s VCs that the price be fixed in Euros, since that was how their distribution to their limited partners would be paid. The problem was that the investors weren’t in a position to fund a hedge, and the M&A contract locked down the balance sheet, preventing the company from investing in a hedging strategy on behalf of the shareholders. We solved the problem by renegotiating the balance sheet lockup in the contracts so that the company could hedge the deal consideration and lock in a Euro value.
Cross-border deals will always expose either buyer or seller to foreign currency movement, and the way the balance sheet is treated is always a critical part of the contract. These terms will impact value if there is a price adjustment up or down caused by missing or exceeding the defined target. These terms can also prevent the company from taking steps that are necessary for running the business.
We’ll wrap up this blog series later this week with our final contract term – “Motivating the buyer to close”.