Beware, not all non-binding offers are non-binding!
Despite the non-binding wording of a letter or ‘agreement’ that you and a buyer may agree to, many tricky items will be introduced later in the sale process that will impact how much total cash you take off the table when finally the deal is done, or even how long you are restrained or even how the buyer will be indemnified if there are issues later.
So don’t be tempted to leave some of this detail for later when the negotiations are getting more granular, and the Sale/Purchase Agreement is being written (usually by the buyer’s lawyer). Too often have I heard the buy-side lawyer dismiss a perfectly reasonable request because “it was not in the NBIO”, which then leads to some tough negotiations to get the deal back to where the parties, and especially you the vendor, expected it to be.
Importance of Detail in the NBIO
You must take the time to address the many points of excruciating detail, so they are included in the NBIO. Some buyers resist this for a variety of reasons, some vendors don’t want to invest the time. But it is essential. And watch out for tricky ‘catch all’ terms that a buyer might put in such as ‘generally accepted practice’ or ‘normal or standard’ adjustments/conditions etc. One thing I’ve learned is that what a buyer regards as ‘generally accepted practice’ is not necessarily the same as what a vendor regards as fair or in the spirit of the negotiated deal.
Key Points to Include in the NBIO
So here are some things to look out for:
- Add a spreadsheet to the NBIO that defines what is included and excluded in the working capital and net debt adjustment. Base it on your recent balance sheet, get granular, do a line by line, for example get agreement on how they will determine all leave provisions.
- Separate out long service leave and general leave provisions, don’t fall into the trap of having them treated the same way.
- Don’t forget to push for net of tax adjustments in the net debt adjustment.
- Get clarity right up front on the restraint period that the buyer believes is ‘normal’.
- Get clarity on who will pay for the run-off PI insurance.
- If the buyer is going to insist on W&I insurance – who will pay?
- What is the buyer’s position on future dividends (if you are left with a minority position) or bonus arrangements. You can’t assume the status quo will be maintained.
- What will the new organisation structure look like, how will you and your team fit in? If you are expecting a board seat, this should be included in an NBIO.
- If you are planning on retiring soon, get that acknowledged in the NBIO.
- Whilst warranties and indemnities are developed during due diligence, you can get clarity within the NBIO on how those indemnities will be shared amongst the vendors. This is a big issue when there is an imbalance in the shareholding group.
The Eaton Square team are all experienced advisers. Most have run their own businesses. Our preference is to work with you from the start, not be called in after you have agreed to an NBIO. We work with our clients to ensure what they are agreeing to in an NBIO is what will be delivered.
