Running the deal
How much do you disclose, and when?
The price rarely goes up following due diligence, but it often goes down.
Due diligence is often described in a term sheet or LOI as confirmatory, as though it exists only to check the box on what you’ve already told the buyer. In practice, it’s the point where the buyer tests whether your valuation story survives contact with the evidence, and the outcome of that test can change the deal itself. A diligence finding that undermines your story can lead directly to a lower price, a withdrawn offer, or terms far less favorable than the ones you started with.
The buyer will examine your company, management, products, business plan, and market all at once, running several diligence workstreams in parallel (see “Are you ready?”). Your aim isn’t to hide weaknesses from this scrutiny; it is to understand your own weaknesses first, correct what you can, and present the remaining risk coherently rather than letting the buyer discover it unexplained.
As indicated in the readiness chapter of this M&A playbook (“Are you ready?”), you should stress-test your own readiness before diligence starts. An internal audit of your business or a full seller due diligence review is what lets you find a gap on your own terms before the buyer finds it. Founders who walk into diligence already knowing their own weak points move through the process faster, keep more negotiating leverage, and are far less exposed to the price reductions and indemnity demands that follow when a buyer discovers an avoidable issue on its own.
Presenting what diligence will find
Once you know what the diligence will find, how you present it matters almost as much as what it contains. Complete, signed, current, and internally consistent documents give buyers confidence, while a disorganized data room invites exactly the scrutiny you’re trying to avoid. Index and manage the data room with a small group, with clear ownership of each response. Sensitive strategic, technical, customer, and pricing information may justify staged access or the implementation of “clean team” arrangements for antitrust purposes, particularly where a bidder is a competitor. Later auction rounds can release more information to fewer parties as commitment and confidentiality increase.
Throughout all of this, you still have to run the company. Diligence requests are demanding precisely when you can least afford the distraction, so agree on a realistic response timeline with your deal team at the outset, assign someone other than yourself to triage incoming requests, and protect enough of your own time to keep the business performing. A drop in performance partway through gives the buyer a separate reason entirely to revisit value, on top of anything diligence turns up.
The disclosure letter
As part of the deal, you will be asked to give factual statements about the company and its business, referred to as warranties. You are not expected to give those statements unqualified. Buyers and sellers typically agree in the SPA that the buyer cannot bring a warranty claim in respect of a matter “disclosed” in accordance with the agreed disclosure standard. That standard determines how clearly and in how much detail you must describe the matter being disclosed against a warranty. It is therefore in your interest to make your disclosures clear, accurate, and sufficiently detailed to meet that standard. Simply mentioning an issue or uploading a document to the data room may not be enough to protect you. You will typically make your disclosures in a document separate from the SPA called the disclosure letter, which your legal advisors will help you prepare. How much disclosure detail is enough also depends on which style of agreement you have signed up to.
English law-style agreements may permit general disclosure of the entire data room, which means a well-organized data room can do much of the disclosure work for you. By contrast, U.S. buyers may expect specific disclosure against each individual warranty, which is far more labor-intensive and leaves much less room for a general sweep to catch something you missed. Identify which disclosure standard you are working with early, so the company can allocate enough management and advisor time to do it properly rather than scrambling in the final week before signing.
Answering follow-up questions
However well prepared your data room and disclosure letter are, you’ll still face detailed follow-up questions from the buyer’s diligence team. Answer them openly. This isn’t simply good practice; it’s in your own direct interest. Whatever limitation of liability package you negotiate in the sale and purchase agreement, it won’t protect you against fraud, and it’s very unlikely to protect you against willful misconduct or willful default either. Full and honest disclosure is therefore not a favor you do the buyer. It’s how you protect yourself.
The long form: anatomy of a sale and purchase agreement
If you’re going to sign it, you should know what’s in it and how it affects you personally.
The SPA is the definitive document governing the terms under which the buyer has agreed to purchase, and you have agreed to sell, the relevant shares of the company. You may think that once you have agreed on the commercial terms in your term sheet, LOI, or NBO, the SPA is therefore a formality, but it is much more than that.
The SPA will reflect everything from the purchase price to the governing law and the terms for resolving any dispute between the buyer and seller. It will also address any conditions precedent to closing, how the company must be run between signing and closing, the warranties, and the limitation of liability package.
Locked box or completion accounts?
A pricing mechanism looks like an accounting choice. It behaves like a risk allocation.
The purchase price mechanism determines the final price the buyer will pay for your shares. You and the buyer will usually agree on a headline price in the form of an enterprise value, and the pricing mechanism sets how that figure is adjusted to arrive at the equity price, which is the amount that actually lands in your bank account. It’s often heavily negotiated in the SPA and shouldn’t be left to the accountants alone, as it can change what you receive by more than a difficult warranty negotiation would.
Pricing mechanisms can appear technical because they depend on accounting definitions, but the commercial effect on you is straightforward. The choice of mechanism is, in substance, a choice about when the economic risk and reward of the business pass to the buyer. The two most commonly used mechanisms are the “locked box”, under which the price is fixed at signing by reference to accounts drawn up at an earlier date (commonly referred to as the “locked box date”), and “completion accounts”, under which the price is calculated on an estimated basis at completion and then adjusted once the company’s actual financial position at completion is known.
Under a locked box deal, the economic risk and reward pass to the buyer from the locked box date, even though you continue to own and run the company until completion. Under a completion accounts deal, the economic risk and reward remain with you until completion because you are adjusting for cash, debt and working capital. The longer the gap between signing and completion, the more this choice matters, and in MENA transactions that gap can run to several months once regulatory approvals are factored in.
RUNNING THE DEAL
The price rarely goes up following due diligence, but it often goes down.
How much deferred consideration will you accept?
It’s not only about how much you get paid, but when you’re paid and what has to happen first.
The locked-box and completion accounts mechanisms determine how an agreed enterprise value translates into the equity value of your shares. Once you know how much you’ll be paid, the next question is when. It’s natural to assume you’ll receive the full price at completion, but deferred or contingent consideration is a common feature of M&A transactions, and one you should be prepared to negotiate.
Deferred consideration is any part of the purchase price paid after closing rather than on the closing date. In some cases, the amount isn’t fixed in the SPA. It most commonly takes one of the three forms below:
- A “fixed deferred payment” is an agreed amount paid on a set date after completion.
- An “earn-out” makes part of the price conditional on the business meeting agreed targets after closing, which can help bridge a gap between your view of the company’s value and the buyer’s.
- “Rollover equity” involves reinvesting part of your sale proceeds in the buyer’s acquisition structure, so that you continue to share in the value of the business until the next exit.
Each of these structures can increase your headline price, which is often why buyers offer them. Each also leaves part of your price dependent on factors you may no longer control after closing. That dependence is easy to underestimate when you’re looking at a larger headline purchase price. Deferred consideration changes the certainty of what you’ll receive, not just the timing:
- Cash at closing is yours the moment the deal closes.
- A fixed deferred payment depends on the buyer’s ability to pay when it becomes due.
- An earn-out depends on future results that haven’t happened yet, generated by a business you no longer control, as well as on the buyer’s ability to pay when the earn-out falls due.
- Rollover equity depends on the future value of the business and the rights attached to your continuing investment.
For this reason, value and negotiate each element separately from the upfront cash. Deferred consideration can be the right answer, but before you accept less cash at closing in exchange for a larger deferred amount, make sure you understand the risks attached to it and have priced them into your assessment of the offer.
Whatever form it takes, any part of the price paid after closing carries a risk that is easy to overlook. You transfer your shares in full at closing, yet part of the price is paid later. For a fixed deferred payment, you are effectively an unsecured creditor of the buyer until it is paid, in much the same position as a supplier waiting on an unpaid invoice, and if the buyer runs into financial difficulty or disputes the amount, you cannot simply take your shares back. An earn-out carries a related but distinct risk: the amount itself is not yet fixed or owed, so your exposure is to whether it is ever earned at all, not only to whether it is then paid.
How much risk will you retain? Warranties, indemnities, and W&I insurance
Risk still exists after the deal closes. Make sure you know who holds it.
Deferred consideration keeps you exposed to the business’s future performance, while warranties and indemnities keep you exposed to its past. M&A doesn’t eliminate business risk for you, but reallocates it, and warranties, indemnities, disclosure, contractual limits, escrow, and insurance together determine how much of that risk follows you after closing. This is where your goal of a clean exit meets the buyer’s need for credible recourse if something it was told turns out not to be true.
What restrictions are you willing to accept after completion?
No one likes to have their future restricted. Make sure you understand the non-competes and non-solicitation provisions you’ve agreed to.
Warranties and indemnities govern what you’re liable for after closing, while restrictive covenants govern what you’re allowed to do. The price paid for your business includes the goodwill, relationships, knowledge, and market position the buyer expects to protect, and restrictive covenants translate that expectation into limits on your future activity. Their significance is easy to underestimate at the signing of the SPA, because your next venture, investment, or role may not yet exist, and it’s hard to object to a restriction on something you can’t yet picture wanting to do.
Take the scope of restrictive covenants seriously when negotiating the SPA and any other transaction documents containing them. These covenants can affect your ability to pursue new ventures, investments, board roles, and consulting work, and may limit how you communicate with old customers, suppliers, and former colleagues.
The most common restrictions are the five set out here:
Non-compete
Prevents you from setting up, working for, or investing in a business that competes with the company, usually for a set period and within a defined territory.
Non-solicitation of customers and suppliers
Prevents you from approaching the company’s customers to take their business elsewhere or engaging its suppliers in a way that prevents or materially impairs their ability to continue supplying the company. A broader “non-dealing” restriction may also prevent you from accepting business from those customers even if they approach you or from using those suppliers where doing so would be detrimental to the company’s business.
Non-solicitation of employees
Prevents you from approaching or encouraging the company’s employees, usually its senior or key staff, to leave and join you or another business. It’s sometimes extended to a “no-hire” restriction, which prevents you from employing them even if they approach you.
Confidentiality
Prevents you from using or disclosing the company’s confidential information, such as customer lists, pricing, business plans, and know-how. It usually has no time limit, but doesn’t extend to information that becomes public or to the general skills and experience you have built up over your career.
Non-disparagement
Prevents you from making negative or damaging statements about the company, its business, or its new owners, whether publicly, privately, or on social media. It’s best kept mutual, so that the buyer gives the same commitment about you.
You should ensure that you aren’t inadvertently prohibited from making passive investments, working with existing businesses, creating family or succession structures, and carrying out roles that don’t genuinely compete. As set out earlier in this chapter, a restriction should protect the company’s legitimate interests, not prevent you from earning a living. Negotiate the scope before you sign the SPA, as your ability to change it after closing will be very limited.
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