mbmcommercial.co.uk
MBM COMMERCIAL’S GUIDE TO
MERGERS AND
ACQUISITIONS
A substantial business sale or acquisition will often represent a life changing event
for founders and a game changer for an acquiring business. It may mark the end
of a long journey for exiting founders or the beginning of the next leg of that
journey. There may be a range of potentially conflicting issues to consider during
the sale process.
For a buyer the acquisition will represent the first phase of a process that will see
the hard work continue into the post completion integration of the acquired
business.
INTRODUCTION
The sale of a company for £10 million may bring with it just as many challenging issues
as a £100 million sale. The target company’s business, corporate history, shareholder
base, management structure and banking arrangements as well as the structure of the
transaction may generate several legal, practical and commercial issues to be worked
through.
While a buyer will mostly be concerned with attributing the appropriate value to the target being acquired
and not taking on unknown liabilities, the sellers’ focus is likely to be on the personal impact of the
transaction, minimising liability, retaining as much of the proceeds as possible and cashing out in a tax
efficient way.
MBM has worked with numerous founder teams, shareholders and buyers in mergers and acquisitions
spanning multiple sectors and while every deal is different, all deals share certain key issues.
This guide provides an overview and practical suggestions of the process focussing on the high level legal
and commercial issues which are relevant to a sale transaction from the sell-side perspective and
focussing on share sales.
MBM Commercial has deep experience in Mergers and
Acquisitions and support with:
EXIT
READINESS
DEAL
STRUCTURING
DUE
DILIGENCE
DOCUMENT
PREPARATION &
NEGOTIATION
SHAREHOLDER &
OPTION HOLDER
COMMUNICATIONS
TRANSACTION
MANAGEMENT
INTRODUCTION
mbmcommercial.co.uk
THE M&A PROCESS
THE M&A PROCESS
mbmcommercial.co.uk
PREPARATION
Internal Review
Due Diligence Preparation
PRE-TRANSACTION
Term Sheet
Confidentiality NDA
TRANSACTION
Diligence
Deal Management
Negotiation
Pricing & Payment Terms
People Management
Liability & Its Limitations
International & US Buyers
POST-TRANSACTION
Completion Accounts True Up
Deferred Payments & Earnouts
Integration
PRE-TRANSACTION
PRE-DEAL PLANNING
PURCHASE
PRICE
How much will be
paid, to whom
and when.
SHAREHOLDER
SUPPORT
You will want support
from the majority of
shareholders and the
ability to manage
any minority.
SHARE OR
ASSET SALE
Each have markedly
different legal,
accounting and tax
implications.
PRE-TRANSACTION
mbmcommercial.co.uk
Whether an approach is unsolicited or the result of a long-term plan, identifying
fundamental expectations and understanding the transaction process should help to
anticipate issues, protect value and manage expectations. The decisive factors in a
deal proceeding will vary from deal to deal but often include:
Getting your house in order at an early stage in the process and preparing for an exit
can save time and money at a later stage. This may include:
Housekeeping
Undertake an internal review of the business
structure, contracts, assets and employees and
recordkeeping. Carrying out any remedial work in
advance of a sale can be useful; this may be to
simplify a corporate structure, resolve a
longrunning dispute or finalise taxation claims
and reliefs.
Contracts & Consents
Identify any change of control provisions in key
customer contracts or any third party consents or
agreements, bank or regulatory approvals or tax
clearances which may be required.
Intellectual Property
Confirm company ownership and chain of title for
key intellectual property (including any IP created
by early stage contractors to the business).
Confidentiality
A great deal of highly sensitive information will be
shared in the course of a transaction and robust
confidentiality agreements should be in place.
Tax Planning
For the target and the sellers, have up to date
financial information and identify any tax concerns
(which may relate to operational matters or tax
benefits such as EIS relief or EMI options). Consider
if tax advice should be taken by the individual
sellers and consider if tax clearance may be
appropriate, to afford an opportunity to structure
the transaction in the most tax efficient manner.
Team of Advisers
Identify and assemble an appropriate team of
advisers including corporate finance, tax,
accounting and legal professionals should ease
the process.
TERM SHEETS
What is a Term Sheet?
Regardless of name, a term sheet, letter of intent or heads
of terms is the foundation for kicking off a purchase or sale
transaction. It covers the key terms of the deal and often
sets the tone for future negotiations. MBM Commercial’s
view is that a detailed term sheet is strongly advisable
– it provides a structured basis for negotiating the
definitive legal documents. A lack of certainty does not
usually benefit a seller.
While a term sheet may be non-binding, it is a “moral”
commitment, if it does not reflect the sellers’ deal terms it
can limit room for manoeuvre in the future, have adverse
tax consequences and create more work (and increased
fees) in the longer term. As such, obtaining legal,
accounting and tax input on before signing a term sheet
is advisable.
Key Terms
There is no set format or content and the terms may be agreed by letter or a more formal agreement. A
good term sheet will address the key deal terms on a high level including:
The parties: This will include the buyer, the selling company or shareholders and any option holders
What is being sold: Share sale or asset sale; all or a proportion of the shares or assets
Purchase price: It can be helpful if a term sheet sets out the key assumptions on which the price is based
to contextualise any future pricing discussions
Purchase price payment method: Cash or in kind (such as shares or loan notes)
Any conditionality: This may include the buyer’s financing, Board or shareholder approval, reports or
regulatory approvals (such as regulatory or government approvals)
Warranty coverage and any indemnities: Statements of fact about the target to provide information to
the buyer and to allocate risk between buyer and sellers
Limits on and allocation of liability: To limit the sellers’ exposure under the warranties
Restrictive covenants on sellers: To protect the buyer from competition post-completion
Any retention package for management/employees: To incentivize key employees to stay with the
target and grow the business after a sale
Exclusivity and confidentiality: To permit due diligence (DD) to proceed; these are typically the only
binding provisions
Payment Timing: Payment in full of completion, deferred and any earnout
PRE-TRANSACTION
mbmcommercial.co.uk
DILIGENCE
Once the term sheet and confidentiality agreements are in place, the buyer’s diligence process typically
begins. This may be the most time-consuming part of the transaction process for the management team.
For the buyer, as well as ensuring there are no inherent problems with the business, the due diligence
exercise will also influence the evolution of the commercial terms of the deal and identify steps that need
to be taken at completion. The diligence exercise may also inform the post completion integration plan.
Due Diligence Questionnaire (DDQ): The buyer’s investigation will be framed around due diligence
questionnaires from separate advisory teams that are dealing with financial, tax, commercial and IP
diligence, and legal diligence.
Time: Given the demands of the process, the target will benefit from allocating resource to respond to
queries quickly and efficiently without the day-to-day business of the target suffering. Ideally the target
has undertaken internal diligence ahead of time to ensure that the information requested is readily
available.
Confidentiality: Subject to existing confidentiality restrictions, release of certain contracts may not be
permitted and other contracts may need to be redacted.
Identified issues: Where the diligence exercise uncovers any areas of concern it may give rise to
immediate remedial work or enhanced contractual protections in the share purchase agreement. If the
buyer uncovers more fundamental issues then a “price chip” may be likely, assuming the deal itself is not
at risk.
Challenges identified during diligence:
• Management of change of control and termination clauses for customers or suppliers
• Key client contracts not on standard terms
• Supplier relationships with connected parties
Reverse due diligence: Where payment is deferred, the sellers will want to investigate the covenant of
the buyer to confirm the buyer’s ability to fund the transaction. Where part of the consideration is equity
in the buyer or the buyer, review of the buyer’s financial worth and its constitutional documents is prudent.
TRANSACTION
mbmcommercial.co.uk
TRANSACTION
Deal Management & Deal Documents
There will be a large amount of transaction documents with the principal document
being typically the share (or asset) purchase agreement. Practical steps taken at the
outset of a transaction can smooth the process:
Allocate an internal deal team: There will be
significant demands on the target’s
management team who should allocate
sufficient resource to the deal, ensuring that
they do not become too distracted by the
transaction to the detriment of the commercial
performance of the business. A designated deal
team is also key to keeping the transaction
confidential so it’s best to minimise the number
of people internally who know about the
transaction.
Virtual Data Room (VDR): Create an online data
room to facilitate the diligence and disclosure
process.
Transaction timetable: Include key decision
points as well as target dates for the initial due
diligence to be completed, further requests for
information to be issued, initial acquisition
documentation to be circulated and ultimately
a target completion date.
Documents list: The lawyers should prepare a
documents list setting out all the legal
documentation that will be required.
Parties list: Setting out the various buy- and sell-
side parties involved including key contacts
advisers and their respective roles is a helpful tool
in managing the process.
Status updates: Weekly update calls with all
parties and regular updates with the target team
is an efficient way to bring various advisers
together and keep parties on track.
Communications: Consider when, and how to
inform, shareholders and option holders about
the upcoming transaction and consider signing
logistics and if powers of attorney are
appropriate.
TRANSACTION
mbmcommercial.co.uk
TRANSACTION
Pricing & Payment
Purchase Price: Needless to say, the purchase price and how and when it is paid are
often the most important deal terms. Pricing can come in several shapes and sizes and
payment terms vary from transaction to transaction.
Consideration: The total amount of the purchase price and when this is payable
Adjustment of purchase price: Typical methods are completion accounts or locked box
Form of payment: This may be cash, shares, loan notes or roll over of equity into another entity
Allocation of payment: How the consideration is allocated amongst the sellers
Timing of payment: Any holdback from the amount paid at completion or deferred or earn out payments

Deferred Payments: The buyer may defer a portion of the price and pay all or part of
the purchase price after completion of the sale transaction in instalments. This may be
subject to conditions or be time-based. This is often a heavily negotiated element of
any transaction.
Deferred consideration: The buyer may pay part
of the price on completion, with the balance paid
in instalments after completion. The sellers will
want clear payment dates and arrangements,
including default interest and the potential
acceleration of payments in the event of default.
It may also be appropriate to seek some form of
security for a deferred payment if the buyer’s
financial standing is not assured.
Retention or holdback: The buyer may seek a
claims retention so that it has ready access to
funds in the event that it has a valid claim under
the warranties or indemnities. Amounts may be
held back by the buyer or put into an escrow
account, with a deadline for the release of funds
if no claims have arisen. If the purchase price is to
be adjusted after completion by reference to
completion accounts, a retention arrangement
may also be used to secure the parties’
postcompletion payment (or repayment)
obligations under the price adjustment
mechanism.
Escrow: The sellers will want protection for any
deferred payment and may require the buyer to
deposit a retained sum in an escrow or retention
account on completion of the transaction.
Typically, the escrow account is opened with an
independent escrow agent, but the buyer will
prefer that it retains the funds.
Earn out payments: The total consideration
payable may be determined by the ongoing
performance of the target after it has been
acquired. If earn out mechanisms are proposed,
then sellers should negotiate protections which
avoid the performance of the business being
manipulated by the buyer post-sale.
Seller earn out protections: Set out clear
payment dates and arrangements, including
default interest, the potential acceleration of
payments in the event of default, and whether
any form of security will be provided.
Buyer’s covenant: Where an element of the
purchase price is held back or where payments
are to be made by the buyer to the sellers after
completion, the sellers may seek assurances that
funds will be readily available. This may include
funds being held in a joint escrow, a parent
company guarantee or other form of security for
the payments. A buyer will typically seek to
minimise this, but it is a fair request from the
sellers.
Buyer warranties: If part of the purchase price is
being satisfied with equity in a buyer entity, the
sellers should conduct their own due diligence on
the buyer entity to confirm the equity’s worth.
TRANSACTION
mbmcommercial.co.uk
TRANSACTION
Purchase Price Adjustments
When attributing value to a business and agreeing on a pricing mechanism, buyer and
seller will typically agree on one of two methods (or a combination of the two).
Completion Accounts
The price is measured against an agreed metric of the target.
A cash-free/debt-free position is assumed and adjustments made based on
actual vs. target net assets and/or working capital.
Completion accounts are prepared post-completion and used to confirm the
target’s financial position at completion is consistent with the value in the
acquisition agreement.
The purchase price is adjusted up or down to align with the value reflected in
the completion accounts.

Locked Box
The Buyer values the target by reference to a specific set of accounts drawn
up to a date prior to completion, the “locked box date”.
The purchase price is agreed between the parties prior to completion based
on those accounts.
The buyer is unable to adjust the price after the locked box date, unless there
is “leakage” (the value of the target has reduced because of a certain agreed
leakage event such as a disposal of significant assets or the termination of a
material contract).

Hybrid
Both completion accounts and locked box mechanisms have pros and cons,
and one approach may not meet all needs.
Sometimes parties may require a combination of the two methods (such as
where a locked box is envisaged but one party still desires an element of
post-transaction true-up.
In some instances, the parties may agree to a completion accounts
mechanism based on the nearest month end date pre-completion, with
leakage and value accrual adjustments similar to a locked box, or with
completion accounts prepared to the nearest month end date post-
completion, with equivalent leakage protection for the seller and a negative
value accrual.
TRANSACTION
mbmcommercial.co.uk
TRANSACTION
At the heart of any business are the people behind it.
The target’s stakeholders may include a diverse group of directors, shareholders and
employees each with their own personal motivation and expectations about the deal
and their future involvement. Managing their interests, identifying the implications for
them and garnering support from the outset will facilitate any transaction.
People
TRANSACTION
mbmcommercial.co.uk
Selling Shareholder’s
Liability:
It may be appropriate to
distinguish the liability as between
certain groups of shareholders
(such as management, passive
investors). The allocation of
liability should ideally be agreed
at the term sheet stage with a
package of protections. If
necessary, the sellers can put in
place a private agreement
between the sellers without the
buyer’s involvement.
Restrictive Covenants:
Post-sale restrictions imposed on
key individuals by the buyer to
restrict competition and soliciting
of customers and employees,
often for 2/3 years for those
whose core expertise is
intrinsically linked to the target’s
business.

Conduct During
Earn Out Period:
How the business is conducted
during any earn out period is
often key to achieving the
earnout thresholds. If senior
management continue to be
involved in the business it may be
easier to ensure a fair outcome
from any earn out. In the case of
split signing and completion,
conduct of the business will also
be restricted and management
should be cognisant of this.
Senior Management Team:
If exit bonuses will be paid out,
the impact of those payments
will be factored into the purchase
price, together with any tax
implications. The buyer may also
propose a retention package for
management and negotiate new
employment terms effective
post-completion (subject to
compliance with legal restrictions).
Option Holders:
The involvement of the option
holders will need to be managed
carefully in order to preserve the
confidentiality of the deal whilst
adhering to the sale process and
the option arrangements
themselves. In particular,
reviewing the option scheme
rules to ensure that the manner
of exercise and payment for
shares is as frictionless as
possible. Similar considerations
apply to any holders of warrants
or other convertible instruments.
Sellers’ Representative:
There may also be an important
role for a “sellers’ representative”
to manage the interests of the
selling shareholders post-
completion, particularly in
relation to the ongoing
agreement on mechanisms such
as completion accounts and
earn out payments.
Investors/Financial Sellers:
Professional shareholders, such
as VC funds and angel investors,
may provide limited
representations and warranties.
This is often provided in an
investment agreement.
TRANSACTION
Liability and its Limitations
A buyer will expect contractual reassurance that the business they are buying is in the
financial, commercial and legal position they believe it to be in, to confirm that they are
paying the right price for the business. This need for contractual reassurance is usually
reflected in a comprehensive list of warranties and, in certain circumstances, additional
indemnities the sellers must provide. There is often heavy negotiation around what
liabilities will be covered and what protection is provided.
TRANSACTION
mbmcommercial.co.uk
Warranties
Fundamental warranties: These cover the seller’s
ownership of the shares in the target and the sellers’
ability to enter into the transaction.
General Warranties: These are statements made about
the target and the sellers which the buyer relies upon in
its purchase decision. If these statements are
subsequently found to be inaccurate and the buyer
suffers a loss, the buyer can sue for breach of contract
and will expect compensation from the sellers. The
protection for the buyer typically last for two years.
Tax Warranties: Like the general warranties, but to cover
specific tax issues. Given the nature of tax liabilities with
HMRC, these may last for up to 7 years.
Indemnities
If the buyer discovers issues during the due diligence
process, it may require indemnities. These cover areas of
risk in the business and if a loss is incurred after
completion, the buyer will expect compensation from the
sellers on a pound for pound basis.
Tax Deed
There is usually a tax covenant or tax deed either
included with the share purchase agreement or as a
standalone document. This includes tax indemnities for
any tax liabilities on a pound for pound basis.
Caps, Limitations and Thresholds
Understandably, sellers will want to limit their exposure
for any post-sale liabilities. The limitations differ for each
transaction and typically include time limits for claims, a
maximum liability amount and thresholds where a claim
will need to be a certain value in order for the buyer to
pursue.
Disclosure
This process allows the sellers to disclose information
against the warranties to the extent that if a statement
is inaccurate but has been disclosed against, then the
buyer has no right of recourse. Frustratingly for sellers,
this may seem like a reiteration of the due diligence
process, but is a very important form of protection.
Allocation of Liability
The allocation of liability amongst the selling
shareholders can become a challenging issue. Where all
shareholders are actively involved in the business is quite
a different scenario from multiple shareholders with no
role in the management of the target company. All
shareholders will be expected to give “title and
capacity” warranties confirming that they have the legal
capacity to sell the shares but often small shareholders
and institutional investors will not accept liability for any
warranties which cover commercial, operational,
financial, accounting and legal issues. The balance of
these interests is negotiated on a case-by-case basis
although there is an increasingly useful rule for warranty
and indemnity insurance to be used, whereby an
insurance policy is put in place so that a third party
insurer meets the cost of any warranty claims. Such
policies come at a cost and who meets the cost of such
policy, whether it is the buyer or the sellers, will be subject
to negotiation.
W&I Insurance
It is increasingly common in larger deals or where there is
a diverse shareholder base for warranty and indemnity
insurance to be taken out by the parties. This would
cover any claims but does increase the scrutiny over the
disclosure process.
TRANSACTION
Share Sale vs. Asset Sale
This guide focusses on the sale of shares in the target company. Asset sales tend to be
less common in the UK.
TRANSACTION
mbmcommercial.co.uk
Share Purchase
Asset Purchase
Buyer acquires the shares of the target
from its shareholders
Buyer acquires selected assets and liabilities
from the target; any unpurchased assets or
liabilities remain with the target
Buyer acquires all of the target’s assets,
liabilities and obligations
Buyer has flexibility to select and acquire
specific assets. Any unwanted assets may be
retained by the selling company
Buyer is entitled to receive the full future
benefit of those shares, but is also exposed to
all future liabilities, known and unknown
Buyer is usually isolated from
historic risks
Cleaner for the sellers as the entirety
of the target is sold
Potentially less clean for the sellers who may
be left with unwanted liabilities
Maintains business continuity and
established relationships
Contracts are not automatically transferred
to the buyer and may need to be
renegotiated or re-established
Often more tax advantageous
for the sellers
Tax and accounting implications
can be more complex
Synergies can result in cost savings,
economies of scale, increased market share
and enhanced competitiveness
Possible challenges integrating different
corporate cultures, aligning business
processes, integrating systems, and managing
employee transitions
Employees’ contractual relationship
is unaltered
TUPE applies to provide continuity of
employment is maintained and involves
consulting with employees
The buyer’s due diligence exercise may be
extensive and more intrusive as the buyer will
inherit all the target’s liabilities
The buyer typically spends less time and
money on conducting due diligence as its
exposure to unknown liabilities is limited
Approval of each selling shareholder is
required.If any shareholders are unwilling to
participate or untraceable, a ‘drag-along’
may need to be implemented
The target company that owns the assets will
conclude the sale, subject to director and any
shareholder approval
TRANSACTION
US Buyers
Deal Structure: US buyers often prefer asset sales
to share purchases, and it is common to see this
deal structure put forth in an initial LOI from a US
buyer. Because an asset sale is the purchase of
individual assets and liabilities, the buyer can
dictate what, if any, liabilities it will assume.
However, UK sellers may prefer a share sale and
UK taxes may be higher for sellers in an asset
sale.
Deal Certainty: US purchase agreements
typically contain more conditions to a buyer’s
obligation to complete the transaction than
those in the UK. Regulatory approvals and
financing conditions, allowing the buyer to
withdraw from the deal if it has failed to obtain
the necessary approval and financing, are
common in US purchase agreements, which also
tend to provide for split signings and completions
more frequently than in UK transactions.
Purchase Price Adjustment: A purchase price
adjustment mechanism based on completion
accounts remains the common approach for US
buyers. While a locked-box adjustment
mechanism offers more price certainty, this is
seen far less in the US than in the UK.
Sellers’ Liability: The level of warranty protection
given and the limitations on liability for breach by
the sellers are usually heavily negotiated in US
and UK transactions alike. However, the risk
allocation under the warranties tends to favour
the buyer in US purchase agreements and the
sellers in UK agreement.
Warranty Coverage: Warranty coverage in US
transactions is generally broader and less
qualified by materiality thresholds and the sellers’
knowledge. Indemnification is the typical remedy
for breaches of representations and warranties,
and exceptions based on disclosure are typically
limited. US buyers often insist on an escrow to
cover sellers’ indemnification obligations.
Disclosure: Unlike the separate disclosure letter
typically used in UK transactions, US M+A
transactions typically use disclosure schedules
integrated into the purchase agreement which
provide either an affirmative or a negative
disclosure. In US transactions, the disclosures are
typically specific, and it is unusual for a disclosure
to qualify all of the warranties. General
disclosures of the contents of a virtual data room
or of a “disclosure bundle” are not US practice
and are often met with resistance from a US
buyer.
Use of Escrow: Sellers are often required to
deposit a portion of the purchase price into an
escrow account as security for the obligation to
pay any “true-up” on the purchase price where
the completion accounts adjustment mechanism
is used. An escrow may be the exclusive source
of recovery for indemnification claims for breach
of representations and warranties.
TRANSACTION
mbmcommercial.co.uk
POST-TRANSACTION
Even after a successful completion there may still be
work to be done. Having a strategy to deal with this
should ease:
Communications: Plan ahead how and when to inform staff,
customers and other stakeholders of the sale. Often a buyer
and seller agree a joint press and staff announcement to align
the story.
Payments: Calendar completion accounts and deferred
payments dates and sellers manage expectations as to when
and how much sellers may receive.
Integration: Consider how the business lines will be integrated
into the buyer’s sales team, how staff will be integrated into the
buyer’s corporate structure and any new contract terms proposed.
Plans: Be aware that things may not go as planned, such as
poor financial performance in the run up to completion, a
dispute as to operation of completion accounts mechanism,
failure to meet earn out targets or warranty claims. Anticipating
and managing such issues and the communications around
them is key to smooth resolution.
Most deals will be shaped by considerations and circumstances
specific to the parties and the target business. Obtaining early
advice can be invaluable in helping to optimise the outcome,
whether at the early stage of a term sheet negotiation or even
earlier, in the strategic planning stages. The corporate team at
MBM Commercial is always keen to join early discussions before
any formal process commences.
More Information
To explore any of the issues outlined in this guide or begin a conversation with MBM
regarding a potential transaction, please contact Tracey Ginn, Head of Corporate,
T 0131 226 8232 E tracey.ginn@mbmcommercial.co.uk
THIS IS ONLY A SUMMARY AND LEGAL ADVICE SHOULD
BE TAKEN ON ANY MERGER OR ACQUISITION.
CONTACT MBM COMMERCIAL FOR DETAILED,
PRACTICAL ADVICE ON YOUR TRANSACTION
ENTREPRENEURIAL BUSINESS LAWYERS
mbmcommercial.co.uk
MBM Commercial LLP
Suite 2, Ground Floor, Orchard Brae House
30 Queensferry Road, Edinburgh EH4 2HS
T 0131 226 8200 F 0843 178 0723 DX ED403
London T 0203 096 0122
E info@mbmcommercial.co.uk