Mergers and acquisitions deals average about $67 million and are incredibly complex. In-house attorneys may have the experience to hammer out these deals, but often it involves a legal team to negotiate the agreement. Someone brought in to focus on these deals will often use a purchase price agreement (PPA) as one key to the negotiations.
What is it?
Negotiations of this magnitude typically do not occur in a day or week. During the talks, the value of the business fluctuates to reflect the balance sheet and the market. Both sides want to protect themselves from these fluctuations so the final price aligns with the agreed-upon terms. It also eliminates the temptation of one side exercising opportunistic actions between the time of negotiations and closing. Some common conditions include:
- The amount of working capital used to measure the adjusted prices
- The purchase price’s financial metric
- How to make adjustments
- How to handle disputes over calculations
How it protects buyers
The potential buyer will do their due diligence before making an offer. A thorough review will likely have certain things flagged as concerns and use a PPA to address them. For example, there may be a regulatory issue that impacts the company’s bottom line or a depletion of working capital or assets that affects its value. The PPA could bring the price down.
It also protects the seller
Along with the difficult work of selling a company, the seller may also work hard selling products or services. The company’s value could dramatically increase if the sales team lands a significant new contract. The buyer will benefit from this new deal, but they will also pay more for the company.
Outside help provides many benefits
Attorneys focusing on M&A deals can bring a wealth of experience and knowledge to the negotiation table, which enables them to drill down into the minutia beyond big-picture perspective and bottom-line thinking. It also gives clients peace of mind in considering all foreseeable issues as they negotiate multi-million-dollar deals.