9. Negotiate the right price adjustment mechanism in the SPA
One of the key negotiation points in the SPA will be the pricing mechanism. The two most common structures are: (1) a valuation based on the target company’s accounts at completion and adjusted through a completion accounts process (Completion Accounts); and (2) a target valuation based on historic reference accounts, which is fixed as at a historic reference date and where all subsequent economic upside (and downside) in the business since that date is for the account of the buyer (Locked Box). In broad terms, a Completion Accounts mechanism is typically the preferred choice for buyers as it means they only pay for the balance sheet that they actually acquire and they are able to check and verify the financial position when they are in full control of the business. On the other hand, Locked Boxes have traditionally been the mechanism of choice for sellers as they result in certainty of proceeds and no post-completion adjustments nor any of the associated costs. In an auction process it is common for sellers to insist on a Locked Box mechanism and there is unlikely to be any scope to negotiate on this — in such a case you will need to make sure that you carry out sufficient due diligence on the historic reference accounts.
10. Negotiate a robust set of warranties and indemnities in the SPA
Warranties serve two purposes. Firstly, they complement the due diligence exercise by confirming that the information that has been given to the buyer is accurate and by ensuring that the seller discloses any known issues to the buyer prior to signing the SPA. Secondly, warranties apportion risk; in essence, the buyer can sue the sellers for damages for breach of contract if the warranties prove to be untrue or inaccurate and, as a result, the value of the acquired business is reduced. As a buyer you will want warranties on all of the key aspects of the target business — good title to the hotel land, accuracy of accounts, absence of litigation etc. Any known material risks — for example, a court case which is likely to result in the target company having to pay damages after completion — should be dealt with by way of indemnities (which provide dollar for dollar compensation in respect of the specific losses suffered).
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