M&A Risk Allocation Strategies: Drafting and Negotiating a Balanced Approach

This CLE course will guide counsel in drafting and negotiating multiple provisions in M&A agreements, including purchase price adjustments, earnouts, and indemnification (for both insured and uninsured deals), with perspectives from each side of the table.

Purchase documentation in an M&A transaction can seem daunting. But buyers and sellers have developed various tools to allocate risk and ensure each party gets the benefit of their bargain in the deal.  

The purchase price itself is complex, involving a "quality of earnings" analysis of the target's actual financial performance during a historical period, multiplied by an industry-specific performance metric for a headline purchase price. Understanding the actual profitability of the target to negotiate an appropriate overall valuation is critical to both sides of a transaction and this process will be analyzed by our esteemed faculty.

The purchase price is often closed if and when certain conditions are met and may be structured through deferred seller financing, equity consideration, or escrow/holdback arrangements securing the seller's post-closing obligations under the purchase agreement. Although typical situations, imprecise drafting, and valuation miscalculations or misunderstandings can derail even the most straightforward transactions. Our panelists will examine these mechanics, offering negotiating and drafting best practices.

When overall valuation disputes arise during a transaction, making some part of the purchase price contingent on meeting certain post-closing performance metrics (an "earnout") may be a strategic benefit for buyers when structured well. In these situations, how the earnout is calculated and the manner in which the target is operated after the closing is critical, along with appreciating other external events—lawsuit or tax liability—that may affect the overall valuation. Time will be spent analyzing earnout calculations, the risks that impact overall valuation most, and transaction strategies to mitigate these risks.

The up-front purchase price usually gets adjusted to ensure the buyer receives the target company upon closing with sufficient net working capital to be able to support its operations on an ongoing basis. Inventory may be separately adjusted for certain types of companies. The parties also adjust the purchase price for debt and debt-like items, transaction expenses, and change-of-control payments (again, to ensure that the buyer gets what it pays for and only pays for what it gets). Each of these adjustments usually gets estimated at closing and verified a few months later to ensure everything is "trued up" to the actual numbers.  

Breaches, inaccuracies, and failures of representations and warranties and covenants within definitive agreements have the potential to undermine the business interests of one or both parties. Whether avoiding burdensome disclosure requirements or vague efforts standards, the parties should take care in how these various provisions are drafted. And when all else fails, indemnification for money damages and the right to compel specific performance are powerful tools for ensuring the parties live up to their end of the deal. Our panelists will spotlight how these tools can be negotiated, drafted, and executed more strategically to ensure business interests and pricing align.

Sophisticated provision drafting requires more than technical precision; counsel must understand each party's priorities, negotiation leverage, and the provisions that materially affect the deal. This webcast will help attorneys distinguish points worth pressing from those that do not advance the transaction, enabling more sophisticated risk allocation and smoother deal execution.

Listen as our authoritative panel discusses considerations and best practices for deal counsel when drafting and negotiating these various provisions in the acquisition agreement.