Mark: Another common question we get from our clients engaged in the sale process is: What do we need to get right in a term sheet? What do we need to address at this stage of the process and what can be deferred to work out with the buyer in negotiations for the definitive agreement? How would you advise clients on that dimension?
Justin: So the term sheet is your opportunity to kind of put your best foot forward. Generally speaking, after you sign the term sheet your leverage goes down over time. And so, you definitely don't want to be punting on major decisions until later in the process. So first, I think one key term is what is the deal? What is the purchase price? How is it calculated? What form does it take? Is it cash? Is a cash and buyer stock? If it involves buyer stock, you're going to want to ask the question: How is it valued and what's the support for it?
There's also going to be a whole set of terms around indemnification, which is you being liable to the buyer after closing for some period of time. Buyers will want to punt on this because, again, after you sign the LOI your leverage goes down their leverage goes up. They'll be able to maximize their benefit when you negotiate this in the definitive agreement, particularly after they've done diligence. So, we always recommend the client at least get a basic framework around indemnification terms, survival, how long is it, what is your cap look like, what's in and out of the cap, so that you don't have to renegotiate that later when your leverage goes down.
The final kind of key term is exclusivity. Almost every buyer will require exclusivity before they embark on sort of the LOI to signing process and the keys there are to keep it short. As we talked about, making sure that it's as close to 30 days as possible. Buyers are going to want 60. There's going to be an auto extension feature to it, try to limit that, and then also give yourselves outs. So, if the buyer retrades on the deal or lowers the purchase price, try to have that be a termination of the exclusivity period because again the more time that you're stuck in it the lower your leverage is going to be over time, and that's when things go wrong.