Negotiating the economic conditions of your transaction


The economic conditions


The negotiation of the price and of the legal documentation requires a precise orchestration.

Which questions to ask first?

  • What is your interest in negotiating the price :
    – Would you rather negotiate a fixed amount or a formula referring to financial indicators, e.g. the EBITDA and the net financial debt, in reference financial statements (e.g. as of the completion date of the transaction)?
    – Would you prefer a price solely based on current results or also based on future results (earn-out)?
  • How to manage the possible impact of due diligence investigations on the price negotiation?
  • How to negotiate the economic conditions of the asset and liability guarantee?

Which preliminary answers provide to these questions?

  • It is important to have optimized your negotiation position by best organizing the sale or acquisition process.
  • For example, if the seller has received letters of intent from several potential acquirers, he/she will not only be able to make a decision based on the price level but also on its fixed or variable nature.
  • Depending upon his/her anticipation of the current trading (forecasted activity, results, and net financial debts of their company), the seller may either prefer a fixed price or a price calculation formula.
  • Depending upon his/her knowledge of the target’s sector of activity and upon his/her strategic interest for the transaction, the buyer may prefer to be straightforward by offering a fixed price or to minimize his/her risk by proposing a price calculation formula.
  • Indeed, a price adjustment creates uncertainty due to the technical questions it raises.
  • For example, which accounting rules shall be used, and how shall the financial indicators be calculated?
  • An earn-out can be tricky to implement, for example if post-acquisition, the target’s perimeter is modified, and/or if synergies are implemented, and/or if transfer prices are changed.
  • Without visibility, the seller may be reluctant to negotiate an earn-out.
  • The buyer may consider an earn-out beneficial, unless he/she anticipates increasing results of the target, in which case an earn-out would lead to overpaying current results.
  • The risks and/or adjustments identified during due diligence investigations are compensated either in the asset and liability guarantee, or in the price.
  • An insufficient preparation to the incidence of due diligence investigations on the price and/or the asset and liability guarantee may lead to breaking off the negotiation.
  • This risk may be mitigated by the seller (e. g. through a Vendor Due Diligence) as well as by the acquirer (e. g. by addressing already identified potential deal breakers at an early stage).