George Spilka
George Spilka

Negotiations are an art, not a science. And when it comes to acquisitions, they’re a critical and often contentious test of wills. If you’re an owner or a CEO of a middle-market company—one with a transaction price between $5 million and $250 million—these three insights will give you an added edge when selling your company. “My watch, Your Watch” Agreements

Most acquirers are used to a rep, warranty, and covenant ("reps") package. This says that anything that happened while you owned the company is your responsibility, regardless of when the issues manifest. And any issues that occur once the company changes hands are the new owner’s problem. This could be problematic for owners who sell in order to escape the risk inherent in the equity ownership position. Here, a selling owner is still potentially responsible for all of the company’s pre-closing actions during the post-closing indemnification period—this can be costly for negatively issues and doesn’t offer the opportunity for a post-closing price adjustment for positive issues that impact the company’s true value. Since you don’t benefit from any unknown positives, you shouldn’t get the downside risk of any unknown negatives.

Instead, add a knowledge qualifier to your “reps,” which will limit your exposure to the issues of which you are aware. Though this position is not customary, it can be sustained if you’re a savvy negotiator. Your indemnification exposure for violation of the reps will be on the personal level, and therefore not limited by the protection of the corporate veil. It’s conceivable that violations of the reps could result in a loss for the seller that exceeds the sale price. Placing a ceiling on the seller’s indemnifications will limit this and will vary depending on the deal environment at that time and the unique characteristics of each company. However, the ceiling should not exceed 15% to 35% of the total deal price.

Entering Into the Letter of Intent (LOI)

Bring all acquirers together simultaneously to leverage one buyer against the other in order to achieve the maximum selling price and deal terms before the execution of the LOI. At this stage of the process, most investment bankers select the company with whom to negotiate a Definitive Purchase Agreement. Their decision is usually based on the level of the acquirer’s price and the composition of the deal consideration.

That’s not all. Prior to selecting the acquirer with which to enter into a LOI, all the prospective acquirers’ philosophies and general positions regarding the reps and indemnifications should be discussed. This is because your exposure in these areas can sometimes be more important than the deal price itself. The LOI gives an exclusivity period that is essential to protecting your legitimate interests. During this period of negotiation, usually 45 to 90 days, the you can neither solicit nor have conversations with any other prospective acquirers.

Nab the Drafting Rights to the DPA

The Definitive Purchase Agreement is an extremely important document and your ability to obtain control of these rights is added leverage, assuring that you won’t be getting the acquirer’s canned materials.

Once you have the drafting rights, prepare a reasonably fair first draft of the agreement. Avoid making excessive demands but don’t jump to significant concessions, either.  Instead, focus on sustaining your major positions. The acquirer should know that you are reasonable but that your flexibility is at its minimum once your position is defined. Clearly lay out your pricing objectives, desired deal structure, the composition of the transaction consideration, and the acceptable level of exposure in the reps and related indemnifications.

Knowing your goals makes it easier to decide which concessions to make—particularly non-essential ones in return for gains that move toward achieving your overall acquisition goals. Avoid giving any substantive concessions without receiving something comparable in return.

Spilka runs Spilka and Associates, an investment banking and acquisition consulting firm based in Pittsburgh. Contact him at