Sale & Purchase Agreements (‘SPA’) - M&A (#6)

0:00 [Music] hi everyone to continue our m a series in this video we're going to be discussing the sale and purchase agreement or spa or spna depending on how you say it so what is a sale and purchase agreement well it's a binding legal contract between two parties that obligates a transaction between a buyer and a seller so what it is is essentially a document very long document in practice which a lawyer will prepare and the buyer and

0:29 seller will both sign and execute and this essentially makes the transaction binding so everything that we've talked about in the previous videos and much much more so in terms of the calculation of purchase price uh you know the completion mechanism the adjustment for net debt and cash and you know we talk about these things at a high level and it's fairly straightforward and talk about it but actually putting it in writing it becomes a very very long document

0:57 because the concern is that you know from the lawyer's perspective is can it be misinterpreted or can it be twisted in a way which wasn't intended on top of that there are a number of other issues which arise from a legal perspective which just haven't been discussed or thought of by the buyer and seller so this ends up being quite a long process in terms of the negotiation of the sp a the signing and executing and what typically

1:23 happens when we get to this stage is that both parties who haven't quite equivocated that you know there's there's a number of items which they haven't considered which are actually quite important and they actually disagree on so because of these items it can actually result in quite a lengthy delay at this stage to avoid that what you can do is to have quite upfront conversations with both legal teams quite early in the process and make sure that this form is

1:46 part of the negotiation process along with the purchase price in other key terms and not just left to the last minute because it can actually delay the transaction so what are the key kind of components of an sp a so they define exactly what's being purchased so you know when you're buying a business think about you know what are you actually getting with it because you might not have discussed this you have an idea in your head you're i'm getting

2:08 this business but does that include the assets of the business does that include the customer list does that include the software does that include the proprietary ip you know there's a there's a whole number of considerations here once you start get around the detail which are very important uh also need to consider the transaction structure for example a buyer and seller the buyer might want to do an asset sale because it kind of de-risks it because then

2:30 you're only buying the trans the assets of the business and not the actual entity that it comes with and and of course any kind of you know liabilities or contingent liabilities or risks that are linked to that entity but from the seller's perspective they might prefer a share sale because typically that results in a more favorable tax concessions for the seller and then there's consideration you know form of consideration you know timing of consideration conditions of

2:56 consideration and so forth so if either party doesn't get what they think they bought or sold the spna also provides protection mechanisms for example purchase price adjustments so one example is the completion mechanism so working capital is one aspect to that which we covered in great detail in the last video so you know if if we've agreed this is you know the kind of the minimum gas that we need in the company or aka the working capital of the

3:22 company and then on the date that we actually settle the business that the working capital has fallen considerably because the sellers have stripped out cash or other things then you know you actually get an adjustment to your purchase price here so that's to protect the buyer it also allows the buyer to actually get some some money back if something goes wrong through representations warranties and indemnities so we'll talk about these in in detail but essentially these are

3:48 statements so representation is a statement made by the seller saying you know to the best of my knowledge that there's no kind of fraud there's no kind of misrepresentation of any of the numbers or statements and warranties indemnities are a section which essentially protects the buyer in certain instances for example if we buy the business and you know all of a sudden there's this massive lawsuit which wasn't disclosed and wasn't picked up and picked up in ftd you could essentially

4:15 sue the the sellers through the warranties and indemnities and actually hopefully get some money back through the court system and then finally it the spna also provides protection mechanism to potentially terminate the deal so the two kind of key areas here are conditions precedent and material adverse change so conditions precedents are essentially if you don't if the seller or business doesn't meet these kind of set criterias whether that's the transfer and approval of the leases across to you

4:42 or perhaps settling on one of the transaction transactions that they promised that they do before settlement you can actually terminate the deal so the other side is material adverse change or mac clauses and these are essentially clauses which say if there's a material change in the business for example you know um maybe they lose their key customer or revenue kind of drops 50 before settlement whilst you're still negotiating the deal you can actually terminate the deal and you don't have to

5:06 pay any kind of break fees or termination fees which are typically quite heavy on a large deal it could be in the millions of dollars so why isn't spna important well this is just essentially a summary of kind of what we touched on the previous slide so number one it sets the price you know it puts it down in writing um you know including how that's comprised of you know the upfront component any earn out components any clawback amounts

5:32 any any completion amounts through the settlement accounts etcetera number two is it seeks a purchase price mechanism so these are common kind of the clawbacks that we discussed so that's the um you know the the completion accounts that ensure a certain level of networking capital will remain in the business and if there isn't it's taken off the purchase price and put back in the business to retain that minimum level of networking capital number three representations and

5:56 warranties just making sure that you know the seller states that you know all the numbers are correct everything is the best my knowledge i've disclosed everything material etc and then number four indemnities this helps protect the buyer in cases of kind of you know any kind of adverse effect like lawsuits you know penalties tax liabilities which weren't disclosed and weren't found in fdd so you know you can sue the the seller through through the court system if

6:27 there's warranties indemnities the capital that which i've mentioned in a previous video is if you do find it in ftd you can't use the warranties indemnities because you were aware of it and you assumed the risk plus you had the opportunity to adjust the purchase price for it at that point in time the other caveat is if it is actually disclosed to you by the sellers again same story you could have adjusted it or you could have walked away from the deal

6:48 at that point in time you're aware of the risk so you can't actually sue under the warranties indemnities in that point in time and then finally the mac clauses which we discussed before which is the material adverse changes clauses this is essentially if something goes wrong revenue declines something like cove it hits could fall under here just gives you a reason to potentially walk away from the deal and protect the buyer so let's talk about kind of some of the

7:16 components of the sale agreement or the sbna and how that links into the enterprise to equity valuation which we've talked about in earlier videos so as you know so far some of the key lessons we've picked up in the previous videos number one we calculate a business on the enterprise value as a function of you know it's um it's ebitda typically but it could be of other other measures so it's typically a multiple of ebitda and we typically adjust the business

7:43 for net debt and also for networking capital [Music] and that gets to our equity value which is the actual amount that we end up paying for the business so this is kind of we understand now why we do this to make sure that you know two businesses which are identical are actually adjusted in their purchase price if one business has more debt one business has more cash so as you know we buy business on a debt-free cash-free basis

8:10 with normal levels of working capital so that's the basis of any kind of m a transaction however debt free cash free doesn't actually mean that the business is acquired free of cash and debt that's why we have mechanisms in place to just adjust the purchase price for that where it's not practical to kind of pay out debt early et cetera so these are all kind of built into the spna and why we need the spna so some of the key purchase price

8:36 adjustments so what are the purpose of of purchase price adjustments so the main ones being the net debt and also the uh the completion accounts for networking capital but potentially also could be a separate one for any kind of known capex spend as well so what is the purpose the purpose is to align the valuation basis which is debt-free cash-free with normal level of working capital with the actual net assets of the business to be acquired so some of the

9:02 functions that it does as you know now it adjusts the purchase price for the level of debt ensures adequate working capital is acquired to run the business and it protects against working capital strip pre-completion and to ensure all budgeted capex is spent up to completion so what are the things that can go wrong so the mechanism in the agreement does not reflect the party's intentions or due diligence issues identified so this is called a a drafting error and

9:29 this is you might have agreed a certain intention between one party or the other party or both parties combined but then the way that the agreement actually reads might end up being a little bit different whether that's due to you know miscommunication between the parties and the lawyer misunderstanding by the lawyer or failure to check a mistake on any parties then yes that's called a drafting error another thing that can go wrong is items included in both the price adjustment

9:56 mechanism and other adjustments such as cash and debt so this is kind of a double up for example you know leave entitlements is an expense that's in the ebitda but also being included in net debt as well and then items included aren't rigorously defined so there's you know open to interpretation and therefore debate or finally too complex and you know the more complexity you add to you know the mechanisms and the formulas etc the more chance it can go wrong could be

10:25 misinterpreted calculating correctly etc so finally covering the risk so awareness that only rules are those contained i sorry awareness that the only rules that are those contained that in this spna all right so you know if there's a gentleman agreement outside of the spna it doesn't really matter it's only what is in the espna is legally binding so you know that needs to be the final document be as airtight as possible we need to ensure the definition of a

10:54 price adjustment mechanism is as watertight as possible as well so you know that's the most important aspect is the actual purchase price calculation so we need to make sure that you know there's no errors there's no room for interpretation or misapplication and then finally working the mechanism through with the numbers does it work so you know what you'll find with the spna calculations is they're often formula based and it's drafted by lawyers who are often you know better with words

11:20 than numbers so it might look you know the formula might look good on the surface but then when you actually plug the numbers into the formula have you checked that it actually flows through and works so we've kind of covered this in the last video with working capital but you know one of the key mechanisms that you'll find in in the spna is the actual purchase price adjustment mechanism for working capital and just to quickly recap what we covered in the working

11:46 capital video is that you know any typical business for working capital which we'll assume is this line here a theoretical business will have ebbs and flows subject to kind of timing seasonality and general recurring trends in the business and the issue is we might do the analysis uh over here let's say over here and then you know we might determine that the normal working capital level at that point in time is you know five million dollars and then by the time we

12:15 settle the deal uh we we calculate the working capital to be nine million dollars which means there's a four million dollar surplus which means there's an adjustment to the purchase price of four million dollars [Music] so completion accounts is required [Music] per the spa to help kind of calculate those working capital adjustments but it may also be used to calculate net debt as well if that's not done up front at the time of negotiation so

12:46 how the completion accounts are specified defined are also really important in the spna because you know that's going to lead on to the interpretation and application and calculation so the sbna should set out the meaning of all terms using the agreement that do not otherwise have an unambiguous comment or legal meaning really important to have clarity on every term to avoid any misapplication or areas of you know non-transparency so really important that they cover the accounting definitions the reason being

13:18 is you know for example how would you define a couple of these terms right material gap cash debt working capital if you just use general definitions like that then obviously these are open to interpretation for example with gaap uh you know it's dependent on you know early adoption of certain standards what's the treatment of certain standards there you know jurisdiction with cash is it per the general ledger or is it per cash at bank with debt is it inclusive of tax capital

13:49 creditors leases and provisions so there's kind of great areas which may sit between kind of working capital and debt are they included in debt and similar for working capital like we just need various precise definitions and inclusions so here's an example of some badly drafted clauses in spna uh just showing you why it's why it's so important to have very specific and correct definitions so some badly drafted examples include stock that has not moved in 12 months shall not be valued

14:16 right because obviously the lawyers are thinking okay that's going to be obsolete stock but you know for a lot of businesses 12 months might be the normal kind of inventory turnover period right so if you've got that that then you know you might be significantly undervaluing the networking capital next is the completion accounts to be prepared in accordance with the accounting policies and the accounting policies of those followed in the completion accounts there's a bit of a circular definition there with no

14:45 specific definition to what accounting policies actually are next the balance sheet is true fair and accurate again you know it doesn't really mean anything at this point in time um especially when there's qualitative words like how can you ascertain that the accounts are fair and then finally warranty should be payable equal to five percent of profit so how do you actually define what profits are so you actually need a separate definition for that as well

15:16 so here's a speci another specificity example where we've defined working capital we've got two examples one where it's a bad definition one where it's a good definition one which is just quite general open to misinterpretation or misapplication and one which is quite specific and he's going to minimize kind of any disputes from both parties so in the first example we've got working capital should be determined in accordance with gaap so why is this a bad example it's not specific it doesn't

15:43 tell us what should be included in working capital and once we actually get to the time of completion both parties are going to be arguing again as to the calculation of working capital so in the second example on the right hand side we've got another situation where working capital the definition says working capital is the aggregate of all line items marked a and the proforma balance sheet above so i've actually attached a balance sheet as a pro farmer

16:04 appendix and the final working capital should be determined by the aggregation of the same line items from the completion balance sheet so we've got to perform a balance sheet above and it's saying you know apply the same line items to the final numbers given us in the completion balance sheet and they've given us specific lines like inventory trade receivables trade payables and if you're very specific about those then you know exactly what to include and there's no dispute at time of

16:27 completion accounts [Music] here's another example of bad drafting that we want to avoid the top one is a bad badly drafted example and the bottom one is a better example of correct drafting so the top one is saying we're defining completion accounts in the spna so in this case the completion account will be drawn up on the basis of those accounting policies which have been used historically in connection with the preparation of the accounts and to which the best knowledge of the

16:55 vendors are in accordance with gaap so the problem with this is that we're saying it's you know be prepared in accordance with how it's historically been prepared but you know what happens if it hasn't been correctly prepared in accordance with gaap or efforts depending on you know how the company's been reporting you know then then the uh the seller is not held accountable to any proper accounting standard so if they've been accounting for things incorrectly all this time then they then

17:22 they're allowed to account for it for the purpose of the completion accounts they could argue that and they'd be correct because of the drafting of the of the completion accounts so a good example is you know the unintended consequences that bad drafting can have for example they could have been accounting for revenue on a cash basis uh and you know let's say that theoretically passed your financial due diligence and no one picked it up you know the vendors could say well to

17:50 the best of our knowledge it was in accordance with cap but it wasn't right and they could use that to then manipulate the outcome of the completion accounts theoretically so a better example wording is saying the completion accounts have been prepared as follows you've got a kind of a flowing hierarchy of standards a in accordance with a specific policy set out in schedule x so you can you know even set out specific accounting policies if you want

18:15 uh b subject to clause a in accordance with the accounting policies adopted in the 2011 accounts so that's then um you know to be consistent with prior years and then c subject to clauses a and b in accordance with australian gaap or iferrous so because they've given a hierarchy in this definition the hierarchy is clear and gap only becomes relevant in a circumstance not covered by a specific policy or specific accounts australian gap should be a

18:40 defined term as well so just make sure we've defined all the key terms here so using completion accounts again as an example you know let's talk about in detail the kind of the key issues arising from each of those so you know and how we should be doing it so we should be using precise and unambiguous wording and sufficient level of detail we should remove the exercise of judgment right we need to just tell tell the the

19:09 reader how it is not leave anything open to interpretation or judgment so vendors should include a cutoff for post balance events right otherwise they can just keep dragging it forward there needs to be a line in the sand when things are just included and tend not to include consistently applied policies as this can create confusion next consistently with prior accounts so issues can arise with reference to policies alone for example financial statements noted stock is to be valued at the lower end

19:38 of cost and net realisable value company calculated this by applying 50 provision to any stocks held for more than six months [Music] some of the issues with with the third hierarchy layer which is just using gaap is precisely define you know which jurisdiction issued by which accounting body at what date so i guess so just to clarify these are all relating to each of these kind of hierarchy levels and i guess the point of this is just to

20:06 show that even in a well-drafted document you know there's still risk of misinterpretation which is why these documents are so long you know often many hundreds of pages uh because kind of everything we need to consider these questions so even when we say specific policies here we need to think okay what are the kind of issues what are the kind of misinterpretation issues or or any kind of judgment issues even when we say specific policies you know that may

20:31 still be too unambiguous and when we say consistent with prior accounting policies we need to say well you know were there potential issues with prior policies yeah and then when for gaap or iferos we need to say you know if for us yes but which jurisdiction is it if for us in australia is it iferrous in the united states um you know at what date because efforts is constantly changing and evolving so is it the most current one

20:57 and how do we approach kind of you know early adopter policies as well so just like just just not definitive but just an example of kind of the way you need to be thinking about these spnas and also kind of explaining why they're so long and the reason why we need to do this so here are some of the kind of common pitfalls leading to spna disputes which you can see why taking this kind of and applying this kind of thinking to

21:23 spnas and problems and definitions can help avoid these pitfalls so number one is inconsistency number two is complexity of subject matter right potentially not being able to understand it or misapplying it or maybe the lawyers it was too complex and the lawyers didn't draft it correctly as a result subjectivity so not being precise enough and that leaves space for either party to interpret a different way use of accounting jargon which maybe doesn't have a correct definition or applied

21:49 incorrectly similar to complexity maybe time pressures so if we need to settle a deal within x you know x days or x months that can maybe lead to some things being missed or or key areas not being addressed in the sp a poor definition so you know for example some of these ones we you know might not have addressed some of these key issues arising from the definition um or maybe it's a circular definition like we showed earlier

22:14 due diligence issue is not reflected so i mean if if there's a kind of key issue either in legal commercial accounting which has been raised um you know we need to figure has this actually been addressed in the spna as well for example a tax liability picked up in the in the tax due diligence we need to make sure that this reflect as a net debt item in the sale agreement and make sure that there's strong warranties and dominators

22:39 to protect against similar issues that not that are not due diligence uh party's intention is not reflected this is essentially when you know this is called a drafting error and this is when you know the lawyers have you know both parties both the buyer and seller have agreed on the terms but then the lawyers haven't interpreted that correctly and they've drafted a different way whether deliberately or accidentally and then finally advice not reflected so we've been provided some

23:03 advice and it's not actually reflected in the sale and purchase agreement so here are some examples of some some other common issues that have arisen in the past so undefined terms so there's been an agreement or provision where oh here's an example here so there's been no material adverse change in the company's financial position since the last audited accounts but the issue in this situation is that material was not actually defined in the sale and purchase agreement so how do you define

23:33 material how do you quantify that is it one dollar is it a million dollars is it a billion dollars right but by not defining that you're then leaving both parties open to dispute when something like this actually arises and of course the buyer and seller are both going to argue the side that suits them the seller could argue well you know we we interpret material to be a billion dollars and you know we only had a one

23:58 million dollar loss therefore it doesn't satisfy this division uh sorry this provision and the other parties can have the adverse view right so we just need to be specific as possible and think about these issues so the next example of issue we've come across is an interaction of agreement clauses so an example of this occurring in the past which is the completion accounts to be prepared in accordance with accounting policies and the accounting policies are those

24:22 policies defined in the completion accounts so there's a two separate uh definitions in the agreement and as you can see there's a circular definition without actually providing an actual definition this refers back to a different section right the problem of course is we now don't have a definition and we're in the same boat as if it was defined not specifically we just now have an open-ended definition the next issue was around terminology that we've come across so the agreement

24:49 example of this was loss means any loss including any damage claim action liability cost expense charge penalty outgoing or payments and legal costs and expenses on a full indemnity basis so the problem with using all these terms is we did use legal and accounting terminology but each term was not separately defined and it's also not clear as to whether these are mutually exclusive or co-dependent in other words do all of these things have to happen at the same time

25:18 or is it any of these could occur for this to trigger this particular clause we also don't know if if the amounts we're referring to in terms of these losses and indemnities etc and payments are they on an accrued basis or a cash paid basis because you know when we actually get to the claims basis it's going to change the dollar amount depending on whether it's accrued or cash so that's why it's super important to have very specific definitions

25:42 everywhere next is unrealistic warranties so for example the balance sheet is true fair and accurate so it's almost certain to breach the accuracy clause right and fair is a kind of you know very open-ended and uh subjective view as well so it's an unrealistic warranty can't expect the seller to sign up for this necessarily because they can't say it's completely accurate next is does the language reflect the

26:13 intention of the party so there's a common issue in sale agreements where it's a drafting issue where the language in in the sale document which is you know often very technical language and the seller and buyer might not actually understand it it might not actually reflect their intention so an example here is the revenues were defined in terms of cash accounting the costs were defined in terms of accrual accounting the earn our provision was a function of

26:33 an agreed ebitda multiple and profits which is revenue less cost so the problem was the business experienced rapid growth the cash revenues were material less than accrual revenues and the profits were spna were material less than accounting profits because of how they defined cash versus accrual on two different terms so here's some more detailed examples so one is one-sided accounting policies so for example no accruals or provisions are released or reduced except for cash payments or utilizations for which

27:01 provisions were originally established for the avoidance of doubt does not include credit to the profit and loss statement so the problem was the tax payable so the tax return finalized before completion the vendor could not release provision and the purchase got a free ride of five hundred thousand dollars next issue is undefined accounting term so an agreement provided for a payment of royalties of five percent of profit for three years period however the word profit wasn't actually defined in the

27:26 sale agreement so the company increased the depreciation rate on the p e to the extent that they didn't actually make an accounting profit so if it was defined on cash ebitda or ebitda they would have paid out a significant amount of money but it's been able to be manipulated because they just change an accounting rate and therefore mitigate any royalty payable and then finally we've got inappropriate or impractical adjustments to earnings for an earn up mechanism

27:52 so we could have an open-ended clause saying something like the ebitda will be adjusted for quality and sustainability and the earnings should be adjusted if the business is underfunded so i mean there's a number of issues arising from this because because it's so open-ended and not specifically defined it then leads this the the buyer to then manipulate that and put in any essentially any normalization they want to because it comes under quality and sustainability which are not defined in

28:18 very broad terms okay now locked box approach so let's talk about this so this is another way of approaching sale and purchases of businesses and it's different from the standard approach with you know a you know working capital adjustment at the time of completion so typically how that works is the normal approach is you know you agree on a business so let's say you do due diligence in let's say

28:48 october let's say october right october 2021. now because it's a large company and due diligence takes a long time and you go through the sale agreement et cetera let's say you do all that process the due diligence the sale agreement the negotiations etc and it takes you let's say until um let's say april the following year to actually settle the deal so sign and pay for it in between it's all the negotiation the fdd the due diligence

29:18 the lawyers the insurance all that stuff the integration planning approvals right it these large transactions take a very long time sometimes and then a completion account that's you know six months later there's probably going to be quite a material change in the business you know and you just you do a new balance sheet at the date of completion and that's your kind of completion accounts so that's how most transactions are done however there are many situations where

29:45 that arrangement cannot be done and a very common example where it cannot be done is where there's a public to private transaction where it's essentially a listed company which is being taken private through a scheme of arrangements and the reason you can't do that normal completion account mechanism is because the people that you are buying the business from are individual shareholders so you're dealing with you know thousands hundreds of thousands even millions of individual shareholders so you can't really do a completion

30:14 accounts six months after the fact because you either propose a single share price per share and pay out to the shareholders and that's it you can't just then claim additional money through the completion accounts later on or do a net debt adjustment later on you can't do that so how we approach transactions like that and so it can you can also do this in a private transaction environment where you just don't want to deal with the inherent

30:37 uncertainties in predicting the shape of the business balance sheet at completion so maybe you just want to avoid that risk you just want to do a single payment purchase and that's it so this is called a locked box approach so how this works is it involves the vendor providing endurance generally warranting a balance sheet for the business being sold at a point in time before signing so an example i gave you before we have a business and we it

31:02 would just be at say the november the october period i think i said it was so at that point in time you just calculate the balance sheet at that point in time you do negotiations you settle the business based on that you in fact are in your net debt at that date you factor in your earnings at that date and you factor in any working capital adjustment at that date and that is it it all bundles into a single payment and

31:21 that's the final and only payment you make so that's the locked box approach so there's a number of pros and cons to this the pros is obviously simplicity and some transactions it's the only way you can do it for example the public to private the cons is you know if there is a large you know movement in the business and that may be favorable to the buyer or seller you know it's often favorable to the buyer

31:43 because in those you know let's say it's six months to completion the business is going to be accruing a whole lot of cash and that won't actually be factored into the lockbox negotiation because as i said before it was settled at october and but we're completing six months later so any cash is just going to get the benefit of the buyer it could go the other way as well right there could be changes in the business

32:02 in those six months which might actually result in a significant decline in the business but then of course you've still got your material adverse change clause which you can then potentially walk away from the deal so i would say locked bridge locked box approaches generally favor the buyer so here's a here's a very basic visualization of how that might work so in this example and forgive me for the old dates so in this example the purchase price

32:30 calculation is based on the most historical figures so in this example we're saying okay let's just going to deal that do all the due diligence and deal at 31 december that's our line in the sand so we're going to use the most recent financial information we're going to use the net debt figure at that point and we're going to calculate our net working capital at that point in time however we don't exchange and complete the deal until much later so in this

32:51 chase in this in this example we're not exchanging till much the next year so that's three months later and we're not completing until another month so four months after the initial exchange date when the cash is exchanged typically i think in most transactions you'll actually do these on the same date but we've just split it out so you can actually see the different processes for the actual signing and exchanging of the sale agreement versus the actual

33:14 payment but in practice this is often done at the exact same time so as i mentioned before you do all your calculation over here and you complete over here and there's no adjustment at this later date and any upside or downside is just assumed by the buyer [Music] so what are the advantages and risks of the locked box mechanism so let's look at from the purchaser's perspective so the advantages for the purchaser so number one competitive adventure it will

33:40 be attractive to the vendor so you can probably you know if you're competing with other bids from other buyers to secure the deal maybe you can get this over the line because it just packages everything up and there's no uncertainty the next advantage is on that it's on cert it gives a provide it provides a very high level of certainty so you know what the normal and actual level of working capital is you know what the net

34:02 debt is and it's all factored into a single purchase price and no further payments another advantage is speed so historical results are readily available you know it's all ready to go you can settle the deal probably a lot quicker so the risks for the purchaser on the other side is there is an opportunity lost to obtain price reduction through completion accounts mechanism so as i said before if there is a downside to the business in the next three to four

34:28 months in that example earlier normally you would just do a downward adjustment to the purchase price through the completion accounts mechanism however with the locked box you know you're already signing that up so you don't get any downside on the flip side you do get the benefit of any upside in the between the time as well so it kind of evens out there another risk is there's less time available to examine the effective date balance sheet compared to full

34:52 completion accounts review next is management accounting records still under the vendor's control as opposed to completion accounts which is under the buyer's control so maybe you're a little bit more comfortable with the completion accounts because you know you've prepared them as opposed to we don't really have a good view of the of the vendors processes and control and whether they're trying to sneak one under that we're not aware of we also need to watch out for

35:16 inter-company transactions in the accounts as well which obviously probably wouldn't be an issue of post-completion if the if it was under the buyer's accounts and then finally the vendors obligations need to be carefully drafted to protect the purchaser okay now what about from the vendors perspective aka the seller so the advantages for the vendor so speed and minimizes vendor time you don't need to worry about completion accounts later on so there's no completion accounts process so it makes the whole

35:46 sale process and totality a whole lot simpler uh perceived higher headline price for the business so at the end of the day obviously it doesn't actually change the purchase price but if you're moving more of the completion account adjustment into the headline price and you're moving the net debt adjustment into the headline price it looks like you got a better deal for the business so maybe if you're a seller you can report to your shareholders your

36:08 investors and say look i've got a higher price for the business we know that it probably would have evened out over time anyway but it just tells a better story might be perceived as a more attractive favorable structure by the vendor and also finally certainty of purchase price at exchange so yes if you have a completion accounts mechanism you know you you do have a certain level of certainty around your purchase price from your headline price but at the end

36:32 of the day um you know it's still at the back of your mind could i have a large negative downward adjustment to my purchase price from the completion accounts and just just to close us off some some other important features we should be aware of so you need to ensure that you have received the appropriate protection from effective date through exchange and completion and this includes value leakages warranties and undertakings as well as warranties on the effective date

36:54 balances um in addition you need to be able to successfully implement the structure you would need to be granted a good level of access to the effective date balance sheet so again coming back to the issue of you know the the buyer typically prepares the completion accounts because the business will be in their hands at that point in time but because under the lock box mechanism if the seller is preparing all of the accounts it's important probably even more

37:19 important than usual that the seller also gets a good level of access to the effective date balance sheet and that includes the controls the processes you know consolidation adjustments like the underlying transactions etc okay so that's the end of the chapter discussing spna uh you know i guess the key you know at the end of the day it might not seem like a key issue because all it is is you've done all the hard work negotiating the deal agreeing the deal

37:48 putting the terms together with the other party you then give it to your lawyers but as you've seen in this chapter a lot can go wrong if you don't actually pay it the proper attention and all your hard work agreeing certain terms could go out the window if you know your issues aren't addressed clearly and if the lawyers haven't actually interpreted correctly or there's you know certain drafting issues within it so really important that we understand

38:13 all the possible issues that arise so that we're across that and we can help mitigate that by involving the lawyers early and being across the issues and looking out for them as we review those sale agreements so hopefully you found that useful thanks for watching