Tales From The Trenches: Negotiating M&A Term Sheets In The Pandemic
The global pandemic, sheltering in place, the shutdown of the economy and the stalling recovery has triggered a massive drop in M&A activity, with the total value of deals in the first half of 2020 at just over $900B, 53% below the same period in 2019, and the lowest half-yearly total since the first half of 2010. Volume, meanwhile, fell 32% year on year, to just under 7000 deals, the lowest half-yearly volume total since the first half of 2013. Meanwhile, according to the CB Insights quarterly report on venture capital, on a quarter over quarter basis, M&A activity also suffered a sharp decline, falling to 120 exits in Q2 of 2020 from 155 in Q1 2020.
While much has been written on the key issues in M&A deals that have been brought on by the global pandemic, Silicon Valley lawyer Louis Lehot, the founder of L2 Counsel, P.C., hosted a webinar on Tuesday, July 14, 2020, to focus in on how to negotiate an M&A term sheet. The webinar, moderated by Lehot, featured panelists Natasha Allen, founding partner of Allen & Hatcher LLP, Vitaly Golomb, managing director of GS Capital, and Brian McAllister, principal at MBL Counsel.
Following the webinar, we sat down with Louis Lehot, who has helped dozens of entrepreneurs in technology and life science businesses navigate to successful exits, as well as big tech, real estate and life science strategic and financial buyers construct smart acquisition strategies. As with the webinar, we focused on key takeaways on how to approach the M&A term sheet, particularly in this environment.
Term sheet — pros and cons
In any M&A process, there comes a time when buyer and seller need to come to a meeting of the minds on the key terms of a deal. The benefits of a term sheet, while typically non-binding, clarify for the lawyers and advisors what has been agreed in principle. Term sheets offer a vehicle to outline the timetable to complete key tasks and who has what responsibilities to get to signing and closing. Typically, buyers will exchange this confirmation of key terms in exchange for exclusivity of negotiations for some period of time. Panelists noted many of the key benefits from a process point of view, and the ability to identify deal-breakers at the outset, and to focus negotiations. A term sheet can often enhance deal stability and commitment of all parties. Louis Lehot warned sellers negotiating term sheets with exclusivity to get the key terms written down before signing the exclusivity provision, as the leverage in negotiating power shifts to the buyer as soon as the ink dries.
While there can be disadvantages in terms of cost and time to negotiating the term sheet before the definitive documents, panelists underscored how typically the benefits outweigh the costs. Unintentionally binding obligations or duties to negotiate in good faith should be explicitly disclaimed.
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Louis Lehot | Negotiating M & A Term Sheets in The Pandemic
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