Acquisition Tactics - From LOI to Closing

May 2021

Recently, I had the opportunity to guide a prominent German company through a significant capability acquisition. This engagement was particularly enriching because we operated almost as an outsourced corporate development unit for the client. The role required us to integrate deeply with their strategic objectives, evaluate potential targets, and execute complex deal-making processes. After months of meticulous planning, analysis, and negotiation, we are now at a stage where the deal is poised to materialize.

Reflecting on this journey, I want to share some key tactics that have proven effective for safeguarding the buyer’s interests from the initial Letter of Intent (LOI) through to closing.

When embarking on an acquisition, my first priority would be to establish control over the negotiation process. This starts with securing a tightly-drafted exclusivity agreement—often called a “no-shop” agreement. By locking in exclusivity, I ensure the seller cannot entertain other buyers for a defined period, typically 90 days, allowing me the space to conduct due diligence and negotiate without the distraction of a potential bidding war. Including this as a standalone agreement, rather than part of a Letter of Intent (LOI), has proven to be a more effective approach for me. It not only avoids prematurely committing to terms but also protects against wasted resources if the seller chooses another buyer.

Negotiating material terms too early in an LOI often puts buyers at a disadvantage. Sellers, particularly those represented by savvy investment bankers, leverage the competitive dynamics of the marketplace to extract concessions. To counter this, I either bypass the LOI entirely in favor of proceeding directly to the definitive acquisition agreement or, if an LOI is required, ensure that it is deliberately broad and non-binding. A carefully crafted LOI limits binding provisions to exclusivity, expense reimbursements, or select specific clauses, granting me flexibility and protecting against the risks of a binding interpretation.

Due diligence is the linchpin of any successful acquisition strategy. Its purpose is not only to confirm valuation assumptions but also to uncover hidden risks. Over the years, I’ve learned that inadequate diligence often leads to overpayment, unforeseen liabilities, or integration hurdles. For this reason, my approach extends beyond data rooms into fieldwork. I prioritize in-depth conversations with stakeholders—customers, suppliers, competitors, and management—to gain a holistic understanding of the target’s value drivers and potential pitfalls. I also maintain the discipline to walk away from deals if risks outweigh rewards, even after significant investments of time and resources.

Whenever feasible, I advocate for asset acquisitions rather than stock purchases in private company deals. This strategy offers a dual benefit: a stepped-up tax basis in acquired assets and minimized exposure to the target's liabilities. However, I am cognizant of liabilities that may transfer under successor liability doctrines, such as environmental or product liabilities. To mitigate these risks, I insist on robust indemnification provisions in the acquisition agreement and ensure creditor claims are managed appropriately, avoiding potential fraudulent conveyance issues.

The acquisition agreement is the culmination of strategy, diligence findings, and deal-specific nuances. I’ve found it invaluable to avoid cookie-cutter templates. Instead, I ensure that the initial draft reflects the unique circumstances of the deal, including risk allocation and purchase price considerations. Depending on the context, my approach may vary—from drafting a seller-friendly agreement to preserve a favorable deal to crafting an aggressive version for transactions fraught with risks. A skilled transaction lawyer, well-versed in the target’s business and potential challenges, is essential to this process.

To safeguard against post-closing liabilities, I typically advocate for escrowing 15–20% of the purchase price for a period of 18–24 months. Escrow accounts, held by an independent third party, offer a fair mechanism to resolve unforeseen claims without resorting to litigation. When dealing with multiple sellers, I recommend appointing a representative for the sellers to streamline decision-making related to the escrow. While escrows are generally more palatable to sellers than holdbacks, I carefully assess their terms to ensure adequate buyer protection.

From experience, I approach earn-outs with caution. While they can bridge valuation gaps, they are fraught with potential conflicts. Issues such as accounting disputes, exclusion criteria, and post-closing operational control can create significant friction between the buyer and the seller. Earn-outs also risk misaligning incentives, potentially leading to suboptimal business decisions. For these reasons, I reserve earn-outs as a last resort, structuring them meticulously to minimize ambiguity and conflict.

A well-drafted Material Adverse Change (MAC) clause is a critical safeguard in acquisition agreements. However, the inherent ambiguity in most MAC definitions can complicate enforcement. To address this, I negotiate for clear, objective criteria—such as specific declines in EBITDA or revenue—rather than relying on subjective language. This clarity ensures that the clause serves its purpose as a meaningful protective measure, rather than an empty formality.

Finally, liability caps are among the most critical points of negotiation in private company acquisitions. The size and scope of the cap depend heavily on the context of the deal. In competitive auction environments, caps may be as low as 10% of the purchase price, whereas deals involving distressed targets or significant risks might warrant caps equal to the purchase price—or even the absence of a cap altogether. Regardless, I push for exceptions to these caps for breaches of covenants, specific indemnities, and critical representations, ensuring the buyer is adequately protected.

Each transaction is unique, and by adapting to its specific demands—while keeping a firm eye on the fundamentals—I strive to ensure not only the success of the deal but also its long-term value.