M&A: Safeguards for buyers

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In an M&A transaction, a purchaser may find that well-drafted representations, warranties and indemnities provided by the seller are not particularly helpful if the seller does not have the financial means to pay damages or honour the indemnities.

Four ways to avoid this:

1. The seller to provide bank guarantee as security for any claims which may be brought by the purchaser against the seller. This is probably the most secured way for the purchaser but the seller will have to incur costs to procure the bank guarantee. I have seen bank guarantee used to secure payment from sellers in the event there is a shortfall in profit guarantee.

2. If the seller is a corporation, the purchaser may obtain guarantee from the shareholders of the seller. The purchaser should be satisfied with the financial strength of the parties giving the guarantee.

3. Structure the payment of the consideration in several tranches and give the purchaser the right to set off the claimed amount against the next payment instalment.

4. The purchaser may retain part of the consideration for an agreed period to satisfy claims which may be brought by the purchaser during that period. The purchaser will pay the retained amount (minus any claims brought by the purchaser) after the agreed period expire.

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This post was first posted on Linkedin on 5 October 2022.

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