Many business owners and their lawyers each day create heads of agreements for various transactions. Many of these agreements however lack the proper thought to drive efficient outcomes. Consequently many negotiations fail, or worse yet drive poor outcomes for all involved.
If you’ve ever read The Art of War by Sun Tzu, a key teaching of his writings, is that the battle is won prior to the battle itself taking place. Victory is achieved through proper preparation, planning, resources, tactics, understanding the opponent and shaping the environment where the battle is taking place.
In our last two articles regarding hostile takeovers we discussed, how acquisition parties could take advantage of takeover targets. You can read the first one here.
In this article we’ll be discussing some of the core elements that are required to drive an effective HOA.
Business advisors with real world experience.
As part of our business advisory and corporate advisory services we are often engaged to negotiate complex transactions for our clients. This ranges from mergers and acquisitions, equity placements and debt negotiations.
Because we work in the private lending and investments space, we understand how to force a position in ways that most others can’t. This is because we understand that necessity, is the fundamental truth by which to force someone else’s behaviour! Whilst this may seem a bit aggressive, the reality is that no one wins if there is a prolonged negotiation period! Deal fatigue kicking in real, and emotions can get high leading to a deal not going ahead.
Business advisors who think practically.
The reality is this. Money needs opportunity, and opportunity needs money. It is symbiotic relationship where the two both need each other to survive.
As we have seen from our business advisory experience, the problem with most heads of agreements, is that they don’t create necessit! More importantly they don’t create enough buy in from both parties to cause a genuine interest in making the transaction work (continue reading on how to create an effective HOA).
How to ensure the success of your heads of agreement.
To ensure your next deal is a success and to create a compelling heads of agreement. We have provided some general advice you can follow. The below is just a few items we look as part of our business advisory and corporate advisory services.
The below relates to business negotiations that are complex such as, mergers and acquisitions, capital raisings and investments. The advice is not for basic things such as the rental of a premises or the intention to purchase goods.
Please speak to your lawyer for the right advice for your individual situation!
The legal enforceability of HOA
Heads of agreements can be legally binding or not, you can read more here about this. You will need to discuss with your lawyer and corporate advisor whether your agreement should be legally binding or not.
Most transactions we have advised on are legally binding based on certain conditions and terms. The importance of having a legally binding agreement, is it causes parties to be committed to the process and for there to be repercussions to the parties if they fail to meet their obligations.
Additionally, it is not uncommon to have other legally enforceable deeds / agreements being entered into in parallel with the HOA. For example, loan agreements.
High level objectives
You must describe at a high level what the outcome both parties are seeking to achieve. Additionally, you must make it very clear what are the required points of agreement that must be reached as part of the HOA, in order to affect the outcome.
Saying we wish to, “complete the purchase of shares in xxxx for yyyy” isn’t enough.
What are the steps that need to be taken to cement that agreement to the satisfaction of all parties?
Do you need a valuation?
Do you need a shareholder agreement?
What resolutions will go to shareholders?
What will be the rights of each share?
These are just a select few points that must be agreed to, prior to a share purchase going ahead.
You should have within your HOA at the very least a high level overview of the lines items, that must be agreed to between the parties.
Alternatively, more aggressive HOAs will not have a full breakdown of all line items, as to take advantage of time and cost pressures to force an outcome.
Financial investment
As a condition of signing the heads of agreement, there needs to be a financial investment by one or both parties. A financial investment might be a percentage of the deal size, an amount to cover DD costs, or a deposit paid.
This amount needs to be small enough as not to deter an interested party, but large enough that it causes some discomfort should the deal not go ahead. This amount should be nonrefundable, and it should stand as a loss for one or both parties.
Exclusivity
There must be deal exclusivity for the HOA being entered into and it must be for a specified period of time. Once this period has lapsed, exclusivity is lost, and so to the financial investment made.
Exclusivity ensures commitment to the deal, and forces people to act quicker or they could lose the opportunity to transact in the deal.
Time
If our business advisory or corporate advisory experience has taught us anything. It's that there must be a time limit put on an agreement being reached for the outcomes mentioned in the HOA. If agreement is not reached, then one or both parties stand to lose the financial investment they have made. Additionally, they stand to lose deal exclusivity to the opportunity.
Resources and strengths of each party
One of the key points that parties often fail to provide in their HOA is their ability to bring something of value to the party, beyond the transaction at hand. If a party can provide certainty, that it can complete a transaction, better terms can be negotiated for proving that certainty.
For example, when our clients engage us as their business advisor or corporate advisor, they know we can give the other party comfort because we can bring certainty regarding financing a transaction. The other party knows that the people opposite to them, have access to family office and wholesale funds to put the transaction into place. This certainty, of being able to do a transaction, then allows our clients to negotiate better terms!
At Royce Stone Capital we aren’t just business advisors proving advisory, we also work on the transactions front as well.
To read more about our business advisory services click here.
To read more about our corporate advisory services click here.
