.jpg)
Signing an NBIO is a major milestone in any M&A transaction as it means that both the seller and the buyer have agreed the major commercial terms for the transaction to progress, such as price, structure, and timing.
All parties will be energised and excited to complete the transaction as quickly as possible as a great deal of time and energy will have been spent to get to this position. The key to ensuring a successful transaction at this point is to continue the momentum and hold all parties to account – particularly any deadlines identified in the agreement such as signing the Sale / Purchase Agreement and completion.
Exclusivity
One of the main aspects of an NBIO that a seller will need to give up when signing (an NBIO) with a buyer is allowing the buyer to have exclusive rights (for a period) to complete the transaction. Exclusivity can be for a period of anywhere from 6 weeks through to 3 months. The period length will normally allow for the buyer to conduct due diligence and to negotiate the key transaction legal documents (Sale and Purchase Agreement, Shareholders Agreement). Once and NBIO is executed, the sellers negotiating power decreases significantly. Not only does the seller have to cease all communications with other parties, but if the deal was to fall over with the buyer (that signed the NBIO) then it sends a negative signal that something is wrong with the business.
While Exclusivity is disadvantageous to the seller, it is nearly always required because the buyer will want comfort that the seller will not transact with another party before spending the time required to conduct extensive due diligence on the company. The cost of conducting due diligence is also very high – going into the hundreds of thousands of dollars for accountants, lawyers and industry experts (HR, regulatory) to review the different elements of the business.
Last opportunity
For a seller, negotiating and signing an NBIO is really the last opportunity to seek the best possible transaction terms. Once the NBIO is signed, your bargaining power significantly reduces as you cannot use the threat of signing with another party to enhance your position. You want to make sure you get everything you want, and it is clear what is for sale and what the owners obligations will be post sale. It is also more favourable to provide as much detail in the NBIO as possible as this will limit the ability of the buyer to push back on any outstanding items that have yet to be agreed or discussed when the final legal documents are prepared. This will also limit the influence (and cost) of the lawyers on the transaction as there will be limited items to be agreed and negotiated.
Diligence for the Buyer
Any seller granting exclusivity to a buyer must do so with caution. You want to make sure that you are dealing with a bona fide buyer who not only has the means and the experience to buy the business, but also the funds. It is worth conducting your own background checks on the buyer so that you can understand firstly how many transactions they have completed, but also whether they are reasonable and commercial when negotiating on detailed elements of the transaction documents. Some buyers may also view signing an NBIO as a free option; until they start spending money on advisors, their outlay for receiving exclusivity is essentially nothing. Your M&A advisor should be able to conduct background checks on your behalf through their relevant network and knowledge of the buyers.
Bad News
Being upfront and candid about any relevant news is important, particularly if it is bad news. While the loss of a key client or poor trading results can have an impact on a transaction, it does not necessarily mean it will be terminal. A buyer may use bad news received to their advantage (to either renegotiate the price or terms of the deal), however to minimise this from happening the seller needs to clearly articulate both the impact on the business operations and the underlying revenue and earnings of the business. One of the main reasons to run a very tight and controlled process is to minimise / shorten the transaction timeline and the potential risk of bad news impacting a deal.
While many people will believe that signing an NBIO is essentially a deal done, the truth is that it is really only the start of a transaction. A lot of work is required to convert the NBIO into a final signed sale agreement, and this can take many months.
