The SPA defines both the terms of a transaction and the basis for deriving the final purchase consideration. The completion price adjustment mechanism set out in the SPA can mean the agreed headline price differs significantly from the final consideration paid and received. A well negotiated SPA can therefore both protect and optimise value.
It's common for buyers and sellers who are the direct parties to an SPA to take specialist accountancy advice, alongside legal advice. But where a lender has an economic interest in any sale, there are significant benefits in the lender directly engaging accounting advice to ensure the SPA protects their value.
This will be particularly important in the case of non-distressed disposals, where the debtor is driving the sale or disposal process, as opposed to a lender-driven enforcement strategy.
In this challenging macroeconomic environment, many lenders expect a rise in distress within their portfolio. Rather than enforcing to realise security, lenders may instead rely on proceeds from a going concern sale to reduce their exposure and/or contribute to the liquidity or new money requirements of the debtor.
Consider a situation where a company in a distressed situation is being sold, and where some, or all of the proceeds of that disposal will flow directly to the security agent on behalf of the lenders. If the lenders aren't involved in the negotiation of the SPA, they are at risk of value erosion and value leakage.
Lenders might assume that the seller (ie, the borrower) is always motivated to achieve an optimal final consideration. However, we've advised on situations where the sale proceeds derived from the completion mechanism were due to the lenders, the value broke in the senior, secured debt and the seller (as shareholder) was ‘out of the money’. In circumstances like this, the economic interest in the sale may lie with the lender group, and therefore the lender group may have more to gain by optimising the SPA process.
In an environment of increasing distress among corporates, we expect more situations to arise where lenders would benefit from driving the SPA negotiations, as well as having greater insight into the completion mechanics.
By engaging specialist accounting advice on an SPA, a lender can optimise value via the completion mechanism, avoid value attrition and mitigate disputes in the post-deal completion accounts true-up mechanism.
The accounting definitions of key items in an SPA – such as enterprise value, cash, debt, working capital and how normalised working capital (where appropriate) is calculated – can significantly impact transaction value. Lenders can optimise their position in these areas by engaging their own SPA accounting advisers.
Completion price adjustment mechanisms can be complex and subjective. Lenders can benefit from advice on which type of completion mechanism is the most appropriate for them and the deal, eg, a ‘locked box’ or a completion accounts mechanism. This can also mitigate the risk of a lender being penalised in any post-deal adjustment.
Under a completion accounts mechanism, SPA accounting advisers can support lenders in the post-deal completion accounts adjustment process and help resolve any disputes.
Many lenders already exercise their right to appoint financial advisers when a borrower is in distress, for example by seeking advice on valuation or liquidity matters or commissioning an independent business review (IBR).
But lenders should also consider exercising this right in relation to relevant disposals. Instead of only relying on the seller to achieve a good outcome, including SPA accounting advice means lenders can achieve the optimal outcome of any disposal where they have an economic interest.
For more information and for end-to-end advice across the deal cycle, contact Patrick O’Brien or Christopher McLean.
