SPA Negotiations
Does anyone have some material / tips on SPA negotiations? Do the lawyers typically handle this, or what role does the deal team have?
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Deal team deals with the commercial points. Your legal counsel ensures those points are converted into legal language and will raise technical legal points independently.
SPA terms can be broadly broken into economic and governance related.
Understanding SPAs and key negotiation points is all about reps. Early on, the most important thing is to carve out enough time to read every word. Things move quickly after the first draft, and it’s impossible to understand redlines if you haven’t been through the base document.
Keep lists of questions as you go through the draft or see how the deal team is negotiating points. Ask the senior deal team member how they are thinking about key points.
After being through a few negotiation processes you’ll see the key issues are often pretty similar. It will allow you to focus your reading on sections that contain those issues.
Echoing what someone above said about getting reps. That’s the only surefire way to learn which points are critical and which are ones to concede. However, best way to begin is:
(1) observe how senior professionals at your firm approach SPA negotiations. The interesting thing here is that there is no one right way - each of the senior professionals at my firm has their own approach (some very negotiated, some more lenient, some good cop, some bad cop). See what works and what doesn’t
(2) again echoing the above, read the docs. It will be tedious, but READ THE DOCS. One way a junior can add value is to catch things in the docs that are incorrect or misrepresented and do not reflect the business agreement. This adds value because your senior partner may not read every word and instead just trust the lawyer to implement the business agreement correctly, but lawyers don’t always have a full understanding of the business agreement like you will
(3) leverage your lawyers. They work for you to get your docs correct. If you have questions on how something is working, ask them. You don’t have to ask the senior lawyer, just call up the associate on the deal and ask them to explain XYZ. This was one of the biggest ways I learned (I’ve now negotiated 3-5 SPAs).
So in summary - Read the entire document, make a note of anything that you don’t understand / seems weird or off, and then ask the lawyer on the side to get an understanding. Then, if it is a material issue tell your deal team and reap the rewards of being a deal king
Number 3 is a huge one, if you have any lawyer buddies, walking through a full SPA/APA with an Associate is honestly how I learned most of what I did. Just going section by section understanding what the legalese is saying, why each side is positioned the way they are, why that section exists, and what the market stances are, is a great way to learn. That and read through the docs on your own, as others have said.
Thanks guys. A couple other questions
1) Who usually handles the SPA negotiation? Is this a VP? Usually someone more senior?
2) Any ways to prepare in advance other than getting reps? If I get thrown in the negotiations, I want to make sure I have at least a decent understanding going in
Will vary by firm, but typically Sr Associate/VP and deal team lead confer on major points of their respective markups and then discuss with their own counsel. First cuts often result in the lawyers creating an issues list that is then discussed with counterparties over the phone. Lawyers will lead the discussion but deal team will jump in on commercial points. As an associate, I would be proactive about reading the document/marking it up and then discussing with VP just to get reps.
Every transaction is different but a few general areas to hone in on: purchase price definition and flow of proceeds (ie. how much are you actually paying, who is getting paid, what is rolling over pre versus post-close), indemnifications (what is seller/buyer on the hook for), NWC mechanism (what is truly normal NWC), reps and warranties (what is seller asserting to be true), and definitions of important terms upfront.
In my firm (MM), usually the process is (1) counsel provides feedback, (2) everyone reads the doc on their own and counsel’s issues list, (3) hop on a call with counsel to talk through any feedback / questions (lawyers will usually identify material points to discuss if you don’t have any issues). On the call with the lawyers, if you’ve got a partner or someone senior on (which we often would), largely defer to them unless there are specific material items you’d like to bring up in the doc. If the partner isn’t, then make it more of a back and forth with the lawyers and ask questions if you need to figure out the deal.
Then, we usually share an issues list with seller counsel, and find a time to discuss commercial points. I’d say it would be rare at this stage for someone with no reps to lead this. If your partner wants to be involved in key deal negotiations (which mine often do), then they will lead the negotiations with seller with assistance from VP. If the partner is not on, the VP will lead and sometimes look to you to supplement.
Deal docs and negotiation are a critical part of the PE business and doing deals - I doubt funds would throw someone in the deep end on deal negotiation with sellers if that person has not at least been part of the negotiations on a number of deals, so I wouldn’t be too worried about getting thrust into the limelight.
In my case, I initially just listened in when more senior team members were negotiating docs, and then once I got more comfortable I now take a larger role in negotiating transaction docs on portco add-ons, and gradually am becoming a larger part of platform investment SPA negotiations.
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