Mergers and acquisitions (M&A), particularly in the private sphere, can be complex transactions where commercial and legal issues are deeply intertwined. While every deal is unique, common pitfalls arise repeatedly in negotiations. Left unchecked, they can derail a deal, damage relationships, or create costly post-completion disputes. Below are five of the most significant traps, and strategies to avoid them.
- Overlooking Deal Structure Implications
The Pitfall:
Parties often focus on price and headline terms while overlooking how deal structure. For example, asset sale, share sale, unit sale or hybrid. This is one of the first and most important decisions in a sale or acquisition and affects tax outcomes, liability exposure, and regulatory compliance. For example, buyers may prefer asset purchases to ring-fence liabilities, while sellers often push for share sales to secure cleaner exits and capital gains treatment. A mismatch in expectations can cause late-stage friction.
How to Avoid It:
Raise structural considerations at the outset, during (or even before) drafting the heads of agreement or non-binding indicative offer. Seek early tax and accounting input alongside legal advice so both sides understand the implications. Align on whether the structure meets commercial objectives and minimises risk exposure before negotiations progress too far.
A qualified legal expert can help determine the right structure in your specific circumstances. For example, a business with unique licensing or regulatory approvals may be better suited to a share sale if certain licences cannot be transferred, though advice will still be needed around any notification or change of control requirements. Conversely, where contractual relationships or goodwill are central to the business, a share sale may provide a cleaner path to preserving those relationships without requiring third-party consents.
- Mismanaging Exclusivity and Confidentiality
The Pitfall:
Exclusivity undertakings and confidentiality agreements are often treated as routine. Yet vague or poorly drafted provisions can backfire. A buyer may commit significant due diligence expenditure without proper exclusivity protection, while sellers risk being tied up by overly restrictive obligations that limit engagement with other bidders.
How to Avoid It:
Negotiate exclusivity periods that balance fairness with commercial reality, typically time-bound and conditional on genuine progress. Ensure confidentiality clauses protect sensitive information but allow disclosures to advisers and potential financiers. Both sides should pay attention to remedies for breach (injunctions, damages, or both) to ensure protections are enforceable.
- Inadequate Due Diligence and Warranty Negotiation
The Pitfall:
A rushed or superficial due diligence process exposes buyers to hidden liabilities, from employment claims and tax liabilities to environmental breaches. Equally, sellers sometimes underappreciate the scope of warranties and indemnities they are asked to give, exposing them to disproportionate post-completion claims.
How to Avoid It:
Buyers should adopt a risk-based due diligence approach, prioritising material risks over exhaustive review, but ensuring legal, financial, and operational areas are adequately covered. Sellers should resist “boilerplate” warranty suites and instead negotiate limitations, such as time caps, financial thresholds, and disclosure processes. A carefully crafted disclosure letter can protect sellers while giving buyers transparency.
- Disputes Over Price Adjustment Mechanisms
The Pitfall:
Completion accounts and earn-out arrangements are fertile ground for disputes. Sellers may assume the purchase price is fixed, while buyers expect adjustments for working capital or net debt. Earn-outs tied to future performance can also create tension, particularly where sellers remain involved in management.
How to Avoid It:
Clearly define the adjustment mechanism and accounting principles in the sale agreement. Specify who will prepare completion accounts, how disputes are resolved (for example, through an independent accountant or auditor), and the timeline for raising challenges. If using earn-outs, agree upfront on governance and decision-making processes to reduce conflict around performance metrics.
Parties should, as a starting point, consider the following basic questions:
- How is the purchase price calculated, and will it be adjusted?
- How and when will the purchase price be paid?
- Will the purchase price be paid in cash, shares or some other form of consideration (or a mix of all)?
- Will part of the purchase price be held back at completion? If so, why, and how much?
- Will the purchase price be subject to any performance-based incentive (such as an earn-out)? If so, is that earn-out commercially reasonable and objectively measurable?
- Underestimating Regulatory and Third-Party Consents
The Pitfall:
Parties sometimes assume regulatory approvals, landlord consents, or key customer approvals will be straightforward, only to face delays or refusals that jeopardise completion. Overlooking change-of-control provisions in contracts can also trigger termination rights or renegotiations. These items are often a source of escalating legal costs and delay.
How to Avoid It:
Identify all required consents early in due diligence. Build conditions precedent into the sale agreement with realistic timelines and clear allocation of responsibility for obtaining them. Where approvals are uncertain, consider mechanisms such as “hell or high water” clauses (where the buyer commits to take all steps necessary) or material adverse change provisions to allocate risk. Communicate with third parties as early as possible. Leaving consents to the last minute is a sure way to stop a deal dead in its tracks.
Conclusion
Private M&A and business sale transactions are not just about striking a price; they are about carefully balancing risk and reward. Common pitfalls, like structural missteps, weak protections around exclusivity, inadequate due diligence, poorly drafted price adjustments, and neglected third-party consents, can turn a promising deal into a dispute-ridden process. Addressing these issues proactively, with strong legal input and clear communication, greatly improves the chances of a smooth transaction and a durable outcome for both buyer and seller.
For more information, speak with our experienced corporate team today on (03) 9481 2000 or info@tauruslawyers.com.au.