The idea behind a vendor pack is primarily about setting up an auction on which potential bidders can bid, not just on price but also on the terms and conditions of sale.
How does a traditional sale work?
This involves the seller preparing an information memorandum and a teaser document. The teaser document, which contains high-level information about the ‘target’, is sent to a variety of companies – enough to find out which ones might be interested in buying the target.
Some of those potential purchasers is then sent a fuller information memorandum, giving them sufficient information with which to join the bidding process – but only by way of indicative bids. Usually, one potential purchaser is selected, a period of exclusivity is agreed, and full further information is provided to them. All being well, a sale and purchase agreement is agreed and they move forward to completion.
How is a vendor pack different?
A vendor pack reverses this whole process. In essence, the vendor puts a lot of work upfront and prepares not only the teaser and information memorandum, but a whole due diligence pack (possibly including due diligence reports) and a proposed sale and purchase agreement.
Once would-be purchasers are selected, they’re asked not only to bid on price, but also to state what further due diligence they’d want to do and terms and conditions they’d want to change, if any.
This make a lot of sense from the vendor’s perspective: how can you agree a price without knowing the terms and conditions of a sale? After all, you’re comparing apple and pears if one purchaser wants 40 indemnities, and five years’ restrictive covenants, while another will accept some general warranties and two years’ restrictive covenants.
In a traditional deal the purchaser’s lawyer sets out their draft document, and the vendor is entirely on the back foot – basically asking for protections that the purchaser has asked to be watered down.
So a vendor pack turns the legal work in effect upside-down. As a potential purchaser’s lawyer, you need to analyse the draft share purchase agreement (SPA). Your client will ask you, “do I really need that extra protection?” knowing that making the request might lose them the deal. It might not sound very different but, believe me, it is.
What are the main benefits of a vendor pack?
Because the vendor does all of their work upfront, the period from submitting teasers until completion will be shorter, cheaper and a lot less stressful.
The vendor is fully in control at all times. No one will even know the target is on the market until all the due diligence, SPA and other principle documents have been drafted.
Because the potential bidders have to specify to the SPA the changes they’d require, the amount of contentious changes will be minimised. A purchaser who asks for too many alterations will simply be eliminated.
It’s hard to overstate the combined pressure of a) answering someone else’s due diligence enquiries (legal, commercial, accounting and tax) while b) negotiating a SPA, and c) managing the expectations of your team – in the middle of doing your day job!
Are there any disadvantages?
The key disadvantage of a vendor pack is its upfront cost at a time when you might not have an acceptable bid. You might also turn some purchasers off. Generally, only the purchaser looks at the teaser; they might get their professionals involved in a high-level review of the information memorandum, but then get exclusivity before spending the big fees on due diligence and legals, etc.
Here, each purchaser needs to be prepared to commit more professional fees at an earlier stage.
Beware of over-egging your pudding
If you’re confident you’ll get a number of interested purchasers, a vendor pack can be a great process to undergo. This is especially true if you plan to sell a target in, say, 12 months’ time. You can do the preparatory work over the first nine months, and, rather than cramming four jobs into three months, you can do the majority of your sale work at a leisurely place. You can then put the pressure on a number of potential purchasers and their advisers.
One word of caution: do not over-egg the pudding. If the SPA is too vendor-friendly it will impact on the price. Give the purchaser the protection they need, but have it crafted in such a way that it won’t result in a post-completion claim.