How To Use "Finding Middle Ground"
This guide will be most helpful when read side-by-side with a purchase agreement to help make sense of the Agreement’s terms. Each section can be read by itself, without reference to the other sections, and in any order.
Each guide begins with:
A rating of that section’s Significance to the deal
An estimate of that section’s Time to Negotiate
An estimate of that section’s impact on Transaction Cost
An indication of whether that section affects Deal Value, Risk Assessment, and Ability to Close
We provide each of these in an easy to read format as shown below:
In this example, we learn the following about the Real Property section of a Purchase Agreement:
The Significance of Real Property on a deal is Situation Specific
The impact Real Property has on the Time to Negotiate ranges from Minimal to Moderate
The impact of Real Property on Transaction Costs can either be Minimal or Substantial (as its Situation Specific nature would suggest)
Real Property impacts both Deal Value and Risk Assessment
How We Measure “Significance”
Each term is categorized according to its impact on (1) deal value, (2) risk allocation and management (together, “risk management”), and (3) the likelihood that the parties will complete the proposed transaction. Each term has been classified into one of the following four categories:
Deal-Drivers
These terms have the most significant effect on one or more of the three factors listed above. They should be the main focus when conducting research and negotiating an agreement. Because they are supremely important to both sides, the middle-ground options are more likely to be a starting point than the final terms. Typically, the contents of these terms will be specialized to cater to the needs of the participating parties. That is not to say that the middle ground terms are not fair and useful, but the more important the term is, the less likely it is that the standard position will satisfy each side’s goals. Once in place, if these terms are not adhered to the deal will likely fall apart and, in many cases, may result in legal liability.
Situation-Specific
These terms are labeled “Situation Specific Terms” because their importance depends on the context of the particular deal. They may be worthy of significant focus, or they may address a remote contingency that is not worth formal negotiation. When they are important to a deal, they will usually take center stage in the negotiations. When they are largely irrelevant, they can safely be relegated to the background through the use of a middle-ground term or by letting each side’s lawyers sort it out. Likewise, there may be substantial transaction costs relating to these terms, or those costs may be almost nonexistent. If important to the specific situation, these terms may act as deal-driving terms. If irrelevant, leaving them unaddressed may simply be ignored.
Moderately Material
These terms have a moderate influence on one or more of our classification factors. They also may serve the role of enhancing the effectiveness of more important terms. They are worth consideration and negotiation, but using a standard, middle-ground term instead of a highly-negotiated term is not likely to cause significant harm for either party. A violation of these terms, or the failure to include one or more of them in the Agreement, will typically expose one or both sides to modest risk or a relatively small loss in deal value, but they are not likely to disrupt the entire transaction.
Insignificant
These terms tend to be related to operational procedures or conduct, and are not likely to cause significant disagreement between the parties. Their effect is typically to make fulfillment of other terms more likely or to allocate smaller levels of risk. Because the dollar-value impact of these terms is less than that of the other terms, they can safely fly under your radar. But, a word of caution. No term in an acquisition agreement is included without reason. Every standard term addresses a potential issue, no matter how remote. Under the radar terms aren’t worthy of great attention from the Buyer and Seller, but they should be reviewed by the lawyers on both sides to ensure no unnecessary or unwanted terms make it into the Agreement.
