From Term Sheet to Closing in an M&A Transaction in Spain

From Term Sheet to Closing in an M&A Transaction in Spain

Mergers and acquisitions (M&A) are complex processes that combine business strategy, financial analysis, and highly sophisticated legal aspects. In the Spanish context, these processes are typically structured in well-defined stages that begin with the signing of the term sheet or letter of intent (LOI) and culminate in the effective closing of the transaction.

The term sheet is a preliminary, non-binding document that outlines the main commercial terms and conditions of a potential M&A transaction. Although it is not a definitive contract, its signing marks a key milestone in the negotiation, as it reflects the serious intention of the parties to move forward with the deal.

In the Spanish market, the term sheet typically includes:

• Indicative price or valuation formula (e.g., EBITDA multiples).
• Transaction structure (share purchase, asset purchase, merger, etc.).
• Conditions precedent (satisfactory due diligence, regulatory approvals).
• Exclusivity of negotiation for a defined period.
• Confidentiality and non-disclosure.
• Intentions regarding management and key employees.

After the term sheet is signed, the due diligence phase begins. This is an exhaustive review of the legal, financial, tax, labor, and operational status of the target company. In Spain, this process can last from three weeks to several months, depending on the size and complexity of the company.

The purpose of due diligence is to identify hidden risks, tax contingencies, pending litigation, labor or contractual issues, and to validate the information used in the initial valuation. The findings of this review usually have a direct impact on the final negotiation: they may alter the price, give rise to additional conditions, or even lead the buyer to withdraw.

Once due diligence is completed, the main transaction contract is negotiated: the Share Purchase Agreement (SPA), or asset purchase agreement, depending on the case. This is a legally binding document that sets out the definitive terms of the deal.

Key elements of an SPA in an M&A transaction in Spain include:

• Final price and adjustment mechanisms (e.g., locked box or closing accounts).
• Representations and warranties from the seller.
• Indemnities for identified contingencies.
• Conditions precedent and termination clauses.
• Earn-out provisions if the price depends on future performance.
• Non-compete clause from the seller.
• Dispute resolution mechanisms (jurisdiction or arbitration).

In Spain, it is common for the parties to agree on a retention clause or escrow arrangement as a guarantee against potential breaches.

Once the SPA is signed and the conditions precedent are fulfilled, the closing takes place. This moment marks the effective transfer of ownership.

The closing includes the formal execution of documents (notarial signing in the case of public limited companies or certain assets), the payment of the purchase price or a portion thereof, and the delivery of documents such as shareholder certificates, powers of attorney, and assignment of relevant contracts.

In many cases, the signing of the SPA and the closing occur on different dates, although in simpler transactions they may take place simultaneously.

Following the closing, a crucial phase begins: operational integration and compliance with post-closing obligations. In some cases, a transition services period is initiated, during which the seller continues to provide certain services to ensure an orderly handover.

Contractual mechanisms may also be triggered, such as post-closing price adjustments, earn-out provisions, or exercise of share options. It is also common for the buyer to monitor the fulfillment of warranties during the agreed period, usually between 12 and 24 months.

The journey from term sheet to closing in an M&A transaction in Spain is full of challenges, strategic decisions, and technical negotiations. Although each transaction has its own particularities, a clear understanding of the key phases, term sheet, due diligence, SPA, closing, and post-closing, allows the parties to anticipate risks, protect their interests, and maximize the value of the deal.

Comprehensive M&A tax advice is essential to navigate this process successfully and achieve a mutually satisfactory outcome.