* by Antonio Mazzucco
Negotiating the sale of a company to a private equity fund demands a rigorous contractual approach, in which price, structure, and risk allocation go hand in hand. The central legal and economic objective is not only "how much" is received, but "how" that value is preserved throughout the operation, through mechanisms that ensure predictability, post-closing governance, and protection against undisclosed liabilities.
The construction of this result begins early, even in the term sheet or letter of intent phase, with the delimitation of commercial premises and typical obligations of exclusivity and confidentiality, and is projected in the definitive documents (SPA/PA, shareholders' agreement, employment/service contracts) based on in-depth due diligence by the buyer and the definition of the seller's liability limits and any price adjustments.
Pricing Mechanics and Payment Structure
The valuation discussion should transcend the EBITDA multiple and consider the pricing mechanics and its adjustments. The payment method is relevant insofar as full cash payment tends to offer immediate liquidity, at the cost of greater buyer sensitivity to discounts and retentions; payment in installments and escrow/holdback create a buffer for indemnities; equity rollover (where the seller retains a stake) keeps the seller in the value creation cycle and requires contractual discipline regarding information rights, liquidity, and protection against dilution.
Whenever there is an earn-out (sale value of a stake linked to future results), it is essential that the targets be objective and auditable (for example, EBITDA measured by audited financial statements), that the calculation formula be fully described in the annexes, and that provisions are made for rights to periodic information, access to accounting records, non-manipulation covenants, and acceleration events in cases such as change of control or material discontinuation of the business. Without these instruments, the contingent component of the price becomes a source of litigation.
The Seller's Position and Protection in After-Sales Service
The seller's role in post-sales service, when it involves ongoing involvement, should be addressed through employment or service contracts that define mandates, metrics, and variable compensation, and through a shareholders' agreement that governs governance, confidential matters, distribution policy, reporting, and external auditing.
If there is a minority stake resulting from a rollover (payment with company shares after M&A), it is advisable to ensure tag-along rights, clear drag-along rules, liquidity windows, and proportional treatment in new rounds, avoiding, as far as possible, undue economic dilution.
Retaining the talent of employees essential to the success of the transaction requires retention clauses and incentive arrangements, while protecting business information and trade secrets demands confidentiality, non-compete, and non-solicitation clauses designed with proportionality in terms of timeframe, scope, and territory to maximize their effective implementation.
Risk Allocation and Contractual Guarantees
In the risk allocation plan, the buyer wishes the representations and warranties to cover, in detail, all matters that may result in risk (in particular corporate, tax, labor and social security, civil/consumer, environmental, regulatory, intellectual property and data protection matters (including compliance with the LGPD), as well as the reliability of the financial statements and the regularity of the most relevant contracts.
The seller's liability for breaches should be calibrated with cap and basket amounts (to avoid underpayments), expiry dates consistent with the nature of the liabilities, and indemnification procedures that include notifications, right of defense, cooperation, and decomposition rules. An insurance policy can transfer a significant portion of the residual risk to the insurance market and may be an option.
Legal Structure of the Transaction
The choice of legal structure — share deal or asset deal — should result from an integrated analysis of liability succession, authorizations and licenses, contractual consents, and tax efficiency.
In the case of shareholdings (stocks or shares), there is broad succession and greater dependence on the guarantee regime; in the case of asset holdings, assets are selected and liabilities are mitigated, at the cost of greater operational friction, potential regulatory triggers, and tax impacts that must be estimated in advance.
Conditions Preceding and Conduct Until Closure
Typical precedent conditions — corporate approvals, third-party consents, tax and labor compliance, and, when applicable, authorization from CADE (Brazilian antitrust authority) and sectoral bodies — should be accompanied by covenants governing conduct in the normal course of business and prohibiting extraordinary acts between signing and closing, as well as no-shop mechanisms and, if applicable, proportional break-up fees.
Dispute Resolution and Applicable Law
The choice of applicable law and dispute resolution method directly influences the residual risk and enforceability of the solutions. Arbitration, with a defined venue, language, and number of arbitrators, is usually preferred in medium and large-scale transactions, with provisions for urgent judicial measures when necessary for the effectiveness of the procedure. Clarity in the wording of clauses regarding price determination, earn-out, indemnification, and governance tends to reduce disputes and shorten the settlement cycle.
Negotiation Strategy and Operation Success
Finally, the most efficient negotiation is one that combines thorough documentation (a complete and credible data room), an economic narrative consistent with due diligence, a contractual design that allocates risks to those best able to manage them, and competition among bidders.
Engaging multiple PE funds increases bargaining power, but only produces superior prices and conditions when the company presents consistent information, auditable KPIs, and a demonstrable growth trajectory.
Price alone is rarely the best criterion: the payment structure, seller protection mechanisms, post-closing governance, and predictability in dispute resolution are crucial for the agreed value to materialize over time and with legal certainty.
Antonio Mazzucco is a specialist in corporate business law and a partner at Mazzucco&Mello Law Firm.