What a Transaction Is, From Approach to Completion

A transaction is a sequence of milestones rather than a single event: approach and confidentiality, an indicative offer and a term sheet, confirmatory diligence, documentation, signing, a conditions period, then completion. Each milestone settles something and closes something off. Harivansh Packaging Limited ran twenty two weeks from term sheet to completion of its purchase, nine of them the conditions period.

The word is one most people already think they know. In ordinary speech a transaction is a moment: the money is handed over, the thing is taken away, and it is done. The cart picture works perfectly well at a vegetable cart, and it fails completely at the scale of one business buying another. What is being handed over never sits on a counter. A business is a set of contracts, employees, machines, customers, tax positions, borrowings and disputes, and none of that can be inspected, agreed and moved in a single afternoon.

So the moment stretches into a sequence. And once it is a sequence, the order of the steps stops being a matter of preference and becomes the whole subject. Each milestone changes what has been agreed, who knows about it, what it costs to stop and who holds the business. So every question worth asking about a transaction is really a question about which milestone it has reached.

A household buying a flat follows an identical shape in friendlier vocabulary. Nobody walks into a flat with a suitcase of cash. There is a conversation. There is an agreement on price, written down loosely. There is a lawyer checking whether the seller can actually sell it. There is a proper agreement to sell. There is a period during which a loan is sanctioned, a society issues its consent letter and old dues are cleared. Only then is the deed registered and the keys handed over. The household would never confuse the day the price was agreed with the day they got the keys. Readers of transaction news confuse the two constantly, and the stretch between the two days is where most of the risk in a transaction actually sits.

Harivansh Packaging Limited, an invented listed packaging maker, agreed to acquire 100 per cent of Sundarban Polymers Private Limited, an equally invented unlisted maker of flexible packaging films that sells to some of the same customers. Devyani Kulkarni is the chief financial officer of Harivansh Packaging Limited and Ashwin Rege leads its transaction team.

Why is a transaction a sequence rather than a day?

Because each step needs the previous step to have happened, and needs it in a particular order. A milestoneA named point in a process at which something specific is settled and after which the parties behave differently. Not merely a date on a plan. here is not a date on a plan. A milestone is a point at which something is settled and after which the two sides behave differently.

There are seven of them, in one fixed order: approach and confidentiality, indicative offer and term sheet, confirmatory diligence, documentation, signing, the conditions period, completion. The order is fixed by what each step needs from the one before it, never by convention.

One rule governs the whole order, and it is worth learning before anything else: what is agreed comes before what is drafted. The shape of a transaction, meaning the price, the structure, who is buying what, and the protections the buyer holds in principle, is settled between commercial people first. Only then does anybody write the full agreement. Reversing the two means paying lawyers by the hour to discover a disagreement that a twenty minute conversation would have surfaced for nothing.

The same rule shows up in the flat purchase. No buyer briefs a lawyer to draft an agreement to sell before buyer and seller have settled the price and what is included. Where that happens, the first draft comes back, the seller says the car park was never part of it, and the buyer has paid for a document that has to be thrown away. A transaction is that, with three more zeroes and thirty more people.

Notice the second consequence of an ordered sequence. Because the steps run one after another and each is expensive, both sides are constantly deciding whether to spend the next step's money. The spending decision is easy early, when almost nothing has been spent, and grows steadily harder. The rising cost of stopping is the reason the cheap steps come first and the expensive ones come last, and the reason nobody does confirmatory diligence before agreeing a price.

What does each of the seven milestones actually settle?

Walk them once, one line each, and the shape of the whole thing arrives in about a minute.

Approach and confidentiality settles whether there is a conversation at all. A buyer says it is interested; a seller says it is willing to listen; both sign an undertaking about what may be said and to whom. Nothing about price is agreed here. The undertaking lets information start moving without either side being harmed by the fact of the discussion.

The indicative offer and term sheet settle the shape. An indicative offerA written statement of what a buyer would pay and on what broad basis, made before detailed checking and expressly not final. is a written statement of what a buyer would pay on the information it has so far, and a term sheetA short document recording the agreed commercial shape of a transaction, ahead of the full agreements that put it into legal form. records the shape both sides have reached. A term sheet is short. The brevity is deliberate: the document exists so that the expensive work has something agreed to point at.

Confirmatory diligence tests what the shape was built on. The buyer's advisers open the accounts, the contracts, the tax position, the employee arrangements and the litigation, and ask one question of each: is it what the buyer was told? Confirmatory diligenceThe detailed checking a buyer does after a price has been indicated, to confirm that the facts the indication rested on are actually true. is not a hunt for a new idea. Diligence checks an idea that has already been priced.

Documentation turns the agreed shape into obligations that can be enforced. The agreement fixes what each side promises, what happens if a promise turns out to be untrue, and what limits sit around that. The existence of those limits matters as much as the promises themselves, and the drafting of them is a separate subject.

Signing binds. Both sides are now obliged to complete on the agreed terms, subject to the conditions. Signing day is the day the announcement goes out, and it is the day that gets mistaken for the end.

The conditions period satisfies what has to be true before ownership can move. Approvals are pursued, consents are collected, and both sides watch each other. The business still belongs to the sellers throughout.

Completion moves ownership and moves the money. Shares transfer, the price is paid, the board changes, and the buyer becomes the holder.

Every one of the seven produces paper, and the paper is the evidence of what was agreed at that point. The paper is not a bureaucratic leftover. Six months later, when somebody argues about what was promised, nobody's memory decides it. The undertaking, the term sheet, the diligence findings, the agreement, the condition satisfaction letters and the completion documents decide it. A transaction is a sequence of milestones and a stack of paper, and the two are the same list read twice.

What is a regulatory approval, and what does it do to the sequence?

A regulatory approval is a public authority permitting a transaction to proceed, having applied a published test to it. The definition is that short, and two properties inside it change how a transaction is run.

The first property is that it cannot be negotiated, and the second is that its pace is not the buyer's to set. Everything else in a transaction is a negotiation between two commercial parties who both want an outcome. An authority is not a party to the transaction, wants nothing from it, and is not trading. An authority reads the application against a test written before anybody had this idea, and it takes the time it takes.

A step that can be neither negotiated nor hurried is a strange object to have inside a plan. Every other line on a transaction timetable can be pulled forward by adding people or money. An approval cannot. A buyer who is behind on diligence can add three more reviewers. A buyer waiting on an approval can add nothing at all. Approvals are therefore filed early, and a transaction team's first question about any structure is which approvals it attracts.

Whether a given purchase needs an approval at all, which test applies, what has to be filed, and how long any of it runs are set by the authorities. For a listed acquirer in India that routing is the Securities and Exchange Board of India, known as SEBI, at sebi.gov.in, and for the company law side it is the Ministry of Corporate Affairs at mca.gov.in.

What is a third-party consent, and who holds it?

A third-party consent is a counterpartyThe other side of a contract. A supplier, a customer, a landlord or a lender who has an agreement with the business being bought. agreeing that its contract with the business may continue after ownership changes. Consent is needed because a great many commercial contracts say, in one clause or another, that the contract may end if the ownership of the other side changes. When it does say that, the counterparty holds something the buyer wants, and knows it.

A consent differs from an approval here, and the difference decides how the time is spent: an authority applies a published test, but a counterparty is a commercial party with interests of its own, so a consent is a negotiation and an approval is not. A counterparty may want a longer term, a better price, a payment, or simply to be reassured that the person it deals with is not about to change. All of that can be worked on. None of an approval can.

The everyday version is a tenancy. If a shop is sold, the landlord's permission to transfer the lease is not a formality; it is a moment when the landlord can ask for something. The shopkeeper knows this and starts the conversation early, warmly, and before the sale is public. A transaction team does exactly the same thing with the counterparties that hold consents.

On this transaction there are two of them. Two counterparties hold contracts that change hands with Sundarban Polymers Private Limited, and both had to consent before completion. Together with a regulatory approval and the absence of a material adverse change, they made up the three conditions this transaction carried.

What is a financing condition, and what does it protect?

A financing condition makes completion depend on the buyer having its money. Put plainly, it says: if the funding does not arrive, the buyer is not obliged to complete.

A financing condition carries the sharpest two-sided character in the whole list, so both sides of it are worth saying flatly: it protects a buyer from being forced to complete a purchase it cannot fund, and it is the condition a seller least wants, for it moves the buyer's funding risk onto the seller's timetable.

The seller's view explains a great deal of negotiating behaviour, so sit with it for a moment. A seller who signs a transaction with a financing condition has stopped running a sale process. Other buyers have gone home. Employees may have been told. And the seller is now waiting on somebody else's lenders, with no ability to influence them and no other buyer in the room. If the funding fails, the seller does not get the price; the seller gets a business that has been through a sale process and is publicly known to have been for sale.

Harivansh Packaging Limited funded this purchase with Rs 140 crore of its own cash and Rs 1,000 crore of new borrowing at its own contracted rate of 9.0 per cent. The cash and the borrowing add to Rs 1,140 crore, exactly the equity value paid to the sellers. The rate is this buyer's own, negotiated against its own balance sheet, and a different borrower would sign a different one on the same day.

The household version is the loan approval clause in a flat purchase. A buyer who signs without one has promised to pay whether or not the bank sanctions the loan, and if the sanction fails the buyer is in breach. A buyer who insists on one has protected themselves and has also given the seller a reason to prefer somebody else's offer at the same price. Neither position is right. The two positions are different distributions of the same risk, and every transaction has to put that risk somewhere.

What are conditions subsequent, and why leave anything until after completion?

Conditions subsequent are things that must happen after completion rather than before it. Everything discussed so far sits in front of completion: it has to be true before ownership moves. A condition subsequent inverts that. The parties complete, ownership moves, the money is paid, and one or more obligations are left running behind.

Why would anybody agree to that? Because some things genuinely cannot be finished in time and both sides would rather complete than wait. A registration that has been applied for and is sitting in a queue, a consent from a small counterparty that is willing but slow, a name change on a licence: none of these is worth holding an entire transaction hostage to, and both sides know it.

But the swap is real and it is one-directional: a condition satisfied before completion protects a buyer with a right not to complete, and the same condition left until afterwards protects a buyer only with a claim against a seller who already has the money. Those are not close to equivalent. The first is a refusal, and it is free. The second is a dispute, and it costs time, money and goodwill, and it depends on the seller still being solvent and still being findable.

The everyday version is uncomfortable and exact. If the society's no-objection letter has not arrived, a buyer can refuse to register the flat and keep the money. If the buyer registers anyway on a promise that the letter will follow, the buyer now has a flat, no letter, and a seller who has been paid. The letter may still arrive. The buyer's position has changed completely regardless.

What is construction risk, what is operating risk, and which one is this purchase buying?

Two words sort transactions into kinds, and getting the sort right decides what work is even worth commissioning.

Construction risk is the risk that an asset which does not yet exist turns out late, costs more than budgeted, or does not work when it is finished. Operating risk is the risk that an asset which does exist earns less than expected. The difference is not one of degree. The two risks are answered by completely different evidence.

With nothing yet to measure, construction risk is answered by contracts, a schedule, a cost estimate and the record of whoever is doing the building. Nobody can look at the earnings of a bridge that has not been built. Operating risk is answered by a trading record: revenue, margins, customers, how the business behaved when demand fell, whether the earnings repeat.

Two household versions, side by side. Buying a flat that is finished and has neighbours living in it is operating risk: the water pressure can be seen, the maintenance bill asked about and the lift tested. Buying a flat that is a hole in the ground with a brochure is construction risk: there is no water pressure to check, only a builder's record and a schedule.

And here is the honest finding this purchase produces: Sundarban Polymers Private Limited is a running business with a trading record, so this transaction carries operating risk and no construction risk at all. Sundarban Polymers earned Rs 132 crore of earnings before interest, tax, depreciation and amortisation (EBITDA) on Rs 880 crore of revenue, a margin of 15.0 per cent. The trading record is what the operating question gets answered with. There is no plant being built here, no schedule to slip and no completion certificate to wait for. A trading record is why the diligence on this transaction reads accounts, contracts and customers rather than engineering reports, and why the conditions are approvals and consents rather than construction milestones.

As a working rule: the answer decides whether the work goes to accountants or to engineers, so which of the two risks a transaction is buying is settled before anything is commissioned. Transactions have been badly diligenced by teams who did excellent work on the wrong question.

What is a transaction outcome, and what does it leave unsaid?

A transaction outcome is what happened to the transaction itself. There are four of them and they are easy to name: it completed, it lapsed because a condition was never satisfied, it was terminated by one side, or it was renegotiated and then completed on different terms.

People forget the fourth outcome exists, so renegotiation deserves attention. A transaction that completes at a price lower than the one announced has not failed and has not succeeded. The transaction has been renegotiated, usually because diligence found something or a condition became difficult, and it then completed on new terms. Counting only completions and lapses records that transaction as a clean success and loses the entire story.

Now the limit of the word, the part that gets ignored: an outcome describes the transaction, not the wisdom of it. A completion says the sequence finished, and says nothing at all about whether the buyer should have done it. A transaction can complete perfectly, on time, at the agreed price, and turn out to have been a poor use of money. A transaction can lapse and the buyer can be better off for it.

Outcome and judgement get confused constantly, in both directions, and the confusion is comfortable because an outcome is knowable and a judgement is not. Whether Harivansh Packaging Limited was right to acquire Sundarban Polymers Private Limited depends on what the money would otherwise have done and on what the combined business achieves over years. No published figure settles that.

What moves at every milestone, and does any of it move back?

Three things move as a transaction advances, and this is the frame the rest of the sequence hangs on.

Price certainty rises. The number of people holding the information rises and never falls. The freedom to walk away falls. All three move in one direction only, and that is exactly why the order of the milestones is not a matter of taste.

Take them one at a time. Price certainty rises because each milestone replaces an assumption with a checked fact. At the indicative offer the price rests on what the seller has said. After confirmatory diligence it rests on what the buyer has verified. After the completion adjustments it rests on what the accounts actually showed on the day.

The information count rises and cannot be reversed, and this is the one people underestimate. At the approach, perhaps six people know. By documentation, both sides' advisers, both boards and parts of both finance teams know. By signing it is public. There is no step at which anybody forgets. A transaction team's information discipline exists because the count only ever goes up, and because what may lawfully be done with information about a live transaction involving a listed company is a matter for SEBI at sebi.gov.in, not for anybody's judgement in the room.

The freedom to walk away falls, and it falls fastest at signing. Before the term sheet, walking away costs a few conversations. After diligence it costs the diligence fees. After signing it costs a breach of contract: the buyer is by then obliged to complete, subject only to the conditions. The fall is not a defect of the process; it is the process. Two parties cannot commit to each other and stay free at the same time.

Put the three together and the ordering rule stops being advice and becomes arithmetic. Money goes on checking while walking away is still cheap. The information count stays low while the price is still uncertain. And the parties are bound only once both of those have been dealt with. Any other order costs somebody something.

How did this purchase actually run, from term sheet to completion?

Now run the whole thing once, end to end, on the invented purchase. Harivansh Packaging Limited agreed to acquire 100 per cent of Sundarban Polymers Private Limited at an enterprise valueThe value of the whole business before deciding who has a claim on it, meaning the value attributable to lenders and shareholders together. of Rs 1,320 crore. Sundarban Polymers earned Rs 132 crore of EBITDA, so Rs 1,320 crore is 10.0 times that. How that multiple was arrived at is settled under enterprise value and multiples, and the figure is taken as given here.

Everything downstream sits on the bridge, so run it in the open. Enterprise value of Rs 1,320 crore, less Sundarban Polymers' net debtBorrowings less cash. It is the amount by which lenders' claims exceed the cash already sitting in the business. of Rs 180 crore, gives an equity value of Rs 1,140 crore. Rs 1,140 crore is what reaches the sellers, and quoting the Rs 1,320 crore enterprise value as the price paid is the commonest error made about transaction figures.

The reason is not subtle. A buyer taking 100 per cent of a business takes its borrowings too. The borrowings are a claim that already existed, held by lenders, and the sellers cannot be paid for value that belongs to somebody else. The flat version: a flat advertised at Rs 90 lakh with an outstanding home loan of Rs 20 lakh on it puts Rs 70 lakh in the seller's hand. Rs 20 lakh has to clear the loan first. Same arithmetic, three fewer zeroes.

Now the elapsed spans, with the base of each named, because a span without its base is not a figure. Twenty two weeks ran from the term sheet to completion. Nine of those twenty two were the conditions period, or 40.9 per cent of that span. Subtract the nine from the twenty two and thirteen weeks ran from the term sheet to signing, the other 59.1 per cent.

Look at where the nine sits. The conditions period is not spread through the transaction; it sits all at the end, and every one of those nine weeks falls after the day the parties were already bound to each other. The conditions period is over two fifths of this transaction's elapsed span and it sits entirely after signing, precisely the stretch at which most audiences have stopped paying attention.

Twenty two weeks and nine weeks are this transaction's own elapsed spans. A transaction with more approvals to obtain, or more counterparties holding consents, runs longer than that, and one with neither runs shorter.

Then the end of the sequence. At completion the price adjusts for what the accounts actually showed on the day, rather than for what everyone assumed months earlier. Two adjustments applied here. Working capitalThe money tied up in running the business day to day, broadly stock and money owed by customers less money owed to suppliers. came in at Rs 108 crore against an agreed normal level of Rs 96 crore, so the price moved up by Rs 12 crore. Net debt came in at Rs 195 crore against the Rs 180 crore the transaction assumed, so the price moved down by Rs 15 crore.

Plus Rs 12 crore and minus Rs 15 crore is a net minus Rs 3 crore, and the equity value paid moved from Rs 1,140 crore to Rs 1,137 crore. The same Rs 3 crore has two honest readings, and they are different statements, so name the base. On the Rs 1,140 crore equity value before adjustment it is 0.26 per cent. On the Rs 1,320 crore enterprise value it is 0.23 per cent. A percentage without its base named is not a figure anybody can use.

How the normal level of working capital is defined, and what exactly counts as net debt on the day, are questions the sale agreement settles, and the answers sit in the agreement rather than in the announcement.

One more thing about that Rs 3 crore: its smallness is the trap. A buyer who checked only working capital would have been wrong by Rs 12 crore. A buyer who checked only net debt would have been wrong by Rs 15 crore. The net is small only because two sizeable movements happened to point in opposite directions this time, and there is no rule that says they will. The smallness of the net is the reason both are computed, never a reason to skip either.

How does a lender, an analyst or an employee read a live transaction?

Three readers, three different first questions, and none of them is the question a headline answers.

A lender reads a transaction as a funding question with a date on it. Harivansh Packaging Limited is drawing Rs 1,000 crore of new borrowing at its own contracted 9.0 per cent alongside Rs 140 crore of its own cash, and the lender's concern is not whether the purchase is clever. The concern is that the money has to be available on a day nobody controls, fixed by a regulatory approval rather than by anybody in the room. A lender therefore reads the conditions list before it reads the price, and it wants to know which conditions are negotiable and which are not, for exactly the reason set out above.

An analyst reads a transaction as a question about which state it is in. A signed transaction and a completed transaction produce different numbers in a model and different probabilities in front of them. Marking a signing as though it were a completion overstates certainty by however much the conditions period is worth, on this transaction nine weeks with three open conditions.

An employee of the business being bought reads it as a question about their own life, and they are the audience most often handled badly. Told on the day of signing that they have been bought, they behave as though ownership has changed. It has not. For nine weeks their employer was still Sundarban Polymers Private Limited under its existing holders, and anybody who told them otherwise was describing a future rather than a fact.

Devyani Kulkarni, as chief financial officer of Harivansh Packaging Limited, and Ashwin Rege, who leads its transaction team, have the same discipline forced on them from a different direction. Everything they say publicly about a live transaction, and when they may say it, is governed for a listed company by SEBI at sebi.gov.in, and the company law side sits with the Ministry of Corporate Affairs at mca.gov.in.

The habit worth taking from all three readers is one question asked before any other: which milestone is this, and what has therefore actually happened? Almost every confused statement about a transaction is an answer to that question given for the wrong milestone.

What a transaction leaves unsettled

Three things, and they are worth stating rather than leaving as gaps.

How long a transaction takes. Elapsed spans are set by the approvals a structure attracts and by how many counterparties hold consents, so the twenty two weeks and the nine weeks belong to this purchase and settle nothing about any other.

The requirements of any approval. Which approvals attach to a purchase, which test is applied, what has to be filed and when, and what a listed acquirer must disclose about a live transaction are set by the authorities named below and change over time.

And whether Harivansh Packaging Limited was right to acquire Sundarban Polymers Private Limited. Worth depends on what the money would otherwise have done and on what the combined business goes on to achieve. The arithmetic of a transaction can be checked by anybody; the worth of it cannot. Neither of those is settled by any figure printed at the time.