You decide to sell your business. An auction process is conducted, and a private equity fund offers an attractive purchase price. The documents, prepared by sophisticated buyer’s counsel, are circulated and negotiations begin.
Unfortunately, your lawyer is more of a generalist than an M&A specialist, and it looks like the lawyer is going to kill the deal. Red-herring issues are raised. Important issues are negotiated outside of market terms.
You want to get the best deal possible from a legal perspective. What should you do? What should you have done differently?
Prior to the commencement of a sale, ask your day-to-day lawyer the following questions to gauge if you have the right counsel in place for the contemplated transaction.
1. How does the lawyer feel about losing a client? In certain instances, positions are taken or advice is rendered to a seller that appears almost to be given in the hopes of a deal not closing.
No one wants to lose a client. A lawyer does have an ethical duty to represent a client zealously. Nevertheless, for your one-time sale transaction, it probably makes sense for you to hire an experienced lawyer who has no qualms with the loss of a client and no reason to queer the sale.
2. Do they know the private equity players and opposing counsel? The more deals a lawyer does, the more likely his credibility and reputation. If the buyer’s counsel is familiar with the seller’s lawyer or is aware of his experience, it may result in a much fairer first draft of a purchase agreement.
A one-sided document egregiously in favor of the buyer is less likely to be served up, since buyer’s counsel knows that seller’s counsel has the relevant experience. A great deal of time and money can therefore be saved in the negotiation and revision process. The resulting savings in legal fees to the seller can be meaningful.
3. How many M&A sale transactions do they routinely handle? Some lawyers are generalists. They can draft a will, handle a house closing and litigate a breach of contract claim. Sometimes all in the same day.
However, the sale of a company is a rather specialized area of the law with many nuances and complexities. It is often a once-in-a-lifetime matter. It should be handled by a lawyer well-versed in M&A issues. As a client once remarked, “If I had a brain tumor, I wouldn’t have my internist perform the surgery.”
4. Do they know what legal concepts to raise? Are they familiar with the differences between a “basket,” “cap” and “sunset” for indemnification purposes? Anti-assignment clauses versus change-of-control provisions as to whether third-party consent is required? A lawyer cannot get the best legal deal for his or her client unless they know the issues to ask for or identify.
5. Are they up to date on market terms? Some lawyers have wound up killing deals because they fought for issues or terms that simply were not customary or market.
Should the basket be one percent or five percent of the purchase price? Should the percentage be solely off of the cash portion? Should the cap be at 20 percent of the purchase price or the purchase price itself? Is an escrow fair if there is an earnout or a seller note? Experienced M&A lawyers should know the answers to these questions.
6. Do they have sophisticated tax counsel? Proper tax advice and structuring can mean the difference between millions of dollars retained or otherwise paid to the federal government. You can be sure that buyer’s counsel will have it.
7. Do they have colleagues well-versed in real estate, labor and employment, ERISA and employee benefits, antitrust and intellectual property law? Depending on the specific business, size and assets of the seller, it may need lawyers experienced in a variety of legal fields.
8. Do they have the bench strength to handle the deal? There may be legitimate business reasons why a deal needs to close very quickly. Does the lawyer have an adequate team to support him or her? A client cannot be dependent solely on one lawyer. Numerous documents can fly fast and furious; they may need to be drafted, negotiated and revised concurrently.
9. If you are to take back a promissory note, does your lawyer have experience with sophisticated commercial finance matters? Do they know about subordination and intercreditor agreements? Fish or cut bait provisions? Second priority lien provisions? Where to file a UCC financing statement? The answers to these questions can sometimes mean the difference between the seller’s receiving full payment on the note or not.
10. If you are going to roll over a portion of the purchase price and receive equity in the newco buyer, do they know to argue that you should obtain your equity on the same price and terms as the equity sponsor? Just in case, do they know about pre-emptive rights, tag along provisions and rights of first refusal? Should you be entitled to a seat on the newco buyer’s board or at least be offered board observation rights?
11. If management is to be employed by the newco buyer, do they know sophisticated concepts to negotiate into an employment agreement? For example, carve outs to include in non-compete and non-solicitation provisions? Are they familiar with “Good Reason” termination triggers that can provide a unique severance payment? What are the exceptions for a confidentiality restriction?
12. Are they willing to work at night? Over the weekend? Buyer’s counsel will. For many deals, time is the enemy. Deals can move at a hectic pace. A seller needs a lawyer who can go toe-to-toe with the professionals on the other side of the table.
13. Do they work well with different types of personalities? Whether the buyer’s counsel is a yeller and screamer, old school, brash, dogmatic or antagonistic, your counsel needs to be able to work professionally and amicably with all different personality types.
14. Are they cost effective? How many junior lawyers will be on their team? Will you be paying to train junior lawyers? On the other hand, if the fee seems rather low, remember the old adage that you get what you pay for.
15. Is the lawyer able to give an estimate or range of the expected total legal fees for the transaction? If provided with the material facts, experienced M&A lawyers will be. An inability to reasonably predict such fees may be indicative of an inexperienced M&A lawyer. A true test may be whether the lawyer will agree to a cap on his fees with certain specified exceptions.
16. Do they know how to deliver additional value over and above what otherwise would be expected? Would they know to inquire (in the context of a sale of 100 percent of the equity of a company) whether the seller personally guaranteed a bank line of credit, such that the guaranty needs to be terminated at closing so the obligation does not survive the sale? Or, for example, would they furnish more than 15 meaningful questions when only 10 were expected?
If the answers to the foregoing questions are not answered satisfactorily, you should hire a sophisticated M&A attorney for your big transaction ahead.
If you have a question regarding any of the foregoing or would like further information, please contact the author at [email protected] or (312) 499-6737. His profile can be found at www.duanemorris.com
