Lawyers, like doctors, have certain specialties. The more time a lawyer spends doing particular types of legal work, the better they become at it, because of the experiences they accumulate along the way, from transaction to transaction.
When you are looking for an M&A lawyer, the first thing you should ask is how many times they have helped people buy or sell a business. Experience is the best teacher, and a lawyer who has been involved in more deals will have a variety of different forms of contracts from those prior M&A deals to draw upon in preparing and negotiating your agreement.
In my experience, the party who drafts the agreement holds the most power. They frame the deal. Some parties don’t want to spend the money to have their lawyer draft the first draft of the contract and supporting papers to save money on fees.
But what these clients don’t realize is that other M&A lawyers may not put much time or thought in preparing the first draft of an agreement because they make more money in drafting and negotiating the revisions to the agreement and supporting papers than they do in setting up the contract in the first place.
One of the best ways to control your legal expenses in an M&A deal is to prepare a letter of intent, also known as an “LOI” or a “deal memo”. This is a summary of the important financial terms of any M&A transaction – what’s the cost, what is being bought or sold (stock, assets or both), how will the deal be financed, when it is expected to close, and what happens to various potential liabilities of the business (rents, leases, employee retirement plans, etc.).
Some people may feel that taking the time to prepare a Letter of Intent can simply be done between the two principals who are buying and selling the business in question, or certain of its assets. They may not want to spend money on having a lawyer prepare it for them, but this is often a mistake. The deal memo is your roadmap to the M&A transaction. Legal issues can find their way into a deal memo before your lawyer gets to advise you of the potential risk or liability you, the client, may have unintentionally agreed to. And when disagreements arise in the negotiation of the M&A documents, the deal memo is your reference guide to what the parties intended.
The most time-consuming part of an M&A deal is the due diligence. Due diligence is the process of confirming that the seller has the right, and clear ownership of the assets, that he or she is seeking to sell to you. Sometimes, manufacturing companies have substantial inventory, parts or ingredients in their warehouse that make up an essential part of the deal.
I had one transaction a couple of years ago where my client was buying a health supplements manufacturer, and had a warehouse full of literally hundreds of raw organic ingredients that they used to make their products. Fortunately, the seller had an outstanding inventory management software system, but we had to tour the facility in person to confirm that the inventory was what the seller claimed it to be.
Other times, “due diligence” can be much simpler, like confirming that a lease for a store can be assigned to the buyer as it currently exists, or whether the buyer will have to negotiate a new (potentially more expensive) rent to keep operating the business in that location. Or, it can be a question of whether employees will continue with the business, whether their payroll and sales tax have been paid, whether there are any liens (legal claims) against the assets being sold, because they are leased, or were paid for with a loan that is still being repaid. All of these details need to be worked out ahead of time.
Another question that often comes up is whether a company is going to enter into an Asset Purchase type of M&A transaction, or whether the buyer is interested in buying the stock of the selling business corporation.
Most times, buyers don’t want stock purchases, because this means stepping into the shoes of the prior operator of the business, and may involve unforeseen liabilities or risks that may not have come to fruition yet. Those hidden liabilities may take the form of employment discrimination claims, OSHA violations by the prior owners, warranty obligations and expenses, or lawsuits that are anticipated by the sellers but may not have been filed in court yet. So, there are plenty of reasons to prefer an Asset Purchase, if you are a buyer, to avoid any of these hidden liabilities.
But sometimes a business holds licenses, and contracts with insurance companies or other third parties, and to interrupt these existing agreements could require the buyer to re-license the business, and might lead to a lengthy interruption in payments from these third parties. When you are first starting out in a licensed business, the last thing you need is no cash flow for six months, while you are in the process of replacing all the licenses that the seller used to have.
In many ways, buying or selling a business is like buying or selling a house. The seller needs to prove what they own to the buyer. They buyer has a chance to inspect and confirm what it is they are agreeing to purchase. Then the parties sign a lot of papers at a closing to transfer title of the assets from the seller to the buyer. You shouldn’t buy a house without seeing the survey to show the bounds of what they own, the title history to how the seller acquired the property, and a deed to convey the property to you, suitable for filing with the County Clerk.
The same processes exist in M&A transactions for your protection. Be sure to hire an experienced lawyer to get the best deal when you are buying or selling a business.
For experienced M&A counsel in Central New York, please visit www.mattvanrynlaw.com.
