If you are selling your company for $20,000, you may decide the risk-reward calculation justifies not paying a lawyer to be involved at all. I understand that line of thinking and would not try to talk you out of it, provided you understand you are taking on more risk than if you hired a qualified, experienced M&A attorney. There’s no question about that. A great corporate attorney who knows M&A transactions and your market well will help you mitigate risk and get your deal done on the right terms for you.
Mergers and acquisitions can be a complex area of law where you need a specialist – not always, but often. While very small asset purchase deals are often straight-forward, they aren’t always, and stock purchases, mergers and larger asset purchase deals have lots of moving parts – questions about structure, fiduciary duties, employment, tax and questions about ultimately collecting the entire purchase price. You want legal counsel that has a lot of experience with M&A. Not every corporate lawyer or transactional attorney (two words for lawyers that don’t go to court and litigate – they help companies transact with each other) has a lot of experience representing buyers and sellers of companies. So, this is not an area where it’s wise to go the DIY route, and it’s also not typically a great idea to hire a lawyer without lots of M&A experience.
A merger and acquisition lawyer that represents you when you are buying or selling a business has a fiduciary duty to protect your interests. When representing sellers, there are a lot of different services I provide. I help organize and consult on due diligence requests, draft non-disclosure agreements (NDAs), draft purchase agreements (asset purchase agreements, stock purchase agreements and merger agreements) and provide strategic advice about the structure of transactions, including which terms are “market” (standard) and which ones aren’t – this is a very important role in negotiating the terms of your deal and can make a huge difference to a seller when it comes to things like breaches of representations and warranties. For example, we commonly aim to put a cap on the indemnity for breaches for things other than fraud. This means that the buyer of your business can only come back after you for a certain amount of money if it turns out there were misrepresentations or things that come up after the closing, which the buyer (or a court if you disagree with the buyer) determines are your responsibility as the seller. This gives sellers peace of mind that they won’t be on the hook for liabilities that come up post-closing and eat up the entire purchase price they received (or more!).
When representing buyers of businesses, I help with lien searches (figuring out if the assets you’re buying are subject to loans and claims from other creditors), litigation searches, other due diligence – preparing due diligence requests list and reviewing contracts for change of control and assignment issues, drafting purchase and sale agreements (asset purchase and stock purchase agreements) and drafting and negotiating other ancillary agreements – employment agreements, non-competes, earn-outs, promissory notes (secured and unsecured promissory notes when the seller carries back financing), bills of sale, resolutions of boards of directors, shareholders, members and managers and other documents that are needed to close a deal. M&A deals sometimes have a lot of documents, although not always. With small, simple asset purchases, we try to keep the paperwork light. It keeps cost down and keeps things moving. In larger and more complex deals, there are more things to address and greater concern around risk, so there’s more reason to create more fulsome representations and warranties, for example. A great M&A lawyer will help you figure out the right amount of process and budget for your specific transaction.
Most M&A lawyers don’t help with determining valuation and deal structure. That type of work is typically left to the business brokers and investment bankers. I spent a year as a venture capitalist during Dotcom 1.0 and have a background in finance. Although I am not generally engaged purely for valuation purposes, I can help guide you on these issues, as well. I may still recommend you hire a business broker or investment banker, although that depends – it’s something we will discuss.
You can think of a great M&A attorney as the quarterback of your deal – helping bring together the necessary players and manage the entire process. These players included CPAs, internal members of the deal team and business brokers or investment bankers. In Austin, the business brokers are more active in the “main street” acquisition market, which means under $2 million. Most brokered business sales are done as asset purchases. Investment bankers operate at higher ends of the market – in the lower middle market (I define the lower middle market as $2 million to $50 million, although different professionals may use a slightly different range) and up from there. Investment bankers are licensed to sell and place securities (stock, LLC interests and other equity instruments) and are more comfortable doing business sales as stock purchase deals, although they help on asset purchases, too. Even though “merger” is half of the term, “mergers and acquisitions,” few main street deals are done as mergers. I can only think one deal out of my last few dozen that was an actual merger, which requires a Plan of Merger and filings with the Secretary of State(s). For a list of investment bankers and business brokers in the Austin and greater Texas market, look at resources page.
There are a couple areas of M&A transactions that almost always require sophisticated counsel – earn outs and seller financing. Earn-outs can be very complex. If you’re the seller there are issues around transparency and control. If you won’t continue to run your business after the closing, you want clear visibility into the results of the business and the right to audit those results. If you will be running the business, you want to negotiate as much control as possible. Be on the lookout for the ability of the purchaser to charge overhead and expenses from other areas of the business to the profit and loss of the business you sold. This reduces earnings (EBITDA) and can affect your earn out. These are a few things we spend a lot of time on when I represent a seller.
Regarding seller financing, you want to negotiate for security for your loan. If you hold an unsecured promissory note and the debtor (the purchaser) defaults due to serious cash problems, including by entering a bankruptcy proceeding, you may get very little. When you have security for your loan, provided it was handled (documented and “perfected”) properly, you can foreclose on the security. At the very least, consider securitizing a seller loan with the assets of the business you are selling.
Some companies acquiring or selling a business bring me in very early on, others later in the deal. This is a function of budget, preference and how many other professional and experienced advisors you already have engaged or on staff in-house.
I occasionally run into business owners who think what transactions lawyers do is of little value. Really, there are some people out there who don’t see any value in hiring a transactional or corporate lawyer. They write their own contracts, use LegalZoom and take other DIY approaches. If budget is the issue (the person or company has no money or you determine the size of the deal doesn’t justify paying legal expenses), again, I understand – budget factors into every purchasing decision. If budget isn’t an issue, though, I can only think these people had very bad experiences with lawyers in the past. I am not going to tell you I am perfect or “the best” lawyer in the world (I don’t know how you’d objectively make this determination anyway). I will tell you that I will shoot very straight with you about what I do, what I’m good at, why you’d use me and why you wouldn’t. I have a lot of experience in M&A, including on the deal team of a public company buying other companies – sourcing, valuing and negotiating deals.
If you are buying or selling a business in Austin, Houston, Dallas or anywhere else in Texas and you have any budget for protecting yourself, let’s talk and let’s get your deal done! I have handled sales of online companies, software companies, energy companies, finance companies, professional and service firms, including engineering firms, and companies in plenty of other industries. You can reach me at 512.888.9860.