Author: Scott J. Lochner
Answer: By building an experienced, high-quality merger and acquisition (“M & A”) team (the "Team") now, and by preparing for your M & A transaction (“Transaction”) sufficiently early.
You selecting the right Team now and preparing sufficiently early for the Transaction is the key to -- and greatly increases the likelihood of -- You achieving optimal results and overall Transaction success.
Question: How early should You start to prepare by building your Team and preparing for the Transaction?
Answer: Often starting more than a year in advance can make a huge difference. Is it absolutely necessary? No. Is it absolutely prudent and smart? Yes!
Successfully building one's own Team early and preparing sufficiently in advance overcomes about half of the challenges with most Transactions and exit plans. It is incredibly important for You to get this part of the Transaction right, because with the right Team and by starting early You will greatly increase your control of Transaction fees and expenses as well as your odds of closing the Transaction. Also, it will promote You receiving maximum Transaction value (the money You receive) and other terms of the deal which can have a huge impact on your quality of life and your peace of mind.
To succeed in battle You need to prepare in advance. It is wise to anticipate that your Transaction will be a battle, despite all the smiles displayed by potential buyers or the litany of professionals associated with mergers, acquisitions and exit plans.
The M & A Business Consultant
The engagement of an experienced M & A business consultant (the "Consultant") is often very useful and cost-effective for a seller, especially when the seller has never participated in an M & A deal and/or is busy and needs to actively manage the business being sold or is active with other pressing activities during preparation for the Transaction and/or during the Transaction itself.
The Consultant can assist the seller in assembling the right Team and in overseeing and managing the work of the Team. The Consultant can coordinate the Team's efforts so such efforts are timely and cost-effectively completed in order to achieve superior results. Also, and very valuable, the Consultant can keep the seller timely informed of all aspects of the status of the Transaction in a non-obtrusive way, while the seller continues focusing on the operation of the business. An excellent Consultant will have the experience to foresee and preemptively overcome the difficulties which often kill deals. Proactive and highly experienced Consultants will save You more money than they charge You and save You a lot of avoidable stress.
Where there are multiple seller-side decision makers, which frequently is the case with family-owned businesses (which constitute nine out of ten U.S. businesses, including forty percent (40%) of companies in the Fortune 500), the Consultant can assist in resolving emotional and personality issues, and can smooth out discord and obtain the "single voice" necessary to obtain optimal Transaction results.
Experienced M & A Consultants add tremendous value for the seller in many M & A transactions, and You should seriously consider if you would benefit from the meaningful assistance such a Consultant can provide.
M & A Legal Counsel
The earlier You select and engage experienced, high-quality M & A legal counsel, the earlier M & A legal counsel can assist with introducing You to other top-notch result-oriented M & A professionals. Because elite professionals tend to deal with one another on a consistent and continuing consulting basis, they can help You discern between the real professionals versus the posers and “wannabes” that over-promise and under-deliver.
In addition, M & A legal counsel can also assist You with (i) tax planning and Transaction structuring (which is in large part tax-related), (ii) assembling, reviewing and "cleansing" the legal records of your business (i.e., the due diligence materials), and (iii) otherwise preparing your business for sale. As repeatedly noted, preparing early is very important, and in the long run can save You significant amounts of money, often even if a Transaction does not move forward. Without question, early preparation greatly enhances the odds for your success with your Transaction if You decide it should proceed. Ultimately it is wise to put yourself in the driver’s seat. Properly represented and informed, You will have more control over terms of the deal and whether or not You choose to complete the deal.
Just like the Consultant, your M & A legal counsel can assist in introducing You to other experienced M & A professionals such as investment bankers, accountants, and wealth managers. You can interview these professionals together with your Consultant and/or M & A legal counsel by including that service in your retainer fee agreement, and in doing so can learn the thoughts of others who often play a material role in M & A transactions and who are being selected for You to meet because they have significant M & A experience. Through such interviews You can gain valuable information and can also determine if having any of these M & A professionals on your Team would add meaningful value to your Transaction. You can also decide if their chemistry with You and others already on your Team is right for their participation on your Team to promote the success of your Transaction.
Adequate lead time for your M & A legal counsel's tax lawyer to review the structure and recent financials of your business is both ideal and necessary. Advance time allows for a potential restructuring of certain aspects of your business for material tax advantage, and it can sometimes result in providing sellers such as You with millions of dollars in tax savings. In addition, this review determines how best to structure your Transaction from a tax perspective, and frequently results in tax savings that indirectly more than pay for the rest of the legal expenses of your Transaction all the way through the closing.
If You are organized and prepared, with business and legal problems identified (and often cured) in advance by your M & A legal counsel, You will have a much faster, ultimately less expensive and more risk-free Transaction.
You need to select M & A legal counsel with the appropriate level of seniority, experience and capability. Not every business lawyer is an M & A lawyer or has sufficient M & A legal experience to secure optimum results. While using a trusted long-time lawyer may seem to make sense, unless that lawyer has a significant amount of M & A legal experience (i.e., e.g., significant experience handling at least fifty (50) substantial and complex M & A transactions that have successfully closed), using that legal counsel for what may be a once-in-a-lifetime exit event is arguably very risky. One inappropriate team member could result in You being hurt financially or in terms that relate to your quality of life and peace of mind. How much money You easily get to keep is important. Avoiding lawsuits, “clawbacks” and sleepless nights are all relevant in every M & A deal. That said, your trusted long-time lawyer may still have a role to play on your Team, especially if such lawyer has a unique and intimate knowledge of your business and thereby can add value in some relevant way to your Transaction.
In selecting your M & A legal counsel, You need to keep in mind "value." Just as a somewhat more expensive car can overall be more cost-effective and deliver more “bang-for the-buck” in tangible and intangible ways (e.g., fewer repairs, greater safety, higher resale price, better performance and so on) than a car that appears to be less expensive upfront (but has its share of costly problems and other aggravations), the same is true with M & A legal counsel. A more expensive but more experienced and seasoned M & A lawyer may have the ability to save You millions of dollars on issues that the less expensive and less experienced M & A lawyer may (and probably will) miss. The old adage that "you get what you pay for" is typically especially true with respect to M & A legal counsel.
Experienced, quality M & A legal counsel more than pay for themselves (i) in helping to locate quality potential Team participants they typically know through prior M & A transactions, (ii) in reviewing the investment banker's engagement letter agreement and making sure it conforms to the proposed deal and is priced within current market parameters, (iii) in finding potential opportunities for restructuring your business for tax savings and in structuring the Transaction for tax savings, (iv) in efficiently assembling, reviewing and curing (whenever possible) the legal records of your business, (v) in preparing and negotiating a “front-loaded” letter of intent, at a time when your position is the strongest (i.e., before You have invested too much capital in the Transaction and have become bound by an exclusivity obligation to work together with one potential buyer), (vi) in efficiently and effectively negotiating the definitive sale agreement pursuant to which your business is sold, including negotiating various types of post-closing risk reductions for You, and (vii) overall by thoroughly understanding and having significant prior experience with all aspects of the M & A process to make your Transaction go smoother, faster, and less expensively, while staying on schedule and closing with the best terms and conditions obtainable. It is not only about the cash You receive. It is also about how much of it You get to keep and what your quality of life will be both during the Transaction and after it is completed.
The Wealth Manager
Meeting early with one or more wealth managers ("Wealth Managers") can be of great value to You, especially if You are unsure of whether You can afford to sell your business. Wealth Managers can typically show You in a one hour meeting how post-acquisition investment cash flows will look, assuming different purchase price outcomes, different risk tolerance, and different investment allocations over different time horizons. In addition to allowing You to better understand your potential post-deal future, Wealth Managers can help You to prudently have a tentative plan, pre-sale, regarding how to deploy funds expected to be obtained at the closing of your successful Transaction, including the general tax consequences related to well-informed investing.
The Investment Banker
It is nearly always prudent for You to retain an investment banker ("Investment Banker"), even in the circumstance in which You believe that You already have located an acceptable buyer for your business. The additional cost of an Investment Banker (which is typically negotiated by your M & A counsel in the Investment Banker's engagement letter agreement so that it is "market") is virtually always offset by the added gain of a financial expert providing competent, unemotional and experienced financial advice and services. Just as with the Consultant, M & A lawyer and Wealth Manager, obtaining wise advice upfront tends to prevent very costly mistakes. Or, You can choose to make mistakes and learn those costly lessons yourself.
Except for the non-refundable portion of the Investment Banker’s fee and expense reimbursements, the great bulk of the Investment Banker’s fee is typically the success fee, which the Investment Banker does not receive unless the Transaction successfully closes.
Investment Banker's assist You in (i) preparing offering materials for potential buyers that describe your business in a manner so as to best promote its sale (i.e., preparing the offering circular, or the "book"), (ii) locating potential buyers (which, when there is more than one buyer, tends to drive up the sale price/consideration for your business), and (iii) resolving business issues and "bumps" that arise in the sale process so your Transaction can successfully close.
Again, it is customary for Investment Bankers to receive the great bulk of their compensation only if your Transaction successfully closes, and in that manner they are generally aligned with You. They want to close your deal, since that is the only way for them to optimize their financial outcome. That said, your M & A counsel will not allow You to close too quickly until You are best-protected regarding your post-closing Transaction liabilities. You should remember it is not what You get from your Transaction that counts, but what you ultimately get to keep (after Transaction fees and expenses, Transaction taxes, potential post-closing “claw-back” liabilities and so on). Investment Bankers typically are paid their success fees at closing, and if there is a later indemnification liability purchase price “claw-back” by the buyer of your business the Investment Banker will not be obligated to return any part of their success fee or expenses.
The interaction and chemistry between your Investment Banker and your M & A legal counsel is important, because each professional has a different role to play in your Transaction. When the chemistry is right, You get an optimal result. When the chemistry is wrong, you get a power struggle that can harm your deal. The involvement of a Consultant often nips issues of this type in the bud as they are usually the best positioned and often the most skilled at managing personalities and egos.
Experienced M & A legal counsel can assist You in locating and selecting an appropriate Investment Banker. Also, your M & A legal counsel can review and tailor your potential Investment Banker's engagement letter agreement to fit your prospective Transaction and ensure that it contains arms-length "market” terms (including, without limitation, services to be performed, amount of the non-refundable retainer (which should be credited against any success fee ultimately paid), expense reimbursements, the amount of success fees, duration and conditions of the "tail," and so on). If You select your Investment Banker and sign your Investment Banker's engagement letter agreement before You retain your M & A legal counsel and/or have your M & A legal counsel review and negotiate the banker’s engagement letter agreement, your M & A legal counsel will be unable to provide this service and You may miss out on significant financial and other advantages that could otherwise have been yours.
If chosen correctly and retained with an appropriate "market" engagement letter agreement (i.e., reviewed and negotiated by your M & A legal counsel prior to You signing it), an Investment Banker can add real value for You in almost all M & A transactions.
The M & A Accountant
Audited financial statements, and short of that reviewed financial statements, give potential buyer's greater confidence in the accuracy of your "books" and accordingly can increase the number of potential buyers (which tends to drive up the sale price/consideration for the sale of your business).
Appropriate accountants, with sufficient advance time, can create audited financials or reviewed financial statements for your business when such “audit levels” do not already exist. The cost-benefit return on investment to You of improving the "quality" of your business financials is in many situations very significant. As earlier noted, such “conversion” of the financials of your business typically broadens and deepens the pool of potential buyers (which tends to drive up the sale price of your business). Accountants with a lot of M & A experience will rightly tell You that buyers tend to pay more for businesses already in compliance with GAAP as compared to the very common “loosey goosey” bookkeeping software systems frequently preferred by entrepreneurs. The “two book accounting system” business owners often use to evade taxes or hide money from ex-spouses is not in your best interest if You want the best price, the best terms and peace of mind.
By building the right Team, and with sufficient early preparation for a prospective Transaction, You can save millions of dollars and greatly enhance your chances of Transaction success.
By You being wiser than the average business owner and taking timely prudent actions "upfront" (most, if not all, of which You would need to take at some point anyway), your odds significantly improve for closing your Transaction as well as closing it on time, on budget, with a minimal amount of aggravation and stress.
By building a good Team early, as described herein, and by preparing for your Transaction early, You will most likely be very pleased in the results of your monetization of your business and will correctly feel You got a deal You can live with and have the peace of mind that eludes so many entrpreneurs. Isn’t that, or shouldn’t that be, what your Transaction is all about?
The views in this article express the personal views of the author and do not represent the views of any other person or entity and do not constitute legal advice.
Scott J. Lochner is a very experienced and pragmatic business lawyer who has helped his clients for over 30 years to cost-effectively achieve their goals. Scott has specialized in providing legal assistance in buying and selling businesses in individual transaction value from several million to several billion dollars. He also has extensive experience in intellectual property ("IP") matters, helping clients to develop, protect and commercialize their IP and brands, both in consumer products and high technology. He is known for being entrepreneurial and thinking like a business person as well as a seasoned business lawyer. In addition to practicing law, Scott is an inventor who has successfully monetized two U.S. patents he owns related to computer wireless technology, and has a score of license agreements with prominent name-brand domestic and foreign multi-billion dollar companies related thereto. Scott writes and speaks frequently on business law matters, and has been involved in improving state business law to create a better business environment to benefit everyone.
Contact: Scott J. Lochner
Phone: (213) 617-4140
© 2014 Scott J. Lochner