By Bruce Raymond Wright

​On April 6, 2016, the Department of Labor (DOL) released its long anticipated rules mandating that all advisors assume personal fiduciary responsibility in all of their dealings with all retirement plans.  The new rule goes into full effect on April 10, 2017.  The impact will be far reaching not only for advisors, but also for every manufacturer, distributor, and broker dealer involved with retirement plans.  It even affects every property and casualty and/or life and disability agent who sells products to retirement plans and/or makes any offers or renders advice to retirement plans, the plan’s participants, sponsors or beneficiaries.  Registered Investment Advisors (RIAs) and their firms have long been held to an even higher and broader standard of fiduciary behavior.  The SEC is expected to release its new regulations related to fiduciary standards later in 2016.

Mandatory Changes
The Obama administration has intended these changes (and far more comprehensive) for years.  Now that it is law, the natural progression would be to create fiduciary rules of conduct beyond retirement plans covering all aspects of financial advice, products, and services, mirroring the RIA standards.  That has been the trend globally over the past decade.  If the trend continues in America as it has in Europe, there will be no more commissions and far fewer (if any) packaged products such as variable life insurance or variable annuities.

Impact
Suitability standards under FINRA remain intact related to accounts that are not held in qualified retirement plans.  However, the SEC regulations could extend fiduciary standards to all accounts, not just retirement accounts.  Notwithstanding the industries preference for the ambiguities and minimal accountability found in FINRA suitability models, informed consumers will no longer tolerate them.  The biggest impact will be in the minds and hearts of consumers, trustees, and just about every investor.  Educated investors will not settle for “protection” under suitability standards on any account once they see how fiduciary standards provide far greater safety.

Plan providers, participants, and fiduciaries such as investment committee members are going to purge “advisors,” products, and models that are not contractually obligated to assure fiduciary responsibility.  Intelligent investors (and their lawyers) will demand fiduciary treatment, transparency, and safety.  They will stop subjecting themselves and their retirement plans to higher risk, conflicts of interest, hidden fees, high expenses, and withdrawal penalties.

The heyday of annuity products sold the old way is effectively over.  Sales organizations will have to completely re-tool.  A mandatory change of this magnitude will cause many sales leaders, managers, and agents to adapt or leave very quickly.  The significant fines as well as criminal penalties will hammer those who are slow to adopt or who revert back to a sales mindset and behavioral patterns.  These individuals and companies will be purged from the financial services professions.

What Does this Mean for Your Business?

1. Your Salesforce can learn how to think and act like a fiduciary must think and act.  This includes a new and very elevated and detailed data intake process, note taking, comprehensive comparative analysis, transparency, and conflict disclosure.  In fact, it’s a radically different way of being than what sales organizations or their people are familiar with.  To protect the client’s best interests, you must actually know what they are and have them in a written plan.  All that data and detailed notes spell disaster for salespeople who prefer ambiguity and less accountability.
2. Your Board of Directors can choose not to adopt and stop all of your dealings with all retirement plans.  This means the termination of those relationships and potentially all relations with those clients.
3. Your BOD can wait for fiduciary standards to take over every aspect of financial advice and services, then re-tool and re-train.
4. Your BOD can ignore the change, then consequently pay significant fines and/or see some of your salesforce and managers serve time in prison and be judicially removed from the profession.
5. Your BOD could treat this as the greatest opportunity ever to position your firm and its representatives as client-centered thought leaders and ride this wave of change to market prominence.

There will be an overwhelming array of choices regarding who to obtain training from.  How to strategically and tactically get from where your firm is now into the dominant position of tomorrow will be offered to you by thousands of consultants, training firms, and business and life coaches.  Most of whom have too little or no practical, tactical track record delivering a profitable fiduciary model to the public.  This subject is too complex and risky to be entrusted to dabblers or those inclined to protect or favor the status quo.  You can transcend the complexity and risk by engaging the right people.

Attracting or finding the right talent and expertise to get you from here to where you need to be next is easier today than ever before.  Sound due diligence and vetting are essential to safeguarding you in your role as a corporate officer and fiduciary.  We want to help you with that.  The Wright Company is my intellectual property ownership and licensing business.  It owns many intellectual properties including the world’s preeminent (and most profitable) fiduciary business model.  That model has been used since 1990 to imagineer and orchestrate billions of dollars of re-positioned wealth while never being sued by even one client anywhere in the world.  That’s the kind of proven track record that stands out when one is conducting a fiduciary due diligence search for excellence, understanding, training, and execution.

​We invite you to experience a completely confidential courtesy call with me to discuss your personal and/or company’s needs.  To arrange your free confidential call, please call my office at (800) 997-2664 if you are in the U.S.A.  If you are calling internationally, please call +1-805-527-7516.

Bruce Raymond Wright is the inventor of Macro Strategic Planning® the world’s preeminent fiduciary business model.  He is an internationally respected author, keynote speaker and change facilitator.  Bruce’s latest book, Transcendent Thought and Market Leadership 1.0; How to Lead Any Profession, Anywhere in the World is available on Amazon.com and most online bookstores.  Inquiries about keynote speeches, training programs, licensing, consulting, and mentoring can be emailed to [email protected] or you may call 805-527-7516 Monday through Friday between 10:00 – 4:00 PDT.

​Artwork provided by Nicole Rose, a fine artist, author, compliance lawyer, and CEO of Create Training International based in Queensland, Australia.

The purpose of this article is to provide a brief and broad overview of the due diligence process in a merger and acquisition ("M & A") transaction.  By increasing your understanding of the due diligence process well in advance, whether you are on the sell-side or the buy-side, you will be able to save time and money in both the short-term and long-term.  Additionally, the better informed you are, the more likely you will be to obtain a more successful outcome.

The reader should note that throughout this article where the author uses the phrase "the seller" or "the buyer" it is implied the phrase also means their respective company representatives and M & A team advisors, including, without limitation, their business consultants, investment bankers, accountants and M & A legal counsel.

 1.  The Purpose of Due Diligence.

        A.  Buyer.  The buyer needs to get a thorough and accurate "snapshot" of what the buyer is purchasing.  A due diligence review should give the buyer insight into the target's operations, culture, human resources, supplier and customer relationships, competitive positioning and future outlook, among other things.  Potential financial, legal and regulatory exposure needs to be assessed, and the buyer needs to obtain hard data as it goes on a fact-finding mission to investigate the seller's business before a final decision is made whether to proceed with the transaction.  Indeed, immediately after the closing of the transaction the buyer will be responsible for operating the business it has acquired.  Done fully, due diligence can give future management a holistic view of the company being acquired and its culture.  This also informs the buyer on how to integrate people, platforms, cultures and align all of the business interests and opportunities.

It should be noted if a third-party, such as a bank or private equity firm, is providing some of the financing for the transaction, that the financing or investing party will want to participate in the due diligence process and obtain a "snapshot" of the business of the seller as well.

        B.  Seller.  The seller needs to determine what "change of control" provisions exist in its contracts that may be triggered by the transaction, and what stockholder consents or other third-party notices or consents may be required to enable the seller to sign and close the definitive acquisition agreement (the "Acquisition Agreement").  In addition, the seller needs to ensure that the representations and warranties of the seller and/or owner(s) in the Acquisition Agreement (and the related disclosure schedule (the "Disclosure Schedule"), which complements those representations and warranties and is part of the Acquisition Agreement) are accurate and do not lead to post-signing and/or post-closing buyer indemnification claims and purchase price claw-backs.  After all is said and done, it’s important for the buyer and seller to be content with the transaction financially and culturally.  Avoiding lawsuits and claw-backs is paramount to a successful transaction outcome.

       C.  A "Win-Win" Process.  Each party in an M & A transaction is obliged to protect and further its own self-interest.  When the due diligence process is a "win-win" for all parties involved, the process is faster, easier and less expensive.  The disclosure of information, representations and written statements adds great clarity to the overall M & A transaction, and helps avoid misunderstandings that could otherwise lead to disputes after the deal closing.  Through performing the due diligence process, which is arguably a cooperative process, surprises and future disputes are minimized and hopefully completely avoided, which saves time, money and aggravation for all parties involved.

2.  Beginning of the Due Diligence Process.  The due diligence process begins, or at least should begin, virtually immediately after the signing of the letter of intent ("LOI").  For why the seller should have an LOI, please see this author's article entitled WHY YOU, THE PROSPECTIVE SELLER OF A PRIVATELY-HELD BUSINESS, WANT AND NEED YOUR OWN HIGHLY CUSTOMIZED LETTER OF INTENT ("LOI").

The seller, with a satisfactory LOI signed (with an appropriate confidentiality provision therein, or an adequate separate buyer-signed Non-Disclosure Agreement), should want to move the M & A transaction forward as quickly as possible.  A smart seller will hurry so as not to allow any unrelated "Black Swan events" to potentially take place that could for any number of reasons unravel the M & A transaction before the Acquisition Agreement is signed, closed and paid out.

The buyer, though it will want to be diligent and thorough in getting a clear "snapshot" of what it will be purchasing, will not want to exceed the exclusivity period it negotiated and the seller agreed to as set forth in the LOI or in a separate standalone agreement.  Exceeding that time period would allow the seller to open discussions with other potential buyers, which any serious buyer wants to avoid.  Meeting deadlines secures exclusivity and keeps the process moving towards everyones’ desired goals.

***

All that said, both the seller and the buyer should have prepared themselves structurally and financially far in advance before the due diligence process even begins, and before any LOI (letter of intent) is proffered by either party.

       A.  Advance Due Diligence Preparation by the Seller. As discussed in this author's prior article entitled BUILD AN EXPERIENCED, HIGH-QUALITY M & A TEAM AND PREPARE EARLY, the seller should work with its consultants and advisors such as accountants and tax lawyer on its financial due diligence materials, and with its M & A lawyers and potentially other experts on its business and legal due diligence materials, as early and as far in advance as possible in order to (i) "clean-up" and fix what needs fixing and is fixable, and (ii) take advantage of as many potential tax advantages and related transaction structuring possibilities as the seller's situation will allow.  Optimizing the investment or transfer readiness of a business well in advance of the initial offering stage is a very wise and cost effective strategy.  Being in such a state of readiness can help increase the price offered and it speeds and eases the entire process.

Ideally, long before the LOI is signed the buyer's lawyers should proactively provide the seller with a due diligence checklist that will typically be nearly identical to the ultimate due diligence checklist that the buyer presents to the seller after the signing of the LOI.  Assuming the seller has worked with the seller's legal counsel and others to organize and perfect the disclosure materials related to seller's business, the seller will be prepared to virtually immediately respond to the buyer's due diligence checklist requests with thorough, organized and accurate responses.

These prompt thorough, organized and accurate due diligence request responses will make the seller's business appear professionally organized and well-run, provide the buyer with confidence in the acquisition, hasten the pace of the M & A transaction, and save all of the M & A transaction participant's time and money.  It should also increase the odds of a successful signing and closing, the goal of all serious M & A transaction participants who, as time goes by, will be increasingly invested in the process and successful outcome of the M & A transaction.

        B.  Advance Due Diligence Preparation by the Buyer.  The buyer uses the buyer's due diligence review to not only get a "snapshot" of the target business, but also, to the extent it finds surprises or problems with the business, to understandably attempt to "re-trade" the deal earlier agreed upon in the signed, but generally legally non-binding, LOI.  In such a re-trade the buyer may ask for a lower purchase price or better deal terms, such as more extensive indemnification rights, often coupled with a higher purchase price holdback or escrow amount.  If the due diligence surprises are bad enough, the buyer may decide to "walk away" from the M & A transaction entirely, causing a loss of time and money for all M & A transaction participants.

       C.  Potential Consequences of Due Diligence Delays by the Seller.  To the extent the seller is unprepared and is unable to promptly provide the buyer with the due diligence materials requested in the buyer's due diligence checklist, the buyer is in a position to attempt to renegotiate the exclusivity period deadline contained in the LOI or separate standalone agreement.  Indeed, the buyer will say it is ready, willing and able, and given the document production delays it is unfair to hold the buyer to the exclusivity timeline given that the buyer negotiated the exclusivity period deadline with the expectation it would be provided with the requested standard due diligence materials promptly.  At some point delays by the seller will give the buyer concern about the viability or trustworthiness of the overall transaction, which can lead to the buyer walking away and the transaction cratering.

***

As with riding a bicycle, an M & A transaction needs ongoing forward momentum to be able to remain balanced and moving forward to reach the intended destination.  Without that ongoing forward momentum, like a bicycle, the M & A transaction often totters and crashes down.  Accordingly, the readiness and trustworthiness of each party is critically important.  Being “on time” every step of the way helps to demonstrate readiness and trustworthiness.  Without adequate enthusiasm and trust, it is unlikely that your deal will come to fruition.

3.  How the Due Diligence Process Usually Works.

      A.  The Buyer’s Due Diligence Checklist.  The buyer will provide the seller with a due diligence checklist which is typically very detailed and rather generic but somewhat customized to seller's business.  The seller will provide the buyer with information responsive to the buyer's checklist requests, either stating the item requested is not applicable, or providing materials that are responsive.  Generally speaking, it is in the seller's interest to disclose as much as possible to avoid post-closing buyer surprises that may lead to indemnification claims and purchase price claw-backs.

      B.  The Seller’s Electronic Data Room.  More often than not, the seller pays a third-party provider to set up an electronic data room for the due diligence review portion of the M & A transaction.  The seller can control and limit who receives data room access and accordingly gets to review the seller’s confidential due diligence materials contained therein.  In addition to saving everyone the time and expense of traveling to review the due diligence materials on-site, the seller’s data room also provides the seller with the ability to see which authorized individuals have entered the data room when, for how long, and what specific data was reviewed.  If the buyer is not actively reviewing materials in the data room, the seller can reasonably assume that the buyer has only limited interest in the transaction.

At the end of the transaction the seller can get a CD-ROM containing everything that it posted in the data room, which is useful for both historical records and in the event of a post-closing buyer indemnification claim.  A thorough historical record is beneficial to all sincere parties.

4.  Due Diligence Process and the Acquisition Agreement.  In most M & A transactions the due diligence review does not delay the negotiation of the draft Acquisition Agreement, and both processes occur concurrently.  These M & A processes can occur concurrently in part because to the extent the representations and warranties in the Acquisition Agreement do not accurately reflect the business of the seller/owner, in addition to the negotiation by the seller and the buyer of their revision, they also can be "fixed" by adding schedules to the Disclosure Schedule (which begins as a blank document).  For example, if Section 4.21 of the draft Acquisition Agreement prepared by the buyer is a representation and warranty of the seller stating, incorrectly, that there is no current litigation, Section 4.21 of the Disclosure Schedule prepared by the seller can cure the inaccuracy by listing the current litigation (assuming it is made clear in the portion of the Acquisition Agreement with the representations and warranties that they are modified by the corresponding schedules set forth in the Disclosure Schedule, a provision which is very typical and standard).

The Disclosure Schedule is initially prepared by the seller, and is subsequently reviewed and commented on by the buyer.  The seller and buyer work together on perfecting the Disclosure Schedule, which is why both the seller and buyer are in a sense due diligence review partners.   Accuracy and a “win-win” mindset are beneficial to everyone involved.

To competently prepare the Disclosure Schedule the seller must know its own due diligence materials inside-out.  Those materials must be complete and accurate if the seller is to protect itself from potential post-closing indemnification claims and purchase price claw-backs.  For this reason it is imperative that the seller’s due diligence materials are organized and reviewed in detail by the seller and its representatives in advance so as to avoid potentially costly mistakes and to save time and money for all.

5.  Variations on the Theme.

       A.  When There is No LOI.  In some cases there is no LOI between the seller and the buyer.  The parties go directly to negotiating the Acquisition Agreement, typically with the thought of saving time and money (although in this author's experience it rarely works out that way).  Once again, the due diligence process begins immediately, while the Acquisition Agreement is being negotiated.  Typically, without the main business points decided in advance, as occurs with a signed LOI, the Acquisition Agreement takes longer to complete and sometimes never gets completed at all.

       B.  When the M & A Consideration is the Securities of the Buyer.  Not all M & A transactions use cash as the sole form of consideration for the seller.  For example, it may be agreed that the buyer may use its own securities as all or a portion of the consideration for the seller.  Alternatively, the seller may be provided with consideration in the form of an "earn-out," pursuant to which the seller is paid the seller's consideration (be it cash and/or securities) over a period of time after the closing based on the post-closing performance of whatever is agreed upon by the parties (typically the performance of what the buyer purchased).  There are numerous other examples not listed above.  In such situations the seller needs to conduct either a partial or complete due diligence review of the buyer, since the seller is in a sense also purchasing the buyer, and accordingly needs its own "snapshot" of the buyer.  Everything in this article described above applies in this situation.  When properly performed, due diligence is a two-way street.  Everyone needs to be ready, accurate and trustworthy.

       C.  When An Owner will be an Employee or Consultant of the Buyer Post-Closing.  In an M & A transaction in which post-closing an owner will become an employee or consultant of the buyer, it is important that the owner perform some due diligence review of the buyer, at least to understand the business process, infrastructure, culture and key personnel at his or her potential future employer.  Hopefully some of these matters will be addressed in the LOI between and/or among the M & A transaction parties.

 6.  Summary and Conclusion.  M & A due diligence is a key part of every M & A transaction that is necessary, and is arguably of material benefit to both the buyer and the seller alike.  It can and should be cooperative and need not be a zero-sum game.

Thorough and competent advance preparation for M & A due diligence is necessary to saving both time and money, and for maintaining the ongoing forward momentum necessary to keep the M & A transaction balanced and flowing toward a successful signing and closing, the goal of all committed       M & A transaction participants.

***

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: (626) 773-6061
                 E-mail: [email protected]

 © Scott J. Lochner 2014

You, the prospective seller of a privately-held business ("You"), should benefit greatly by creating your own customized letter of intent (“LOI”) prior to entering into negotiations regarding the tentative sale of your business (the "Transaction").   By being proactive and presenting your ideal terms and conditions upfront, you substantially increase your ability to get your ideal outcome.  This statement assumes You enter into an LOI with a potential buyer before You (i) enter into an exclusivity agreement, (ii) share the due diligence materials (other than the financials) regarding your business, or (iii) negotiate a definitive sales agreement, with the potential buyer.

Why follow this advice?  Because when You consider the reasons for entering into an LOI first, as generally described below, it will be clear to You that You want and need your own customized LOI.

The LOI stage of the Transaction is early.  As noted, it is before You enter into an exclusivity agreement, before You share due diligence materials regarding your business, and before You negotiate a definitive sales agreement, with a potential buyer.

If You immediately give a potential buyer contractual exclusivity (pursuant to which You will only be allowed to negotiate the sale of your business with that particular buyer), You will have given up a lot of your bargaining leverage.  You will no longer be able to have potential buyers compete against one another, which competition  can often drive-up the sales price for your business and improves other sales terms for You.

If You immediately provide a potential buyer with the due diligence materials related to your business  You may irreparably harm yourself.  Due diligence material disclosure (other than the disclosure of the financials of your business, which is typically shown to a potential buyer very early) usually occurs prior to or concurrently with negotiating the definitive sales agreement. Buyers often delay negotiations while they digest the due diligence materials, which materials the buyer will use to "beat You down" to obtain a low(er) sales price and better Transaction terms from You.  You may not even understand how you have suffered in the Transaction, since virtually none of your Transaction terms will have been previously agreed upon.

If You immediately start negotiating a definitive sales agreement (which is usually prepared by the buyer), You will be reacting to what the buyer wants.  You will have already set the stage for Transaction term compromises that will not benefit You.  After You have spent a lot of time negotiating Transaction deal points, You could become overly invested -- both emotionally and financially -- in the Transaction.   Your negotiating leverage might not be as strong as it earlier was.  If you "walk away" (which typically will become harder and harder for You to do), You will give up all the emotional time and energy and all the money You spent negotiating the Transaction.  You may feel somewhat trapped, and forced to accept Transaction terms that You do not want in order to simply move forward so as to not lose your investment of prior time and money.

How can You avoid all of these situations that will be harmful to You?  Easy!  You can avoid all of these bad situations by providing your potential buyer(s) early on with a front-loaded LOI that You have prepared which contains all of your preferred Transaction terms.

With a front-loaded LOI You can determine early, before you have selected and agreed to exclusivity with one potential buyer, whether the buyer(s) will give you acceptable Transaction terms.  You can require multiple buyers to compete on both Transaction and financial terms.  A buyer marking up your LOI does not have to know how many other potential buyers there are.  Through an LOI You can "lock down" the terms of your Transaction as much as possible before You (i) select your preferred buyer and give away negotiating exclusivity, (ii) disclose your due diligence materials to your preferred buyer (which is especially important if that buyer is in the same industry and is a competitor), and (iii) negotiate your definitive sales agreement with your preferred buyer.

Remember, as a seller You are strongest, and have the most negotiating leverage, early on at the LOI stage of the Transaction.  This is why the most experienced EXIT STRATEGISTS encourage their clients to create their own customized term sheet and include it in their LOI.

Over the past three decades we have studied thousands of opportunities and challenges for clients.  In the vast majority of those projects, Macro Strategic Design was the only organization being paid directly and solely by the client to analyze and diagnose the MACRO and MICRO aspects of the project.  In most cases, the recommendations for the client to act or change or buy some kind of asset, investment or insurance product were introduced and supported exclusively by salespeople or biased advisors whose compensation was directly connected to having the client implement their proposal(s).  Without a thorough and unbiased review, our clients would have been “flying blind” so to speak and left vulnerable to the damage that so often occurs when piecemeal or transactional thinking drives a decision.  We are not suggesting that all salespeople or advisors with conflicts of interest are not to be trusted.  We are suggesting that it is wise to apply competent, unbiased, unconflicted due diligence prior to any significant sale, loan, investment or acquisition.

In wood shop in the seventh grade, Bruce Raymond Wright’s teacher reminded his students daily to “measure twice, cut once.”  When dealing with anything of great importance or where holistic synergy is relevant, second or third opinions can save you from making a disastrous mistake.  Piecemeal, transactional thinking and action is amongst the most ineffective of human behaviors.  Salespeople thrive upon and even depend upon their prospects taking fast and under scrutinized action.  Truly client centered, competent and honorable professionals expect and respect a reasonable level of scrutiny (due diligence) and the time necessary for clients to make well informed synergistic decisions.  We believe that due diligence is most effective when the process and those performing the evaluation(s) are not conflicted.  We do not believe that due diligence performed by the company or person trying to sell the asset to you is optimally effective for the consumer.

When we carefully take measure of a situation from both a MACRO and MICRO perspective, we are able to make more aware, enlightened, holistic and informed decisions.  The following story is excerpted from The Wright Exit Strategy - Wealth; How To Create It, Keep It and Use It authored by Bruce Raymond Wright.  Bruce updated it slightly for this website in June 2014.  It illuminates how a wiser MACRO perspective can be more valuable than even the best of MICRO tactical plans performed by paid advisors (in this case a CPA) and biased salespeople who fail to inquire about, understand and act in support of a client’s highest and best interests.

It is all too common for people to become so focused on a transaction, an opportunity or an adversity that they fail to truly understand the big picture or the “why” that ought to be the driving force behind all decisions to act or not to act.  The following story has helped thousands of people avoid very costly mistakes.  It has also helped people gain clarity about why, what, where, when and how to take appropriate action.  Remember this simple basic part of our due diligence formula:

After you read the story below, please email us your thoughts about it and we will send you a free gift as a token of our appreciation for your feedback.

How Best to Improve One’s M & A Transaction Outcome (aka “The Early Bird Catches the Worm”) 

 Author:  Scott J. Lochner

Question:  How can you, the prospective seller of a privately-held business (“You”), obtain a significantly improved outcome in the potential sale of your business?  

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.

CONCLUSION

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?

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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.

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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: (626) 773-6061
                 E-mail: [email protected]

© 2014 Scott J. Lochner