In the ownership of a company there are few things as important as its sale. Selling a business gives the seller the opportunity to monetize decades of hard work and will hopefully result in the seller receiving a significant amount of money. While the seller and the buyer may determine how much the buyer is willing to pay for the business, there is no assurance that the seller will actually receive the entire sale price – without a detailed and enforceable Sale and Purchase Agreement.
Both parties’ understanding of the deal structure and terms are documented in a transaction agreement that allocates risk between the buyer and the seller. The buyer will ask for certain promises about the historic facts and operations of the company (Representations and Warranties). A buyer is likely to ask for certain commitments or assurances about the short and medium term post-closing performance of the business (Covenants). Also, a buyer may ask the seller to defer a portion of the purchase price based upon the performance of the business following the closing (an Earn-Out).
Within the sale agreement there are customary market terms for each provision. Counsel that does not regularly represent parties in these transactions is unlikely to be aware of market terms. This lack of familiarity may delay or destroy a transaction, or worse, result in the seller not receiving the purchase price. When selling a business, it is best to retain those most qualified for the task and not rely on local counsel, who may be cheaper, but could ultimately cost the business owner significantly more by failing to properly protect its interests.
Sellers that rely upon local counsel in a sales transaction may not be able to negotiate advantageous terms or fully protect the payments due from a sale. Often the local counsel has a long-standing relationship with the seller and has helped them with a variety of commercial, real estate or even personal transactions. However, each of those transactions are very different than the ultimate sale transaction.
It is not unusual for complicated tax planning to be necessary to minimize the amount of taxes that a seller will pay when the business is sold, thereby increasing their net proceeds. By utilizing a firm with transactional and tax specialists, the seller’s ultimate costs will be lower because the transactional and tax counsel can structure a deal in a manner to achieve these objectives. Additionally, many businesses may have intellectual property, real estate or environmental issues that need to be addressed in a sales agreement. Rather than finding appropriate specialists for each area, a large institutionalized law firm can offer qualified experts to assist with these areas, which pose their own unique risk to the seller.
Representations and Warranties, Covenants and Earn-Outs are all standard parts of a sales agreement, however each can be a trap if a seller or its counsel are not focused on the risks. Legal counsel that does not specialize in sales transactions may be unaware of market provisions, causing the seller to assume too much risk. By assuming too much risk it will be easier for the buyer to erode or re-coup a portion of the purchase price.
While the seller may not be aware of the different techniques to erode value, sophisticated counsel is aware and will protect the seller’s interests. Further, counsel inexperienced in acquisitions may focus on the wrong issues thereby slowing down the normal process. When representing a seller in a deal, the priorities are to close the deal, protect the proceeds that the seller anticipates receiving in the transaction and limit the buyer’s ability to re-coup the purchase price following the closing. For example, a buyer may reduce the purchase price by including the following in the purchase agreement:
- A working capital adjustment that does not provide for seasonal changes;
- An Earn-Out that does not account for certain pre-disclosed risks or the buyer’s actions post-closing; or
- A portion of the purchase price is contingent on the seller providing consulting or employment services post-closing.
An opportunity to sell a business is very exciting and with the right assistance a seller should be able to preserve the proceeds. Businesses are built on working with the right professionals and paying them for their services. While a transactional firm may cost more than local counsel, the value that the seller will receive will offset any increase in cost. Buyers and their counsel tend to be more comfortable working with counsel that is an expert in the sales process as it will allow the transaction to proceed efficiently and timely.
Sophisticated counsel also lends some credibility to the process ensuring that the buyer or its counsel will not take advantage of the seller. Local counsel is a very valuable resource given their relationship with the owners of the business and their knowledge of the business, however for key negotiations on the sales agreement the value of a seasoned professional cannot be quantified, or overstated.