How Lawyers Can Help Prepare and Provide Value to Clients Today for a Future Sale
As with most things in life, proper preparation can make a tremendous difference down the road. Most family-run and closely-held businesses do not operate on the context of a future sale of the company; rather, they bend and adjust in the moment, either unknowingly or consciously creating potential issues and red flags which can either derail a future sale of the company or negatively impact its valuation, as well as impact the amount of money required to be kept in escrow to back up representations and warranties made in the purchase agreement and the timing of its release.
However, the lawyers for these types of companies are uniquely positioned to generate present and future value for their clients by properly and timely advising them of things that can and should be done before being under the magnifying glass of a potential buyer, regardless of whether that buyer is a strategic acquirer, private equity firm, family office, search fund, or serial entrepreneur.
Below are examples of agreements and other items that should be reviewed by counsel in the ordinary course and which take on tremendous significance in the context of a future merger or acquisition:
- Ownership Agreements. It is not uncommon for shareholder or operating agreements and the related agreements to have never been signed by any or some of the owners. It is essential that the corporate house be in order and, to the extent that any votes or resolutions may have been required over the years, that appropriate protocol was followed. No potential buyer wants to get in the middle of a dispute between owners over their rights and interests at the time of a sale.
- Employment Agreements with Key Employees. Key employees for this purpose typically include management and sales people, but the definition can be expanded depending upon the type of company, e.g., for a software company, it would include the most important developers. Critical provisions include the non-compete, which must be reasonable in scope and duration and becomes quite complicated in the connected world of today, as well as other restrictive covenants, such as non-solicit of customers, partners, suppliers and other employees. This review can also involve an analysis of whether independent contractors truly meet federal and state criteria for such a position regardless of what the contract says. To the extent that any verbal promises were made about such things as stock or severance, it is essential that they be reduced to a signed writing.
- Customer and Partner Agreements. Subject to the type of business, prospective buyers will want to see contracts in place with any significant customers and partners that spell out the rights and obligations of the parties and will want to know that the contracts can be assigned.
- Supplier Agreements. A buyer may want to make sure that it has the ability to terminate a supplier agreement post-transaction if the buyer is making the acquisition in order to use the target company as a channel for its own products which are competitive with the current supplier, or it might want to leverage the seller’s existing contract to get favorable terms and avoid a renegotiation. Either way, knowing who a likely buyer will be, understanding which terms would be important ahead of time, and working towards putting the appropriate language in place ahead of time can be a valuable exercise.
- Ownership of Intellectual Property. Even if a company has not been granted any formal patents or trademarks, buyers will want to know that the intellectual property ownership is clean and that all employees, independent contractors, and suppliers have previously made the appropriate assignments sufficient to preclude a future adverse claim.
Running a successful M&A process requires, among other things, confidentiality. The last thing that a selling company wants to do is to have to locate or clean up these types of agreements while actual due diligence is taking place and provide fodder for the rumor mill.
Gregg Schor is the CEO of Protegrity Advisors, a leading M&A advisory and business valuation firm. Headquartered in Ronkonkoma, Protegrity works with companies and family-owned businesses in New York, New Jersey, Connecticut and beyond, and has relationships with private equity, strategic and other types of buyers and sellers across the US and internationally. Contact Gregg at firstname.lastname@example.org.