What do you call five thousand lawyers at the bottom of the ocean? A good start.
How many lawyers does it take to screw in a light bulb? How many can you afford?
Why-- well, I’d better stop there. My daughter reads this column, and she has a law degree.
All joking aside, you can’t run a company without good legal advice. You have to know the difference between a C corporation and an S corporation, what the Americans with Disabilities Act requires you to provide for employees, how to file an effective patent . . . the list goes on.
This is especially true when it’s time to sell your company. The buyers are guaranteed to have a great lawyers. If they are a strategic acquirer (meaning, a larger player in your industry), they will have made acquisitions before and will have an experienced team on hand. If they are a financial acquirer (such as a private equity group), you can bet they’ve hired the absolute best, because they’re investing other people’s money. You need to balance the scales, so make sure you have appropriate representation on your side.
Hiring an Attorney
I cannot emphasize this enough: You must hire an attorney who specializes in mergers and acquisitions for mid-size companies.
I once represented a company that made ultra-lightweight luggage. As we always do, I strongly suggested, several times, that the owner contact some of the reputable business transactional law firms we’ve worked with in the past. Instead, when he came to negotiate with the buyer, he brought his divorce lawyer.
This divorce lawyer was not at all pleased with the contract that the buyer, a private equity group, brought to the table. He immediately started objecting to some of the provisions. The buyer’s lawyers stared at him incredulously, until finally one of them spoke up. “Bob,” she said, “the contract we have with our investors requires those provisions to be in every deal we make when we buy a company. No one negotiates those boilerplate paragraphs in a deal like this. In fact, we don’t even have the authority to negotiate them.”
A professional business transactions attorney would have known that this boilerplate language was standard for that kind of deal, and would not have attempted to argue about it. This poor family attorney--who was excellent at litigating divorces!--came off as incompetent and unsophisticated. As you can imagine, the buyers were able to capitalize on the lawyer’s lack of knowledge and negotiate better terms for their client.
I’m going to say it again: You must hire an attorney who specializes in middle market mergers and acquisitions.
When Your Attorney Should Get Involved
As a rule of thumb, you don’t need to get your attorney involved in the nitty-gritty of your deal until you have a Letter of Intent (LOI) from a prospective buyer. A LOI outlines the basics of the deal they would be prepared to make to buy your company. Your investment banker is the dealmaker who negotiates the terms of the LOI to get you the best possible deal.
When you bring attorneys into the deal before the LOI stage, they can’t resist acting like dealmakers. But because that’s not their area of expertise, you generally won’t actually get to a successful closing. I don’t want to suggest that they get in the way... but from my perspective? Yeah, they get in the way.
How to Keep a Leash on Your Attorney
As the deal nears completion, there can be some tension between your investment banker and your attorney. Reputable investment banking firms work on commission, so they don’t get paid until the deal closes. Attorneys, on the other hand, work for an hourly fee, so once the deal is closed they stop getting paid. Even the most ethical attorney in the world might feel a little tug to spin the negotiations out just a little bit longer, and the longer the deal drags, the less likelihood there is of closing. Remember, in the world of mergers and acquisitions, time is not your friend. The longer a deal drags on, the less likely it is to close, and the less likely you are to get the terms you want.
How and when to sell your company is probably the biggest business decision you’ll ever make. You owe it to yourself to manage the legal side of things and choose the right attorney for the job.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA