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Selling Your Business: Do You Need to Prepare in Advance?

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Spoiler alert – YES, you do! Tackling a complex new undertaking – such as the business sale process with its many moving pieces, new concepts, and special terminology – brings with it a learning curve. It demands thought, attention to detail, and time to fully process various concepts. In addition to moving up the learning curve, when preparing to sell your company you will also have work to do on the business itself, Just as you might paint or complete repairs around your home in preparation for a sale or Selling Your Business.

You may be thinking, “When the time comes, I’ll just hire a couple of experienced M&A professionals and we’ll get it sold.” Or you find yourself overwhelmed with questions wondering how to get started. Regardless, there are several reasons why the most successful sales processes begin long before your business goes on the market.

Ensure your personal readiness.

Before you plunge into the sales process, take time to dig deep into your reasons for selling, must-haves in the deal, and future plans. Too many sellers decide to sell based on a bad quarter (or year), only to realize midway through the process they’re not especially motivated to sell. That’s not only a substantial waste of time and resources for you, your M&A professionals, and potential buyers – it’s also a red flag when you are truly ready to sell.Like the boy who cried wolf, your credibility will be suspect. And sellers should spend quality time with their financial planner and tax accountant in evaluating their future so that when potential buyers make offers, they can be systematically compared against needs.Sellers often jump at a seemingly attractive offer for their business, only to realize late in the process that it won’t net what they need for their desired new lifestyle. Every business owner has a different set of wants and needs, including financial goals as well as plans for the company, its employees, and their legacy; every M&A deal is structured differently depending on the motivations of the parties. One of the keys to success in an M&A deal is immersing yourself in the process so you recognize the best fit deal when you see it, because the best fit probably entails far more than just the highest price.

Learn about the sale process.

Selling your company is a big deal (yes, pun intended) involving a complex M&A process that has its own set of customs and requirements. You can minimize surprises if you learn about the many steps in the process, what will be expected of you, what to expect from buyers, normal time frames, and typical valuations in your industry. You can study the mistakes sellers frequently make and avoid making them.

A prepared, savvy seller is another way to impress potential buyers and maintain their confidence during the process – which is most critical when they will be working closely with you after the sale as many sellers continue to have skin in the game post-closing.

Assemble and lock in your management team. Selling your company usually means you’ll be walking away within some defined period after closing. Undoubtedly, as the owner, you perform multiple functions at the company. Have you developed a well-rounded, seasoned management team that is ready to step up and run the company successfully without you? Some, but not all, buyers bring management talent to the table, so you will be limiting your universe of potential buyers if you don’t have a complete, seasoned management team in place.

And is your team adequately incentivized to stick around during an exit event? (read more in our article, Profits Interests Explained). Hiring and keeping stellar employees is always a challenge, and both the risks and stakes escalate during a sales process. Developing and incentivizing your team is obviously not a simple or overnight fix.

Develop a great M&A deal advisor team.

Experienced deal professionals, including financial, legal, and investment banking experts, are essential to a well-run M&A deal. Begin well in advance of selling your company to seek out recommended M&A specialists and develop relationships with them. To take advantage of the best offer, you need a cohesive, well-oiled team that will help you move through the sales process effectively and minimize hitches, hiccups and delays.

Refine your business records. Essential steps in the M&A process include assembling a data room that is populated with the necessary documentation and providing financial statements that attractively position the company for the potential buyer. Prior to putting your company on the market, your M&A professionals will guide you through the time-consuming data room setup and work with you to get your accounting in order to best showcase your company.

These tasks will continue throughout the sales process as potential buyers make new and different requests, but you’ll be well served by getting the bulk of the materials assembled early.

Keep running your business.

Selling your business is an exceptionally demanding undertaking all by itself even when you have a team of deal professionals to manage the process. Assume you will be fully engaged with coordinating your deal team’s efforts, responding to prospective buyers’ inquiries and requests, negotiations, and recasting financial statements. And, even while all these activities are moving full steam ahead, your potential buyers will also be evaluating the business and the financial results up to and beyond the closing table.

If you take your eye off the ball during this critical period, you risk flat performance, missed targets, and lackluster financials. Potential impacts can range from a drop in buyer confidence to a lowered price and even a lost deal. While you’ll still be running full throttle while selling your business, advance preparation will ease the load during the crazy breakneck process. 

Thoughtful preparation for the sale of your largest asset will help you run a smooth process and prime you to take advantage of the best-fit deal. Completion of several essential tasks, deserving of adequate time to really think them through, is not an overnight fix – but will pay off when the time comes to sell your business. You can prepare in advance to sell your company, or you can play catch-up throughout the deal process when your leverage is lowest.

Selling Your Business: Best Ways To Prepare In Advance

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.

Selling Your Company: Bridging the Gaps Between Financial and Legal Advisors

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Mergers and acquisitions (M&A) are complex transactions involving a wide array of financial, legal, and operational considerations. The M&A process requires a deep understanding of various business disciplines, with financial and legal advisors working in tandem with the goal of ensuring the deal proceeds smoothly.

Clients rely on their professional advisors for this information, which is often not understood by all parties, sometimes resulting in a lack of overall deal cohesion. This disconnect may exist because financial professionals may struggle to fully grasp the technical contractual nuances of M&A, while conversely legal professionals may find it difficult to understand various technical accounting and financial nuances.

This article examines the reasons behind this disconnect and explores possible solutions to improve collaboration and communication between these two critical groups of deal advisors.

1.Potential for Disconnect Between Financial and Legal Professionals in M&A

In the M&A realm, financial and accounting professionals are primarily responsible for conducting financial due diligence, analyzing, and developing valuation models and financial statements, and negotiating the parts of the deal related to these elements.

On the other hand, legal professionals are primarily tasked with conducting legal due diligence, drafting contracts, negotiating legal terms, and ensuring compliance with regulatory requirements. While both groups play a vital role in M&A deals, their differing areas of expertise can lead to a lack of understanding and cohesion between them.

According to a 2019 study by Deloitte, only 42% of surveyed M&A professionals believed collaboration between financial and legal professionals was effective, with the majority citing a lack of understanding of each other’s roles and responsibilities as the primary cause of the disconnect (Deloitte, 2019).

Furthermore, a 2017 survey conducted by Ernst & Young found that 75% of respondents identified misaligned expectations between deal parties as a major factor leading to failed transactions (Ernst & Young, 2017). These statistics highlight the pressing need for better integration and collaboration between financial and legal professionals in M&A transactions.

2. Causes of the Disconnect

A. Limited Understanding of Each Other’s Domains 

The specialized nature of financial and legal professions means that individuals in each field may not have a comprehensive understanding of the other’s area of expertise. This can lead to misinterpretations and incorrect assumptions, ultimately hindering effective communication and collaboration.

B. Misaligned Objectives 

Financial and legal professionals may have different objectives in M&A transactions. For instance, some financial professionals may focus solely on valuation while underappreciating that legal implications can result in financial losses for the client. Conversely, some legal professionals may overly prioritize risk mitigation and regulatory compliance while failing to appreciate the overall financial picture. Regardless, these divergent goals can create tension and impede cooperation.

C. Inadequate Communication 

In the fast-paced world of M&A, effective communication is paramount. However, professionals in different disciplines often use jargon and terminology unique to their fields, sometimes making it difficult for the other party to fully understand the intended message.

D. Insufficient Training 

Financial and legal professionals often receive specialized education and training, with limited exposure to the other’s discipline. This lack of interdisciplinary training can exacerbate the disconnect between the two groups.

3. Some Examples of Negative Implications Due to the Disconnect

A. Inadvertent Inclusion or Exclusion of Key Financial Terms: 

The accounting and financial provisions of the acquisition agreements (such as around working capital and EBITDA based price adjustments) sometimes inadvertently include, exclude, or misapply key components because the nitty-gritty of the acquisition agreements failed to capture, describe, or apply them correctly, whether because:

  • The financial professionals (1) didn’t look closely at the contractual provisions, (2) didn’t understand the contractual provisions, or (3) didn’t otherwise closely coordinate with the attorneys; AND/OR
  • The legal professionals (1) didn’t look closely at the financial statements and calculations underlying the key financial and accounting provisions of the acquisition agreements, (2) didn’t understand the basics of the accounting and financial information, or (3) didn’t otherwise closely coordinate with the accounting and financial professionals.

Remember, spreadsheets and financial statements aren’t contracts, but the contracts must accurately reflect what’s in those spreadsheets and financial statements. And it takes some work and thought to make sure they’re properly integrated when it comes to the volume of financial and legal information underlying any M&A deal of size. The most pristine spreadsheets and financial statements are only as good as the acquisition agreements that interpret and apply them.

B. Allowing the Deal to be Over-Lawyered: 

People often talk about over lawyering in M&A deals, but they don’t always do enough to prevent it. Lawyers for institutional and private equity buyers tend to overdo it, and financial professionals and lawyers don’t always work together closely enough. This can lead to lawyers sometimes making changes to the contracts that hurt the other side, for example, even if they weren’t agreed upon.

Sometimes, high-level financial executives just say they’re following the advice of their white shoe law firm without considering the actual business case. Many non-legal professionals aren’t comfortable with the technical details of contracts, so they may rely too much on what their lawyers tell them. This problem can be exacerbated when the financial and legal professionals are not collaborating as closely as they should.

4. Bridging the Gap: Solutions for Better Collaboration between Financial and Legal Professionals in M&A

Some strategies for M&A principals to consider in seeking solutions for better deal collaboration between financial and legal professionals include:

A. Engage Professionals with Cross-Functional Experience or Backgrounds: 

When vetting their prospective deal teams, M&A principals should understand and inquire about the cross functional training, if any, that their professionals possess. For example, does your M&A attorney have prior hands-on experience in entrepreneurship, business management, accounting, or finance, and so on for the various types of deal advisors involved in the transaction?

The more practical and hands-on experience a member of the deal team has had in one or more areas of other professional disciplines involved in the transaction, the better. Advisors with such cross-training experience will undoubtedly have a more holistic understanding of the deal elements than those who have no real experience or training outside of their individual professional domain.

B. Ensure Properly Coordinated Communication Throughout the Process: 

Insist on regular communication between financial and legal professionals throughout the M&A process. This should include scheduled meetings and the use of shared language and terminology to ensure both parties understand each other’s (and most importantly, the client’s) perspectives and goals.

C. Clarify Roles and Responsibilities:

Clarify each party’s roles and responsibilities at the beginning of the deal. This will help to ensure that everyone understands the scope of the work and can work more effectively. It may also shed light on incorrect assumptions each party is making about what the other is truly doing and identify gaps or oversights that might otherwise fall through the cracks.

D. Develop Mutual Understanding of Deal Components: 

Financial and legal professionals need to have a mutual understanding of the key deal components. This can be achieved by ensuring they both review the same financial and accounting information, as well as the same contractual terms, and by discussing any discrepancies.

This is not to suggest they should replicate the other’s work, or that financial advisors should be the lawyers, or the lawyers the financial advisors, etc.

The point is to ensure through reasonably coordinated collaboration and discussion that the attorneys properly describe and implement the intricacies of the accounting and other financial components in the acquisition agreements consistent with the overall deal intent, and conversely that the financial professionals spend the time necessary to reasonably understand and confirm the legal terms in fact truly reflect those intricacies.

This collaboration should involve more than just taking the other’s word for it.

E. Build Trust:

Trust is essential to any successful working relationship. Building trust between financial and legal professionals can be achieved by creating opportunities for both parties to get to know each other on a personal level, particularly at the outset of the deal, whether through a social event or even just an informal meeting. This can help develop rapport. By building trust, financial and legal advisors can work together more effectively, which can ultimately lead to more successful deal outcomes for clients.

CONCLUSION

In conclusion, bridging the gaps between financial and legal advisors is critical to ensuring the success of M&A deals. The specialized nature of these professions can lead to a lack of understanding and cohesion between them, but by implementing solutions such as proper vetting of interdisciplinary skills, coordinated communication, clarifying roles and responsibilities, developing a mutual understanding of deal components, and building trust, M&A professionals can work together more effectively.

By doing so, they can ensure that deals proceed more smoothly, benefiting clients and their businesses. Ultimately, it’s the responsibility of all parties involved in M&A transactions to prioritize collaboration and communication, striving towards common goals and a shared understanding of the complex and intricate elements of the deals they undertake.

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.

New Attorney Announcement

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Linden Law Partners is pleased to announce that attorney Dave Stefanski has joined our business and transactional practice group as Senior Counsel.

Dave Stefanski: New Attorney Announcement

Dave Stefanski specializes in securities and business law. He has extensive experience representing public and private companies in the technology, real estate, energy, and banking sectors for a variety of securities and other transactions, including equity and debt offerings, rights offerings, exchange offers, mergers and acquisitions (M&A), divestitures, and spin-offs.

Dave’s securities law focus also extends to federal and state compliance work, including SEC, stock exchange listing, and other compliance work. His business and transactional law work extends to corporate governance, M&A and private equity transactions, and venture capital investments. Prior to joining Linden Law Partners, Dave spent more than 20 years with securities and business law firms in Denver. Dave is a Longmont, Colorado native who obtained his undergraduate accounting degree from CU Boulder and his law degree from the University of Denver. Outside of work, Dave enjoys golf, traveling and spending time outdoors with his family.

Dave and Pat Linden have been friends for nearly 25 years having originally met as classmates in law school starting in 1998. They continued to collaborate on their professional pursuits and formalized their business relationship in March of 2023. Mr. Stefanski stated, “I’ve known Pat for decades now and have gotten to know the other attorneys at Linden Law Partners over the last several years. I’ve been impressed by the exemplary work they perform on behalf of their clients and I’m eager to be a part of what they’re building. The commitment of Linden Law Partners to continued growth in the securities and M&A arenas was attractive, and I look forward to increasing their momentum.”

Pat Linden commented, “we’re thrilled to add Dave to the team. We have a long-time relationship that’s based on friendship and professional respect. In addition to having significant M&A experience, he’s an exceptional securities attorney who further deepens our experience and footprint in that practice area. Dave’s always had excellent business sense, is a high integrity guy, and being from Colorado he’s got a lot of connections and established clients in the community. He adds a lot to what we’re doing and it’s exciting.”

Linden Law Partners is a boutique law firm that helps clients effectively navigate every stage of the business life cycle, from formation to exit. We are business and transactional law specialists with extensive experience in all aspects of corporate law and governance, complex partnerships, joint ventures, emerging companies, mergers and acquisitions, venture capital, and private equity. We view our representations as relationships, not just transactions.

The Last 5% in M&A

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Any serious athlete will tell you the very end is usually the hardest and most important part of the competition. For example, the last few miles of the marathon and the “championship” rounds in boxing are grueling – but they always matter the most. That’s easily where the race or fight is won or lost. Similarly, the “last 5%” of an M&A deal is virtually always the hardest and most important component to obtaining a successful outcome for what are often life-changing deals for M&A sellers.

Once key deal points such as overall price, terms, and conditions have been agreed upon and the finish line is in sight, there may be a false sense of relief for both parties. But even after these key points are negotiated, deals can and do fall apart. Deal fatigue sets in and, thinking it’s “just a matter of closing,” the unsuspecting principal may become complacent and fail to give appropriate attention to the final stages of the transaction. The same focus and energy that has been accorded the rest of the process needs to be applied to this final 5%.

The last mile involves countless crucial details that may not seem especially important at a 30,000-foot level but must be completed to actually “close” the deal. The last 5% inevitably always take longer and involves more parties than anticipated. Consider these examples: 

The ancillary agreements matter – a lot – as each adds or subtracts value from the deal. A savvy seller budgets time to review these complex agreements with their M&A attorney and investment banker to develop a thorough understanding of the following: 

Small changes can create big ripple effects.

Seemingly small changes can permeate what are hugely long and interconnected agreements and spreadsheets. One change or renegotiation late in the process can permeate hundreds of pages or spreadsheets, and it happens at the end of every deal. A savvy seller stays on top of small changes and thinks through the various ripples and ramifications.

A working capital adjustment

was likely agreed upon as part of the overall price calculation, but how, exactly, will working capital be calculated? In some cases working capital has the potential to move the effective price by millions of dollars! Lots of times parties make assumptions about this essential element and it causes hiccups and negotiations late in the deal on one of the main deal points. A savvy seller insists early on that the calculation methodology be explored and negotiated.

Purchase price allocation

is rarely discussed in depth when agreeing on the overall price, but the way price is allocated for tax purposes (to goodwill, inventory or other asset classes) must be agreed upon. It creates potentially large differences in (1) ordinary income vs. capital gains treatment for sellers, and (2) step-up in basis and deductibility for buyers – cash out of one pocket and into another. The purchase price allocation is rarely negotiated until the end and is always harder than anticipated with accountants, tax advisors, and lawyers scratching and clawing. Once again, the savvy seller brings up this topic early and often.

Third-party consents

often involve multi-million-dollar customer contracts that cannot be assigned without the customer’s approval. That multi-million-dollar customer will have some questions about their new business partner before simply signing the consent, and the parties should expect some bureaucracy and process around that. To add another layer of complexity, the government may also need to approve the deal. Obviously, this work cannot commence until the parties to the transaction are ready to divulge the deal to customers, but a prepared seller assembles all customer contracts so the consent can be circulated rapidly when the time comes.

Execution risk

is frequently ignored or minimized by principals who don’t understand that high-level agreements between principals can’t and don’t address all the execution elements of the deal and the different ways value can be eradicated. The price may be good, but what about the clawbacks the buyer created for themselves?

Or the fact they want to sit on 25% of your money for two years to make sure it “works out”? Would that change things for you? Of course, it would. The savvy seller remains alert to such aspects of the deal structure and insists on negotiating them throughout the process.

Most of these factors come into play in every M&A transaction, so what else can a savvy seller do to prepare for optimal handling of these potential deal-breakers?

  • Coordinate your M&A deal team – internal personnel, M&A attorney, investment banker, and tax advisors – and ensure that key points and messaging are consistent.
  • Structure and then adhere to rigid communication protocols with both parties to the transaction, expecting and providing regular status updates and addressing issues early.
  • Build a trusting relationship with the buyer in the early stages of the process to help move through late-arising roadblocks.
  • Work through details as much as possible early in the negotiations, and include them in the letter of intent.
  • Understand key must-haves in the deal – both your own and those of the other party – and be prepared to negotiate your points clearly and compromise when necessary.
  • Anticipate and work through deal fatigue by creating a sense of urgency, setting deadlines, and maintaining momentum.

Like that tired marathoner closing in on the finish line, buyers and sellers experience deal fatigue. You can still easily lose when you’re exhausted at the end of the race. That’s when you must be MOST focused and block out the noise because, if you give in, all the hard work and negotiating you’ve done can easily come undone in the final mile. Happens all the time.

The Last 5% in M&A

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.

2023 Super Lawyers Colorado Recognizes Pat Linden For Mergers & Acquisitions

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Super Lawyers has recognized Pat Linden in its 2023 edition for Colorado attorneys for his work in mergers and acquisitions (M&A). Only 11 Colorado attorneys made the 2023 list for M&A. Pat was also named to the M&A list for each of 2020, 2021 and 2022.

Super Lawyers® is a rating service for outstanding lawyers who have attained a high degree of peer recognition and professional achievement in their field of practice. The annual selections are made using a rigorous process, including a statewide survey of lawyers, an independent research evaluation of candidates, and peer reviews by practice area. Only 5% of all practice lawyers in each state or region are named on its list.

Learn more about Pat’s practice and background. In addition to the Colorado Super Lawyers® designation, Pat was recognized as Colorado’s best M&A attorney in 2018 and 2020 by Law Week Colorado in its annual Barrister’s Best publication and was named Colorado’s best private equity attorney in its 2019 and 2021 editions.

Super Lawyers Colorado Recognizes Pat Linden

“We Always Do It This Way” in M&A – Sellers Beware

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Who doesn’t love a good to-do checklist or blueprint? They lend a sense of control where otherwise there is mayhem and provide satisfaction as you check completed tasks off the list. It probably won’t surprise you to know that most M&A buyers (especially institutional and private equity buyers) have checklists and blueprints of their own when working through an M&A transaction. And that’s a good thing – to a degree.

A checklist or blueprint provides a starter roadmap, ensures that no major deal component falls through the cracks, and they outline the types of key legal agreements required to thoroughly address the situation.

But there can be a dark side to these checklists and blueprints. If the phrase “we always do it this way” sends an involuntary shiver down your spine, you understand the flip side. A buyer’s preexisting checklist or blueprint can become a bit of a trap, freeing dealmakers from thinking too hard about the details of your specific transaction and discouraging creative thinking.

If your buyer has relegated your transaction to the completion of their checklist or overly rigid adherence to their blueprint, it’s a red flag. We can tell you in our experience that more than once, the phrase “we have a checklist or blueprint for these deals” was effectively a kind and subtle way of indicating “here’s how we will get one over on you and maximize our positions at the expense of yours.”

With that in mind, consider the following situations we’ve dealt with recently, along with suggestions for handling them.

The Lazy Buyer

The lazy buyer is unable or unwilling (or both) to think or work outside the box. They are stuck on repeating things that brought them success in the past. “We always do it this way,” the lazy buyer asserts.

“Why reinvent the wheel?” Consider the over-lawyered, overly lengthy, in-your-face definitive legal agreements containing sections that have no bearing on your situation, or worse, which negatively impact your overall financial and legal positions for no legitimate reason.

You might be surprised to learn, whether knowingly or naively, that a lot of so-called high-level institutional and private equity deal makers and their attorneys do this to entrepreneur M&A sellers all the time (usually in passive aggressive fashion).

These agreements may repeatedly restate negotiation points with each restatement changing things somewhat – a little bit more here, a little more there, a little claw back there, a little bit more money for the buyer here – to where when added up the buyer has moved the needle a lot in their favor while also moving the needle a lot to the seller’s detriment (including financial detriment).

And in some cases, your requests for additions or other changes to the agreements – even when they’re logical, straightforward, common sense, win-win, and within the overall financial and business spirit of the deal in mind – are ignored or denied for no good reason other than the buyer “always does it this way.” That is of course before a well-advised seller properly repositions and renegotiates in response.

The Arrogant Buyer

The arrogant buyer’s negotiations are always one-sided rather than seeking out mutually attractive solutions that result in win-win outcomes for both sides of the deal. When your buyer demonstrates little partnership mentality, the future will most likely be bleak for you. And remember, only in the minority of cases do M&A sellers pocket all the cash at closing and ride off in the sunset never to worry about their business again.

In most cases, the primary selling owners will stay on for some period after the sale, oftentimes with significant rollover equity or other skin in the game requiring them to be around to participate in a second bite at the apple opportunity down the line. The absence of a team-oriented mentality exhibited by your buyer during the deal will likely also continue to be absent after the sale.

And what do you think they’ll do post-closing if collaboration isn’t 100% in their interest? After you’ve signed on the dotted line, you’ll have no leverage. Be on guard.

The Bully Buyer

The bully buyer is a forceful negotiator (again often in a passive-aggressive way) who assumes they have all the power in the deal, and that you have none. With every response and gesture, their actions seem to be implying, “We always do it this way. We don’t need your input. We are smarter than you.

You should be happy we are paying you anything.” They focus on winning, winning, winning every small point at all costs (up to and including losing out on a transaction) while placing little value on the seller and the relational elements of the deal. 

What Does An M&A Seller Do In These Situations?

Maybe your potential buyer is exhibiting one or a mix of these traits. Your transaction toolbox should include the following:

  • Strong-willed, experienced and advocacy oriented deal professionals who run interference and negotiate on your behalf. Even when you can’t quite put your finger on the reason for the difficult relations, your M&A attorney and investment banker will immediately recognize a difficult buyer. They know from experience what is and isn’t standard procedure and have tactics of their own to offset the buyer’s one-sided approach.
  • Your full focus. Pay close attention throughout the negotiation process and all dealings with the buyer. In some small way, virtually every communication through the M&A process is a negotiation. This is something a seller should never lose sight of. Don’t fall into the trap of telling yourself that things will get better once the stress of the negotiations is behind you. Once you close your M&A deal, your leverage to change or improve your position will be non-existent.
  • Know and identify the must-haves and deal breakers for your transaction. Spend plenty of time evaluating your wants and needs before you embark on the sale process for your business, and then stick to your guns during negotiations. Rest assured you’ll be glad you did in the end.
  • Tolerance and even encouragement of uncertainty and uncomfortable, sometimes contentious, discussions. Be ready to work through them with your buyer. Don’t fold. This is frequently unavoidable in deals where the stakes are high (and if you’re selling your company, it’s often a life changing transaction with naturally high stakes involved).
  • Be prepared to walk away. This is a very difficult decision to make, but you need to consider it at the outset of preparing to sell your business and position yourself in a manner such that it’s always in your back pocket. Closing your transaction with a lazy, arrogant, or bully buyer won’t improve when the agreements are signed. It’s typically forever. Many of the most successful sellers we’ve represented at some point during the transaction process were ready to walk, and their willingness to express their sincere conviction to the buyer ultimately got things over the hump to where the seller felt good about closing the deal. Remember, if you’re not willing to walk away from a deal, you’re not actually negotiating, you’re just begging.

Takeaways

When you’re selling your company, your buyer’s checklist or blueprint can be a valuable starting point. It means that your deal will be fully vetted. But you are being underserved if your buyer merely relegates your transaction to completion of a checklist and is overly reliant on “we always do it this way.”

Your business is unique, your transaction is unique, and they each need to be treated as such. What’s worked in the past isn’t necessarily a solution today. And there are two parties to the deal. As they say, it takes two to tango. Buyer and seller need to discuss all critical deal points and strive for a mutually beneficial outcome.

If your buyer can’t accept that your transaction requires a level playing field with two equal parties involved, always be prepared to walk away from the deal. Recognizing that opportunity cost is real and a deal falling through can be hard, in the end life and M&A deals are never limited or constrained to one situation or one buyer. Never lose sight of the big picture.

About Linden Law Partners 

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.

Linden Law Partners Represents Warning Lites of Colorado in Acquisition by AWP Safety

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Linden Law Partners is pleased to announce the sale of our client Warning Lites, Inc. of Colorado to AWP Safety, a portfolio company of Kohlberg & Co. private equity firm. Warning Lites is a full-service traffic control and equipment rental provider operating throughout Colorado.

For more than 50 years, Warning Lites was operated by its family ownership team of Barbara Barron, Robert Barron, and Julie LeRoy.

AWP Safety is North America’s largest traffic control safety services provider. As of 2023, Kohlberg & Co. has raised 9 private equity funds with approximately $11 billion of investor commitments.

Linden Law Partners was lead counsel in the deal for Warning Lites and its family ownership in the deal.

M&A Deals and Private Equity in 2023

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Change is in the air for private equity (PE) firms, which closed record-setting numbers of merger and acquisition transactions in 2021 and early 2022. It’s been smooth sailing for PE firms for several years – explosive fundraising, returns that regularly outpaced those achieved in the public markets, easy access to debt financing, and low interest rates. But since mid-2022, waters have gotten choppy. Whether you are in the recession or “slowcession” camp, the economy has entered a slowdown and as a result deal volume is dropping, as are overall valuations for M&A sellers.

In the macro environment, there is stiff competition as an expanding number of PE firms have a record level of dry powder. A PwC analysis[1] finds that the number of funds raising over $500 million nearly tripled from 37 in 2011 to 104 by 2021. And, according to PitchBook[2], PE firms had $1.2 trillion of dry powder in August 2022 (down from $1.5 trillion in 2020).

However, when it comes to investing all that capital there are significant headwinds and uncertainty, including ongoing supply chain issues and the war in Ukraine. Less willing lenders, rising interest rates and low unemployment levels present challenges to companies across the U.S. And PE firms, having become a considerable presence in the economy, are getting significant pressure to invest and create value in their portfolio companies via environmental, social and governance strategies.

M&A Deals and Private Equity

What are the ramifications for business sellers? As a general comment, it is a more arduous process to get a PE deal done today than it might have been a few months or years ago, but M&A transactions are closing. There are several trends worth considering:

  • Deal types – as bank financing becomes more costly and increasingly difficult to obtain, there are fewer all-cash leveraged buyouts; instead, add-ons, divestments, and public-to-private deals are increasingly common
  • Deal structure – with less cash available up front, buyers are offering more earnouts and other contingent payout instruments to entice sellers
  • Large PE firms are going down – market for smaller deals to avoid using expensive debt financing to leverage their investment
  • Fewer M&A auctions, as extended due diligence becomes the norm – PE firms are taking more time to get to know the management of target acquisitions, and strong fundamentals are more important than ever. Inflation, labor costs, uncertainty … buyers are taking longer and digging deeper during due diligence in an attempt to add certainty in an uncertain environment (for an example of a spectacular fail in due diligence, read our article on Theranos).
  • Lower valuations – it has been a seller’s market for years, with attractive businesses courted by multiple suitors and able to demand all-cash deals; however, it has flipped to a buyer’s market
  • A focus on data – PE firms are increasingly looking to digital transformations in their portfolio companies to create value, focusing on developing and enhancing data strategies that build speed, efficiency, and productivity, and thus improve profitability

Deals are taking longer. With sellers holding out for last year’s valuation and buyers offering multiples in line with current conditions, it can be difficult for the parties to reach agreement. But no matter the economic environment, the keys to success for a seller, as ever, are to prepare your company for sale well in advance, select the right PE partner, and work with a trusted team of deal professionals to help you negotiate and structure your definitive agreements. With record levels of funding at the ready, PE firms will find ways to close attractive deals.

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.

1. PWC, Next in Private Equity,

2. Pitchbook Private Equity

Linden Law Partners Represents Tribologix in Acquisition by AIM MRO Holdings

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Linden Law Partners is pleased to announce that Golden, CO based Tribologix, Inc. was acquired by AIM MRO, a leading manufacturer and supply chain manager of engineered repair products for the aerospace aftermarket. AIM MRO is a portfolio company of private equity firm AE Industrial Partners, LP. Tribologix is a leading provider of engineered surface coatings solutions which reduce friction and wear in extreme environments.

Linden Law Partners Represents Tribologix

Linden Law Partner represented Tribologix in the deal. You can read the full press release.

REPRESENTATIONS AND WARRANTIES FOR M&A SELLERS: What They Are and Why They Matter

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As you explore the possible sale of your business, you’ll hear a lot of references to “representations and warranties” (casually referred to as “Reps” in M&A deal jargon). The process of negotiating, drafting, revising, and responding to Reps is a critical and time-consuming aspect of any M&A deal. But what exactly are “Reps” and why do they matter to M&A sellers? We explain in this article.

1. What Are Representations and Warranties?

Strictly speaking:

  • A “representation” (distinguished from a “warranty” for the moment) is an assertion as to a fact that is true on the date the representation is made and which is given by a party to an M&A deal for the purpose of inducing the other party to enter into the acquisition agreements and close the underlying transactions.
  • A “warranty” is a promise of indemnity if the underlying representation/assertion is not true.

Practically speaking, the terms “representation” and “warranty” (combined to mean ‘Reps’ for purposes of this article) are used together. If a representation is not true it is “inaccurate.” If a warranty is not true it is “breached.”

While buyers make limited Reps in M&A deals (e.g., such as the buyer is authorized to enter into the acquisition agreements and is a duly incorporated entity, etc.), sellers make much more exhaustive Reps as buyers rely on them in exchange for their willingness to close the deal and pay the acquisition price.

2. What do M&A Sellers Make Reps About?

Sellers always make a litany of Reps about the status, condition, assets, liabilities, employees, intellectual property, and on and on, of the business they’re selling. The seller’s Reps normally cover virtually every financial, operational, and legal element of the target business that one could possibly conceive.

At a minimum, Reps for any transaction of reasonable size will extend to the following areas of the target company’s business:

  • Accounting Matters and Financial Statements
  • Legal Existence and Good Standing
  • Contracts
  • Compliance and Regulatory Matters
  • Litigation
  • Tax
  • Real Estate
  • Insurance
  • Intellectual Property
  • Liens on Assets
  • Indebtedness
  • Labor Matters and Employee Benefit Plans
  • Capitalization and Ownership
  • Product Liabilities
  • Customers and Suppliers
  • Licenses and Permits
  • Related Party Transactions
  • Environmental

While the Reps given by M&A sellers are normally comprehensive, like with everything else in life and business, there should also be limits as to what a seller should represent and warrant to, and a well-advised seller will point to market deal studies around customary categories of Reps that are readily available to M&A professionals.

For example, these studies show limited use today of draconian and open-ended “catch-all” reps that were historically more prevalent in M&A deals. On the other hand, a buyer may have identified areas of concern or known liability potential, such as ongoing litigation or known product liability issues. In these instances, the corresponding Reps are often negotiated to address the buyer’s risk on the specific areas of concern.

If the transaction size justifies it, obtaining a Representations and Warranties Insurance Policy (RWI Policy) is typically well worth the cost of the premium and can sometimes significantly reduce the typical extensive negotiations over the scope of the Reps and associated holdbacks and indemnity liability of sellers. RWI Policies, once reserved for public companies and higher-market M&A deals, have become more prevalent in lower middle-market deals. Recent trends show that RWI Policies, which provide liability coverage for breaches of Reps made by M&A sellers, are now being used in an estimated 25% of private company deals.

3. Why Do Reps Matter to Sellers?

Reps made by M&A sellers are significant to them for many reasons, including the following:

  • A seller must indemnify a buyer for losses incurred because of the seller’s breach of a Rep.
  • In some cases where the acquisition agreement is signed before the deal closes, it may permit the buyer to walk from the deal or terminate the agreement before closing.
  • Buyers often try to shift an unwarranted amount of legal and financial risk to sellers by requiring Reps of a certain nature, which may sometimes be unjustified or overreaching.
  • There may be holdbacks or escrows of purchase price funds that don’t get paid to sellers for some substantial post-closing period (a ‘survival period’) and which will only be paid if the seller has not breached Reps during that survival period.
  • To support due diligence materials provided by sellers to buyers.
  • To avoid fraud (g., in some cases by giving a Rep on certain matter and provided the Rep is true, it will prevent a fraud claim by the buyer on the matter at issue).

4. General versus “Fundamental” Reps and the Differences in Survival Period and Limits of Liability

In most M&A deals, various categories of Reps are more important than others. Those that are most important are termed “Fundamental.” Determining which Reps are Fundamental is often heavily negotiated and can change from deal to deal. Whether a specific Rep is Fundamental might also be affected based on the industry of the target company and/or heightened areas of risk identified by the buyer during its due diligence. Regardless, the following categories of Reps are almost always Fundamental:

  • Existence and Good Standing
  • No Liens
  • Taxes
  • Capitalization
  • Power and Authority
  • Broker Fees

Sellers prefer the survival period of their Reps to be as short as possible and for liability to be limited or capped. The typical survival periods for non-Fundamental Reps are between 12- and 24-months after closing. But the survival periods for Fundamental Reps will always be longer—often until the lapse of the applicable statute of limitations (this can be 6 years or more for certain matters like taxes or even much longer for Reps on environmental matters in cases where environmental is relevant).

The amount of liability exposure for sellers also differs between Fundamental and non-Fundamental Reps. For example, the maximum liability for breaches of non-Fundamental Reps will normally be capped at between 10-20% of the purchase price. In contrast, the maximum liability for Fundamental Reps is often much higher (normally up to 100% of the amount of the purchase price).

5. Practical Negotiation Tips for M&A Sellers Regarding Reps

Here are some practical negotiating tips for M&A sellers regarding Reps:

  • Engage highly experienced M&A counsel with proven knowledge and understanding about the use and importance of Reps. This includes knowledge of what Reps are common or overbroad, what’s objectively Fundamental (and what’s not), and the ways that Reps can translate to losses and indemnification obligations (as well as the differing survival periods and liability limits depending on whether the Rep in issue is Fundamental).
  • Sellers must understand exactly what they’re asserting in the Reps—they must be able to work with their M&A counsel to provide evidence, background, and other reliable factual support to ensure they are making Reps that are 100% accurate.
  • Make sure the seller’s disclosure schedules are correct in all respects. Disclosure schedules are formal legal qualifications and attachments that accompany the definitive acquistion agreement and either support or provide exceptions to the Reps. For more on disclosure schedules, see our article “M&A Disclosure Schedules: What They Are and Why They Matter.”
  • Evaluate the utility and appropriateness of a possible RWI Policy.

Key Takeaways on Negotiating Reps

Negotiating Reps and the consequence of their breach is a laborious but critically important component of any M&A transaction, and what sellers don’t know can hurt them. Reps must be accurate, and the category of a particular Rep can have liability for sellers over longer periods of time and for higher amounts. Knowing which Rep belongs to what category, what’s market, and everything in between requires guidance and M&A counsel with deep experience obtained over many M&A transactions.

You can learn much more about negotiating Reps and other important components of M&A deals in our FREE guide: 10 Key Components of Successfully Selling Your Business.

Let Us Guide You to a Favorable Outcome

Linden Law Partners has been lead counsel for countless M&A transactions, yet we recognize the uniqueness of each deal. Contact us to discuss how we can support you in your next M&A endeavor.

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