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

Posted on by PLinden

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

Posted on by PLinden

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

Posted on by PLinden

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

Posted on by PLinden

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

Posted on by PLinden

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.

Selling Your Business – The M&A Auction Process

Posted on by PLinden

As you explore the sale of your business, you’ll likely hear that you should consider an auction process. What exactly is an M&A auction, why run one, and when is an auction process not advisable for the situation?

What is an M&A Auction?

An M&A auction process is led by an investment banker with the goal of attracting multiple potential buyers for your business. It’s very structured – going far beyond a few casual conversations with a handful of potential buyers. A proper auction employs rigid deadlines and is intended to result in multiple letters of intent (or even purchase agreement proposals in some cases) – all based on the same set of information. An auction puts power into the seller’s court because competing buyers are forced to put forth their best offers and negotiate in good faith.

It usually works something like this: you and your deal professionals develop a list of potential buyers, typically including strategic buyers (competitors, customers, suppliers and others in your industry), as well as financial buyers (private equity, or for smaller deals, perhaps high-net worth individuals). Your investment banker sends them a “teaser”, or generic description of your business and desired transaction.

A buyer who wants to learn more is required to execute a non-disclosure agreement, after which they’ll receive a detailed confidential information memorandum (CIM) describing your business. Your investment banker also communicates deadlines for each step in the process, including initial indications of interest, preliminary access to your data room, management presentations, site visits and letters of intent.

This sounds like a lot of work – and it is. Why engage with multiple possible suitors, especially if you believe you already know who your buyer will be and when you may even have a preliminary proposal on the table? Because when the situation is right, an auction can result in numerous added benefits for the seller relative to non-auction situations.

Why Consider an M&A Auction?

Competition.

 Several things happen once a potential buyer realizes there will be other possible suitors bidding for your company. First, buyers will self-select in the process, and if they do, they’ll tend to be both motivated and qualified. A buyer’s interest may also be piqued, as an auction suggests that it may be worth fighting for your business (i.e., the process implies your business is valuable). And buyers know they must submit a competitive offer instead of trying to get your business “on the cheap”.

Condensed Timeline.

Deadlines keep the process moving efficiently. A single buyer without this time pressure has less motivation to promptly complete their due diligence and get serious about moving toward closing on the actual purchase of your company. Without these deadlines, time is on the buyer’s side – especially if a single buyer’s offer is the only one on the table for you to consider.

As a result, your deal may drag on far longer than necessary while the uncontested buyer waits and slowly plays things, all the while expecting you to eventually agree to “their” terms.

Superior offers.

When multiple potential buyers are competing for your company, there’s pressure to put their best offers on the table (both price and deal terms). It’s possible that a higher value will be placed on your business because with multiple suitors – each with their own reasons to do the deal – there will likely be a few highly motivated potential buyers who bid the price up.

You and your deal advisors can also then evaluate various deal structures side by side and, having spent time and resources to assemble a competitive offer, none of the bidders wants to lose!

Likelihood of Closing.

The more potential buyers, the more front-end due diligence, the more front-end questions that are resolved quickly, and the more front-end discussions that occur in a condensed time frame.

Once you get to the tail end of an auction process, few issues remain unexplored and there is less potential for a last-minute surprise that derails your deal from closing.

Is an M&A Auction Always the Right Move?

Despite its numerous benefits in certain cases, an auction process is not appropriate for every M&A sale transaction. Since the primary advantages derive from having multiple potential buyers interested in your company, it’s important for you and your deal team to take a critical look at your business to evaluate the realistic likelihood it will garner the level of interest that justifies conducting an auction process.

For example, is your company well known and of a sufficient size to attract a range of qualified buyers, such as a bona fide private equity or other strategic acquirers with deep pockets that will only buy companies of a certain size and standing? Do you compete in an attractive, growing industry? Do you have a proprietary niche or competitive edge that makes your business especially valuable?

Running a competitive auction is a complex process and you will need deal advisors who have been through it many times. The confidentiality risk is clearly far greater when multiple buyers are involved, and your deal professionals must be versed in handling the risk.

The time and expense required to communicate and negotiate with multiple potential buyers needs to make sense vis-à-vis the overall economics of the deal. And it’s worth considering that some qualified buyers could decline to participate in an auction, believing they can strike a more favorable deal in a less competitive transaction.

Conclusion.

If your company fits the profile where an auction is likely to yield benefits, it’s hard to argue against conducting the sale through an auction process. While real estate sales aren’t fully comparable to business sales, it’s generally a safe assumption to conclude that fielding offers from multiple qualified buyers in M&A deals will fetch most sellers higher prices for reasons similar to why real estate sellers and their agents work hard to get multiple competitive offers from qualified buyers (i.e., they want to bid up the price and the recent pre-recession real estate boom was a great example of this).

In addition, if an auction is indicated for the sale, you will be testing the market regarding the proper valuation for your business – and in the end, the true value of the company is what the market says it is. From that vantage point, you’ll have confidence you will be evaluating the best offers the market will bear for your business.

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.

New Attorney Announcement

Posted on by PLinden

Linden Law Partners is pleased to announce that attorney Holden Bank has joined our business and transactional practice group. Holden has spent most of his 35-year legal career managing and solving an expansive range of domestic and international corporate and business legal issues.

His experiences as Chief Legal Officer and General Counsel for both publicly traded and privately held companies, and as outside counsel in private practice, allow him to offer unique perspectives, guidance, and strategic direction to business clients. A former All-ACC swimmer for Duke University, Holden continues to swim competitively and has enjoyed being part of successful English Channel and Swim Around Manhattan relay teams.

These experiences energize both his personal and professional lives, which he happily keeps separate with ease. He grew up in the Maryland suburbs of D.C. but has loved living in Colorado for over 40 years.

Holden and Pat Linden have known and collaborated with one another for many years, ‘threatening’ to formalize their professional relationship for the last several.

Mr. Bank stated, “I’m thrilled to finally be able to work more closely with Pat, whom I know as talented, responsive, and business-minded counsel. As with swimming, which remains a passion of mine, strategic goal setting, planning, individual accountability, teamwork, and execution are all part of what I do with my clients, and what I’m looking forward to continuing with Pat and the rest of the team at Linden Law Partners.”

Pat Linden commented, “with Holden, what you see is what you get. He does what he says he’ll do. I also know first-hand that he thinks outside the box and brings a practical approach to solving complex problems and getting deals done. That’s what clients need, and that’s what we want in attorneys we work transactions with.

His experience in GC roles at major companies combined with the success he’s developed in his own private business practice further provide an intriguing value proposition for us. He also has deep rooted connections in the Boulder startup community, which is a demographic our firm is very capable of serving. It’s an all-around great fit.”

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. To learn more about us, visit e59ubbo54u-staging.onrocket.site.

Going Beyond Price: 5 Elements Often Overlooked by M&A Sellers

Posted on by PLinden

It’s easy for M&A sellers to become overly focused on the initial proposed price they see and to become star struck with that figure. However, there are numerous other elements to consider beyond just the price number on the page, some of which can materially impact what sellers actually “net” from the deal. This article examines some of the key elements Sellers should understand and scrutinize up front. By doing so, Sellers will go a long way toward “realizing” their price goals from a sale transaction. After all, a stated number on a page isn’t the same thing as “money in the bank.”

It’s a bit of a myth that private company owners sell their companies, pocket all the cash at closing, and ride off into the sunset to never worry about their business again. There’s typically much more to it than that, and most sellers are likely to be involved with the business after the sale. Selling owners and key employees of acquired private companies almost always play crucial post-closing roles, particularly when selling to private equity buyers. Given this, there are often one or more contingent aspects associated with receiving a portion of the price (and often this contingent portion can be substantial).

With this in mind, let’s look at some key points of consideration that go beyond a generic stated price.

1. What’s the amount of up-front purchase price payable at closing?

One important question that sellers should have in assessing the amount of the cash proceeds they will receive should always be “how much of this does the buyer expect to hold back or ‘escrow’ for some post-closing period”?

Escrows/holdbacks exist for most private company sales. There are typically two forms of escrows/holdbacks: (1) indemnity escrows to secure recovery of losses sustained by the buyer for the seller’s breach of representations and warranties (or other seller obligations or commitments contained in the definitive agreements); and (2) working capital escrows (the price adjusts post-closing, up or down, based on the actual working capital [current assets minus current liabilities] of the seller’s business on the closing date – which is determined and adjusted after the closing).

Sellers should advocate for smaller indemnity escrows for shorter periods. The more money a buyer holds back, or which is escrowed, and the longer the period, the more likely buyers will make claims, whether legitimate or simply given a longer lookback period to assess how the return on investment of their purchase is turning out post-closing. We’ve provided some particulars around what’s market on escrow/holdback periods and amounts in our free 10-point guide for M&A sellers.

In some cases, a seller may be better off with more cash payable at closing (and a smaller escrow) versus a higher overall price where the buyer is insistent on holding/escrowing a material portion of the cash portion of the price. There’s an old expression we’ve come to appreciate over many years of working on M&A deals, which is that “possession is 9/10ths of the law.” Sellers should take heed when it comes to negotiating and agreeing on the amounts and time periods of escrows and holdbacks.

2. Will there be an earnout?

Earnouts in M&A deals provide for a portion of the purchase price to be paid to the seller contingent upon the target company reaching certain financial goals or performance milestones after closing.

Earnouts are typically among the most heavily negotiated provisions in a private company acquisition and are highly susceptible to disputes following the closing. Note that earnout provisions can vary significantly from transaction to transaction. Even so, there are several key issues that should be considered with any earnout, including:

  • The financial and/or non-financial targets to be achieved in the earnout. These should be objective, measurable, and clearly defined in the purchase agreement. Examples of financial targets include total revenue, net income, EBITDA, or some other financial measurement that is relevant to the target company’s operations. Non-financial targets may be appropriate when financial targets don’t provide for a relevant measure of a target company’s performance. This may be the case with an emerging technology company that has limited revenue on which to base a financial target; the parties may instead agree on non-financial targets, such as achievement of certain operational or product development milestones.
  • The length of the earnout period, the timing of the earnout payments, and the formula for determining earnout payments. These terms are largely based on the financial or non-financial targets agreed upon by the parties as well as, with respect to the earnout period, potential tax considerations for each party.
  • The form of earnout payment. The parties must determine if the earnout payment will be made in cash, which is typical, or in some other form of payment, such as the issuance of equity in the buyer.
  • Procedures and dispute resolution. Parties should carefully consider the procedures for calculating and verifying any relevant financial target for each earnout payment. In most instances, the parties will agree to involve an independent third party, such as a mutually agreed upon accounting firm, to determine the calculations in the event of any objection to the earnout calculation.

3. Will there be rollover equity?

Rollover equity is the amount of money that a seller is expected to invest (e.g., “rollover”) into the equity of the acquired company. Again, this question involves certain key issues often negotiated by the parties as part of agreements:

  • The rollover amount. While 20% is a commonly targeted number, the specific amount is based on various factors, such as the type and amount of other management equity-based incentives being offered to the sellers, the existing equity structure of the target company, the amount of risk the buyer investor believes management of the seller should retain in the post-closing company, the buyer investor’s financing needs in the acquisition, and tax considerations.
  • Repurchase rights. Buyers will often seek the right to repurchase a seller’s rollover equity upon his or her termination of employment or services to the post-closing company for any reason. However, because a seller purchases (versus being granted) the equity in the post-closing company through the rollover structure, sellers will typically seek (and should be successful) in eliminating these restrictions.
  • Vesting. Some aggressive buyers, particularly private equity acquirers, may want the rollover equity to vest over time, depending on the type and amount of equity rolled over by the seller. But a seller will typically (and should) object to these requirements with rollover structures because the seller has in effect made a capital contribution equal to the value of his or her rollover equity at the closing of the transaction.
  • Management rights. The parties may need to determine if the rolled seller equity will have equal voting rights as that of the buyer, and whether the seller will have a right to appoint directors or LLC managers. Typically, the buyer r will maintain control of the board / management, but agreements vary by deal.

4. Will there be employment compensation?

Many selling owners are asked to continue in management after closing to help with continuity. As a result, employment terms (and often detailed employment agreements) will be expected and important for both parties.

The stakes in employment agreements can be especially high if a separation from employment can affect the rollover equity of the seller, or if an employment separation can impact the obligations of the parties related to earnout payments if part of the deal. Sellers should negotiate for severance on terminations “without cause” or for “good reason” and look to avoid the ability of the buyer to repurchase their rollover equity. Buyers, and particularly private equity buyers, will try to negotiate equity repurchase rights based on prices “determined in their subjective discretion” often payable over years with little or no collateral.

Sellers are expected to object to these positions to make certain they will receive the full benefit of the value of their rollover equity—no matter if they’re employed at the time of the second bite at the apple sale. Because the equity rights of sellers will be memorialized in an operating or shareholders agreement, there’s a substantial interrelationship with the employment agreement that should be identified and properly drafted.

5. Who do you look to if you’re not paid?

Of all of the overlooked elements, this is the one most neglected by sellers.

Most buyers set up a special purpose acquisition vehicle when they acquire a business. Often, the true financial wherewithal resides with a parent or holding company. A seller likely has limited control over post-closing management of the finances of the technical legal acquiring entity. Sellers should request a guaranty by the parent or holding entity to make certain that the seller will in fact be paid any contingent consideration earned. This avoids being stuck in a position of attempting to collect from an undercapitalized special purpose acquisition entity.

In addition, many buyers will try to subordinate the seller’s rights to continent compensation to their lenders or other financing sources. Sellers should resist this, and, if forced to be subordinate, understand the exact subordination terms. Sellers who fail to read and negotiate the fine print may find themselves in a provision effectively making their right to contingent consideration (even if earned) subject to the complete discretion of the bank or some other third party creditor.

Remember, the price is only as good as the money that hits your bank account.

Takeaway

It’s easy for M&A sellers to concentrate just on the stated price of a transaction, rather than these important and often overlooked issues that are critical to what sellers will net from the sale.

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.

M&A Sellers: Developing an Exit Frame of Mind

Posted on by PLinden

Planning to sell your company someday? Even if it’s two, three, five years down the road, developing the right exit frame of mind now will pay off handsomely in the future. We’ve already shared several ideas on the topic of preparing to sell your company, but we’ve got more to say about it because here’s the thing: it’s a myth that selling your business will be easy – very few successful sellers just got lucky.

The mergers and acquisitions landscape is littered with killed or failed deals for business owners who believed they were well-positioned to sell their business because they were masters at running it. Not so. Successful sellers lay the groundwork for their exit years in advance, developing processes, tweaking operations, and building out a complete management team, constantly putting themselves in the mindset of a potential buyer.

Optimize your business for sale today, tomorrow, and every day – there are several critical but simple actions you can take now that will pay dividends when you’re ready to sell. Let’s dig into a few key ideas.

Get Your Accounting in Order

Countless deals die because the seller’s books are sloppy and the seller doesn’t truly, deeply grasp their financials, and needs months of clean-up to present them to a potential buyer. Even if the deal moves ahead, a lack of in-depth understanding of your financials means you risk leaving money on the table.

The right exit frame of mind means a regular focus on your financials. Review your P&L, cash flow statement, and balance sheet monthly, even weekly. A few times a year is inadequate to fine-tune your expertise and the insights you need to recognize and act on subtle areas for improvement.

Businesses are typically sold on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). There is any number of fairly painless ways you can boost your EBITDA, and thus your sales price, by focusing on profitability, i.e. enhancing revenue and streamlining expenses.

Another common area for improvement is minimizing addbacks. Many sellers run many quasi-personal expenses through their business. Those season tickets you purchase each year “to entertain clients”? Your company vehicle that is a tad too luxurious to be considered basic transportation? Such expenses are incurred for you, and not for the benefit of a future buyer.

Guess what happens when a buyer sees your financials overpopulated with addbacks? If you’re lucky, the price they’re willing to pay for your business goes down, but that once-eager buyer could lose interest and kill the deal. They can’t clearly see what they’re really buying.

Changes should be introduced long before you plan to sell your company. Sellers who promptly present clean, consistent financials have infinitely more credibility with a buyer than the seller who must try to convince their buyer that numerous improvements could be made to EBITDA … It’s a weak negotiating position and detracts attention from the deal, often derailing it completely.

Tie Up Your Management Team

When you’re ready to sell your business and walk away from it, a buyer needs to feel confident that it will continue to thrive without you. Once again, this is not a quick fix you can make when you’re ready to sell.

The right exit frame of mind means planning well in advance, always thinking of how you can round out an effective, self-sufficient management team with the skills and relationships to take your place.

Consider compensating key team members with equity in the business, which not only builds employee loyalty and aligns interests but also improves EBITDA (see above). Share your exit plans with your team before you are knee-deep in the selling process and discuss potential future scenarios regarding their roles going forward.

Prepare for a Competitive Auction Process

A competitive auction is key to garnering the most attractive offer and becoming a successful seller. Think of it along the lines of selling your home: it’s unlikely you would blindly accept an offer from somebody who calls you out of the blue.

More likely, you will work with a real estate agent to list your house and solicit viewings and offers. You and your agent will compare your multiple offers and select the offer with the terms and price that best suit your needs.

Likewise, if you receive a single offer to buy your business, that buyer is calling the shots and you may not know what you don’t know. Is their offer even in line with the market? When multiple buyers compete to acquire your business, you call the shots and buyers are put on notice that they need to submit their best offer with attractive deal structure and pricing – market dynamics at their best.

A good investment banker will maintain a level playing field for all potential buyers by releasing prepared information in stages, and will set a deadline for offers. Your M&A attorney, investment banker and other deal professionals will help you evaluate and compare the offers, and you will negotiate a letter of intent with your preferred buyer.

The right exit frame of mind means you’ve thoughtfully prepared for the process – once again, not an overnight task. It means you’ve considered a list of potential buyers for your business (particularly the strategic buyers already involved with your industry), the information that your investment banker will use to describe your business to buyers,

the materials and effort needed to populate your data room, and your must-haves for a successful deal. It means you’ve developed relationships with a skilled M&A attorney, investment banker and other deal professionals to ensure that you are ready to respond to buyers’ requests and offers quickly and thoughtfully.

Conclusion

Successful M&A sales don’t happen by luck or accident. Develop the right exit frame of mind and groom your business to make it as attractive as possible to buyers. The business owner with the right exit frame of mind can make subtle changes in the operation of their business over the years that will pay huge dividends.

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 Allied Pipeline Technologies for Acquisition of United Pipeline Systems

Posted on by PLinden

Linden Law Partners is pleased to announce that our client Allied Pipeline-Technologies (APTec) acquired United Pipeline Technologies (UPS). The transaction resulted in APTec’s acquisition of all UPS businesses and properties conducted in the United States, Canada, Chile, and Argentina.

Linden Law Partners Represents Allied Pipeline Technologies

APTec is a multinational company specializing in pipeline services. APTec’s focus is on developing and implementing solutions for corrosion/abrasion protection of new pipelines, and rehabilitation of existing pipes with no-dig methods. APTec’s client base includes mining companies, oil and gas industry leaders, and a variety of municipal and industrial operators.

Since 1985 UPS has been a global leader in high-performance thermoplastic internal pipeline lining systems for pipeline integrity. UPS has installed over 20,000 miles of the Tite Liner® system from 2 inches to 52 inches in diameter – with operating pressures up to 7,500 psi – in more than 30 countries worldwide. Their extensive experience and proven track record make UPS the trusted choice for high-performance thermoplastic internal pipeline lining solutions.

Linden Law Partners was the lead counsel for APTec in the deal.