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Selling Your Company: Walk Away for the Best Deal

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When you begin negotiations with a potential buyer who is interested in acquiring your company, theoretically the goal is a deal that is fair for both parties. Nonetheless, as we’ve said before, M&A deals can be competitive, messy and even contentious, with each party trying to get a deal outcome that serves their own best interest.

Even if you’ve built an exceptional company and are a talented business owner with the ability to turn anything you touch into gold, buyers will often start with lowball offers and you will need to negotiate to get the outcome you want and deserve.

The process isn’t always positive for both sides and it’s critical – for a number of reasons – that you’re prepared to walk away from the negotiating table if you feel what’s being proposed to you isn’t fair.

Unleash the Power of Selling Your Company

Negotiating or Begging?
In the words of legendary sports agent Leigh Steinberg, who has negotiated more than $3 billion in sports contracts and inspired the movie, Jerry Maguire, “The first key step is introspection. You need the clearest possible view of your goals.” Prepare in advance your list of non-negotiable must-haves; your deal-breakers. While cashing in some chips and getting a fair purchase price is always a critical component of a deal, sellers also have additional motivations; for instance, preserving the culture of the firm they have built, rewarding an unfailingly loyal executive team, leasing their owned real estate to the buyer, etc.

Discuss your goals at length with your deal professionals. Revisit your goals often. When negotiations begin and offers, counteroffers and compromises start flying, take a moment to reevaluate whether you are approaching your goals or getting perilously close to your walk away limits. You also need enough context to understand what constitutes a fair outcome based on the marketplace. Your deal professionals will both advise you on what is “market” and advocate to help you obtain it.

It can be a tricky mindset, but you need to go into the negotiations willing to walk away. A sophisticated buyer will know whether you are willing to walk and, if not, they will get the best deal for themselves while you come up short. If you aren’t negotiating with the full faith and power of a walk away in your pocket, you’re not actually negotiating, you’re just begging.

Foster Competition
If you’re approached by a buyer who is interested in making an offer for your company, you will likely be flattered, intrigued and maybe even ready to begin the sale process. But know this: a lack of competition makes it easier for a buyer to play by their own rules and set the terms of the deal.

Just like the products or services you sell, the law of supply and demand applies to the sale of your business: when demand exceeds supply, the value increases. Not only does competition help keep all buyers “honest”, but it also provides you with a safety net so that you are unafraid of walking away from an unfavorable deal. You know you have alternatives.

To attract multiple offers and create a competitive environment, your investment banker should run an auction process that covers the following aspects:

  • Scouring the market for a wide variety of buyers and buyer types – strategic and financial, geographically dispersed, international and domestic
  • Get an early read on the level of interest in the market and potential valuation for your company
  • Vet potential buyers for their appetite and ability to close a deal, and requalify them as the process moves along and the stakes get higher
  • Allow all qualified buyers to play in a defined deal process with well-communicated timelines
  • Pit the buyers against each other by requesting favorable deal terms

If you have foregone the services of an investment banker, you should make every effort to attract other suitors to maximize your outcome. You should consider approaching prospective buyers you have a relationship with. Regardless, quality competition provides a litmus test of the purchase price and deal terms, improves the timeline, and decreases closing risk as buyers are qualified, requalified, and forced to pay market price and provide other market terms.

Keep It Professional
You’ve worked hard to build a stellar reputation over the years and it’s very possible that you will encounter the parties to your negotiation again, either in later negotiations or in business. Keep emotions in check – respect the other side and don’t let your desire to close a deal overcome the quality of that deal. Resist wasting their time and yours in negotiations that are not going your way. Don’t allow yourself to feel that walking away is a losing strategy – winning means staying true to your own goals.

At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we have represented buyers and sellers in hundreds of M&A transactions. 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.

© 2021 Linden Law Partners, LLC. All rights reserved.

3 Key Deal Structure Elements When Selling to Private Equity Buyers

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Private Equity Buyers

Private equity (PE) firms have many ways of structuring a merger or acquisition deal to entice sellers to get to “yes” in the sale of their business. Each of these structural elements will have a real and significant impact on the actual purchase price a seller will walk away with as well as their rights and obligations post-closing.

It’s therefore critical for sellers to closely analyze and understand how structure affects deal outcome from the get-go with any prospective PE acquirer. In this article, we dive into three key structural elements that every selling owner should know in the context of the overall deal calculus so that they can make the best decisions with respect to whether they are truly getting the deal they want in a company sale to PE.

For purposes of this article, we assume that the seller has already established an enterprise valuation for their business. It’s advisable that sellers engage an experienced and knowledgeable investment banker or M&A valuation specialist to assist in the development and negotiation of an accurate valuation on which a purchase price for the business can be based. 

1.   Payment Structure.

In today’s M&A environment, the payment structure for an M&A sale to PE will almost always consist of some portion of cash and some portion of a deferred and/or contingent payment whether by earnout, rollover equity, or promissory note (or some combination thereof).

Too often, sellers bullish on the future prospects for their business and the buyer’s financial wherewithal post-closing view deferred or contingent consideration as almost guaranteed, but the reality is that payment of most deferred or contingent consideration is rarely, if ever, guaranteed and is in fact at risk.

The degree to which a deferred or contingent payment is at risk varies depending on the specific structure and requirements agreed to by the parties, and so sellers should look very closely at the terms and conditions placed by the PE buyer around payment of these amounts.

Earnouts

In an earnout arrangement, the buyer agrees to pay the seller a portion of the purchase price upon achievement of specific post-M&A financial milestones or objectives. Our previous article provides a deeper discussion of M&A earnouts, where we touch on common risks to sellers with respect to earnouts, such as prolonged attachment to the acquired company, inability to control achievement of the milestones or financial targets, and the inherent difficulty of calculating the earnout amount.

One component of the earnout that many sellers and their advisors may overlook at the letter of intent stage and in the purchase agreement is the subordination of the earnout to the payment of the acquired company’s senior debt.

PE buyers will often require that the acquired company incur substantial debt in the form of a line of credit and other loans in order to finance the PE acquirer’s purchase of the business, as well as for the acquired company’s working capital post-closing.

The PE buyer and its lender may then require that the earnout payment be subordinated to the senior debt, meaning that the PE buyer will be prohibited from paying the seller the earnout if the buyer / acquired company is in default to its senior lenders, which can create significant problems for sellers who have earned the payment but are then told they can’t be paid because of the acquired entity’s noncompliance with a financial covenant under their senior loan agreements (and the seller will have no control over these senior loan covenants).

In addition, if there will be an earnout, aside from the subordination issue, it is important to obtain a guarantee either directly from the PE fund or another affiliated entity of the PE that has the financial money to ensure there is an independent source of the backstop to pay the earnout if is achieved. Without this, if the PE buyer defaults on paying the earnout, sellers may find they are seeking recovery from an entity with no assets, making it impossible to recover on those amounts.

Seller Rollover Equity Consideration

More and more PE buyers are requiring that sellers “rollover” a portion of the purchase price into equity of the acquired company (or an affiliate of the buyer, such as one of its PE funds). We covered rollover structures in M&A deals in a previous article.

As much as 20% (and usually at least 10%) of the purchase price can be required to be rolled over. Some of the more important components of rollover equity structures for sellers to consider include:

  • Ensuring the rollover equity is the same class as the equity acquired by the PE buyer.
  • Limiting the triggers for a premature buyout or forfeiture of the seller’s rollover equity, such as upon the selling owner’s separation of service without cause. The goal is to allow the seller to hold the rollover equity until the exit event on the same terms as the PE investor given that the rollover equity is in effect just like a cash investment by the selling owner (in contrast to it being a cash-free grant in exchange for services to the company such as one would expect to see with key employees who receive equity but didn’t roll potentially millions of dollars of their sale proceeds as selling founders often do as part of sales to PE buyers).
  • Limiting the percentage or amount of payments, such as excessive management fees, to the PE firm that may unduly reduce the amount realizable to the founders as it pertains to their rollover equity.
  • Implementing come-along (sometimes called “tag-along”) rights in the event of both full and partial exits to provide the selling owner with the same rights to sell their equity in the event the PE buyer decides to sell some or all of its equity to a third-party.
  • Using preemptive rights, which allow the selling owners to maintain their pro rata share of their equity should the acquired company issue new equity (such as to the PE investors or their affiliates) or anti-dilution measures to address the potential for dilution of the selling owners’ rollover without their consent.

2.   Employment Agreements for Sellers.

Selling owners typically continue in management employee capacities after the closing. Therefore, employment terms (often detailed employment agreements) will be expected and important for PE buyers and sellers.

Any employment agreement should address the salary, term, authority, benefits, bonus potential, and severance (if triggered upon a termination without cause) of the selling owners. For more information on post-closing considerations for sellers, see our prior article covering these items.

Sellers need to negotiate appropriate terms like severance upon termination of their employment “without cause” or for “good reason” (not forgetting to also negotiate the meanings of these terms, which can differ dramatically from deal to deal).

PE buyers routinely endeavor to negotiate repurchase rights on the rollover equity of sellers in the event of their termination for any reason—typically on less-than-optimal terms. For instance, there could be a payout at a price determined by the management board of the PE buyer which is payable over a period of several years with no collateral.

Sellers should push back on this to ensure they maintain their rollover equity until there is a subsequent exit event by the target. At a minimum, sellers should insist any such repurchase rights would exist only on a “cause” termination (illuminating the importance of having an appropriate “cause” definition that is not open-ended or vague and is attached to an event unlikely to occur, such as fraud on the part of the seller).

See one of our previous articles here that utilized a prominent public figure to analyze the importance and impact of “cause” and “no cause” separations and the financial ramifications associated with those distinctions (and which also includes important tips when it comes to negotiating the terms of executive employment agreements).

3.   Equity Incentive Plans for Key Employees.

In PE deals, both the buyer and seller will want to incentivize key personnel of the acquired company to stay on post-sale. Profits interests are common incentives that help align the interests of a private equity buyer and employees of the target company. Other equity incentive plans include stock options, restricted stock, or bonus pools. These incentive plans are not just for key employees other than founders. In most cases, the selling founders are also eligible to participate in them.

Conclusion.

Payment structure, employment agreements, and equity incentive plans for key personnel are critical elements in any M&A sale to a PE acquirer. At Linden Law Partners, we have represented numerous sellers in all aspects of once-in-a-lifetime sale events to PE firms, including for the development and negotiation of the key elements outlined in this article. Contact us today to discuss how we can help.

Selling Your Company: 3 Key Deal Advocacies You Need

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You’ve heard it before: when you’re ready to sell your company, your very first step should be to hire a team of seasoned deal professionals. But why? What, exactly, should you expect from your deal team? In a word: advocacy. A professional boxer would not step into the ring without a team to coach and keep him on his feet from start to finish, and neither should you. From taking your company to market through reviewing offers, due diligence, negotiations, definitive agreements and closing, your deal team will champion your cause by providing valuation, contract, and strategic advocacy.

3 Key Deal Advocacies You Need for Selling Your Company:

Getting your deal team on board from the beginning is critical to help you avoid building a deal on a shaky foundation, such as a weak valuation or contract terms that are not favorable to you. It’s very difficult (if not impossible) to walk back something you neglected to deal with in your conversations with prospective buyers early in the process.

1. Valuation Advocacy.

Sophisticated deal advisors will begin by taking a cold, hard look at your business to assess its readiness for market. This is not the time to have advisors tell you what you want to hear. Are the right systems and management team in place? Are sales moving in the right direction, and supported by a strong marketing plan? Are the numbers favorable and defendable?

AdvocacyEarly on, your deal team will work to position your company to garner the highest possible valuation. The level of interest in the market will determine the value of your company, typically based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Your investment banker will advise you on multiples typical in your industry and will present prospective buyers with an adjusted EBITDA portraying the most profitable picture.

Expect to answer endless questions while your financial and accounting representatives scrub your financials. They need to know, before a potential buyer moves into the picture and commences due diligence, where any skeletons are hidden. They may add back one-time or owner’s expenditures. An above-market owner compensation package? Addback. That all-expense-paid company retreat in Jackson Hole? Health and country club memberships? Addbacks.

The resulting “base case” presents buyers with a reasonable run-rate for the company post-acquisition, and your deal team will backstop the position with an “upside case” to demonstrate the enhanced profitability the buyer may expect with growth and synergies. 

Buyers frequently request a Q of E (quality of earnings) assessment performed by an unbiased third party. Having gone through the adjusted EBITDA “dress rehearsal”, you and your accounting team will be prepared to deal with the rigor of this analysis of income and earnings.

The last thing you want to do is weaken your negotiating position by damaging your credibility with a potential buyer. Nothing scares off potential buyers faster than sloppy financials or questionable accounting practices.

You should also understand that valuation is not just simple math, and that the highest-priced offer is not necessarily the best one! In a competitive sale process, an interested buyer may be forced to offer a market-rate multiple but do so in such a way as to preserve their cash at closing and protect their potential downside (should the company not perform as expected).

This means you can often expect prospective buyers to include earnouts, rollover equity, and other financing options as part of their valuation and offer. Buyers want to buy low, you want to sell high, and these financing options are commonly used to bridge the gap. Through the offer and negotiation stages, your deal team will work to maximize cash to you at closing by negotiating to minimize the impact of these delayed and conditional payments. After all, as we say in the deal business, “Cash is King.”

2. Contract Advocacy.

Expect your deal attorneys to continually interface and negotiate with scores of sophisticated M&A attorneys that leave no stone unturned looking not after your interests, but rather the buyers’ desire to make more money for themselves in the deal. There will be numerous interrelated variables to consider, negotiate, and manage.

Look to your deal professionals to translate the numbers, help you to understand every nuance, and draft your desires into the letter of intent and definitive agreements. This process takes extraordinary attention to detail and significant expertise with complex contracts. 

Most deals have a contingent piece in the equation when it comes to a portion of the purchase price. Even all-cash deals invariably have an escrow holdback, where a portion of the price is held in an escrow account as insurance for the buyer.

Wouldn’t a $50 million cash at closing offer be more attractive to you than a $50 million all-cash offer that requires a 20% ($10 million) holdback to protect against working capital adjustments or undisclosed liabilities for an extended post-closing period? Although it’s likely in just about any sale deal that some portion of the closing proceeds will be escrowed, an M&A expert will know if you’re being asked for too much to be held back and/or for a time period that is too long.

An experienced M&A attorney will also have access to market studies and experience to advocate for market (or better than market) terms for you on these elements. Similarly, the representations, warranties and indemnities included in your definitive agreements can lead to price erosion and should be in line with what’s market for similarly situated deals. (You may not be familiar with what’s market for these items, but a specialized M&A attorney will be). 

Additional layers of complexity come into play with the interrelations between the purchase or merger agreement and the numerous other complex agreements required to fully memorialize a deal. For instance, implications of each of the following (among many other key contractual provisions) must be seamlessly woven into the definitive agreements: 

You need contract experts to run interference, identify what’s critical and what’s not, translate it for you, and then negotiate it, get it, write it, and ensure it stays in the contract through signing and closing. The cold, hard truth is that all the terms of your deal will be included in the contract and your deal gets done exactly according to the contract. All those tantalizing valuation figures discussed between principals are ultimately meaningless if they’re not properly reflected in the contract. Reality.

3. Strategic Advocacy.

Valuation and contract advocacy require consistent, coordinated strategic planning as well as negotiations involving you, your deal team, the buyer and the buyer’s representatives. Your team needs to always be aligned and repeatedly realigned. Each of you must know who is talking to whom on the other side, and you must continuously coordinate your messaging and negotiation strategy.

It’s essential that your buyer constantly hears the same message from each of you, with no chinks in the armor. The many variables, negotiations, and staying in tune with your team inevitably takes a toll, and you will need allies in your corner. Expect them to recommend where to push back, where to concede, and remind you, when the going gets tough, that hard conversations are part of making deals.

Your deal team should keep you strong, focused and on task when the deal gets muddied – as it will. A key strength of a seasoned deal-professional is their ability to keep their eyes on the prize when the deal bogs down (as most do) in the innumerable details.

Expect your deal team to help you see beyond all the noise and disarray and keep your sights on stepping off the playing field victorious (which in practical terms for owners selling to sophisticated buyers can mean you got to the 50-yard line, i.e., you ended up with a deal that was fair).

We Can Be Your M&A Deal Advocates.

We are strong proponents of hiring deal experts to guide you through the complicated, lengthy, and all-important process of selling your business. At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we have represented buyers and sellers in hundreds of M&A transactions.

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.

Protective Provisions in LLC Operating Agreements: Why They Matter

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Introduction: Protective Provisions In LLC Operating Agreements

You came up with the right business idea, formally organized your LLC, are about to raise some seed money from friends and family, and you are ready to prepare the operating agreement for your company.  Or maybe you are a prospective investor, and you believe in the idea and team behind a business operated as an LLC that pitched you for a capital investment.

Whether you are a founder or investor, the protective provisions (sometimes referred to as “major decision” provisions) of an operating agreement are critical to consider, understand, and have appropriately drafted in the LLC operating agreement.

What Are Protective Provisions?

Generally, a designated manager (or board of managers, such as if there are multiple founders) is granted with the power and authority to decide, approve, and conduct the day-to-day decisions of an LLC. However, the “protective provisions” give rights to investors, whether through their representation as a manager on the board or through their voting rights as members in the LLC, to approve certain decisions of the company.

These approval rights are often critically important to the long-term success of the company and its investors. The protective provisions are often heavily negotiated by investors and founders. 

While the protective provisions for anyone operating agreement may be deal-specific, a list of typical ones that both founders and investors should evaluate includes:

  • An increase or decrease to the authorized amount of membership interests (or designation of differing classes of membership interests, particularly classes which are senior to or on parity with the class of interest held by investors); 
  • The redemption of previously issued membership interests (other than under equity incentive plans or employment agreements giving the company a repurchase right on discontinuation of services);
  • The company’s making of distributions (other than tax distributions); 
  • The company’s borrowing of money above a designated threshold amount;
  • The sale of the company or another other change of control transaction; 
  • An increase or decrease in the number of the company’s managers;
  • Changes to the annual budget above certain threshold amounts; 
  • The hiring of executive employees (and/or compensation levels above a designated threshold amount); and
  • The amendment of certain fundamental provisions of the operating agreement (such as distributions, allocations, and other similar provisions that were likely a fundamental basis for a member’s willingness to make an investment in the company). 

Why Do Protective Provisions Matter?

It is self-evident why protective provisions matter to investors in an LLC. Without them, the founders have unfettered ability to spend company money, and to otherwise make unilateral decisions for the company or themselves, that may have no relation to the overall interests of the investors and/or the protection or increase of the value of their investment.

What is sometimes less obvious is the impact of protective provisions on the interests of founders and their ability to operate the company in the manner they may feel most prudent to all constituents involved. For example, it is probably not a wise idea to give extensive protective provision rights to investors for a relatively small overall investment amount. Consider an instance where the total investment is $50,000.

In these cases, for an early-stage startup to need to obtain approval from investors on each major company decision can be impractical and overly time consuming, particularly where the investor is not involved day-to-day and is not truly in the same position as the founders to best assess the company’s needs and objectives.  

For more significant investments in LLCs, such as tried and true venture capital type investments (which do occur in LLCs more routinely than years past where companies were more frequently structured as C-Corporations), the likelihood is high that investors will demand board of manager representation rights and an extensive list of protective provisions.

In these cases, it puts emphasis on the need for founders and investors to be more intricately aligned on the company’s plans and objectives from the outset of the investment (such as a shared philosophy pre-investment on matters of strategy, budget, hiring, raising subsequent capital, and the eventual exit desires for the company).

Conclusion.

The protective provisions in LLC operating agreements can significantly impact the rights of both the founding members and investors. The appropriateness for various protective provisions often depends on the stage of the company and the overall size of the investment.

Regardless, founders and investors alike need to assess, understand, and appropriately draft protective provisions, which are often some of the most heavily negotiated and impactful elements of LLC operating agreements. The attorneys at Linden Law Partners have prepared and negotiated hundreds of LLC operating agreements for business owners and investors at all stages of the company’s business life cycle. Contact us today to discuss how we can help. 

© 2021 Linden Law Partners, LLC. All rights reserved.

Recognized Denver Business Executive Joins Linden Law Partners Board of Directors

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Denver Business Executive Joins Linden Law Partners Board

Linden Law Partners is pleased to announce the appointment of Bryan Taylor to serve on the firm’s Board of Directors. This appointment will further support our philosophy of constantly seeking to learn from best-in-class professionals, both legal and non-legal, to obtain the benefit of their insight and experience as part of an unwavering commitment to our business and the clients we serve.

Mr. Taylor currently serves as an International Development Advisor at Velocity Global where he assists clients with their international growth strategies and use of employment of record services for the compliant hiring of global teams. Before Velocity Global, Bryan served as a Managing Director with The Stage Fund and Chief Executive Officer of turnaround Blue Cod Technologies (which ultimately sold to Activer Solutions & Xceedance). 

His experience also includes numerous leadership roles within the Insurance and Financial Services Industry. Throughout his accomplished career, Mr. Taylor has demonstrated success in building sales and marketing teams, improving operational efficiencies, enhancing the customer experience, and consulting on other critical strategies for business organizations. 

Mr. Taylor stated, “I’m ecstatic to be supporting the team at Linden Law Partners. I have known Pat Linden personally and professionally for many years, and I’ve also come to know and admire the rest of the professionals the firm has assembled. I’m thrilled about the opportunity to now work with them in a formal capacity.

They are entrepreneurial trailblazers in their field that combine powerful legal experience with proven abilities in business. I look forward to aiding them with their expansion, promoting their brand, and further optimizing the client experience with their firm.”

Pat Linden, founder of Linden Law Partners, commented “Bryan and I met nearly 10 years ago and while we have some common personal interests like each of us having two young children and a love for sports, we’ve also always shared similar philosophies and helped each other along the way in our own industries and individual pursuits.

He brings a valuable business perspective based on his experiences that deepen the knowledge base we draw upon as professional deal advisors to our clients. Our firm’s imprint in our market has grown consistently over the last few years, and he’s going to help us accelerate even faster and become that much better.”

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 Linden Law Partners, visit e59ubbo54u-staging.onrocket.site.

Selling Your Company: Debunking 5 Deal Myths

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You’ve worked hard, probably for years, to build your business. Sweat equity, tears, gut-wrenching decisions, and more missed family celebrations than you care to admit. Now you’re thinking about selling, and this is not the time to take shortcuts. A Harvard Business Review report finds that 70% to 90% of M&A transactions fail, usually because buyers and sellers take shortcuts during the evaluation process.

The average business owner may sell a company once in a lifetime, and the process can be confusing and uncomfortable. Understanding the truth about these five common myths will help you position yourself to get the best deal possible.

Debunking 5 Deal Myths for Selling Your Company:

Myth #1: The highest offer price is the right one.

Total purchase price is only one measure of an offer, so dig deeper to understand the quality of each offer. Often, buyers for your business – whether strategic or financial – have completed numerous M&A deals and are adept in the use of various financing options that comprise their total purchase price.

While all these options have their place and potentially add up to a higher purchase price, all increase your risk of receiving full payout of the purchase price. Consider a few examples:

  • Earnouts provide for a portion of the purchase price to be paid to you contingent upon the post-close company reaching certain financial or performance targets. Because the buyer will likely have operational, financial and accounting control post-closing, negotiating the criteria required to determine and achieve earnout metrics is crucial. 
  • Rollover equity, typically offered by a private equity buyer to owners and key management team members, involves receiving a percentage of your sale proceeds in the form of equity in the new business. The private equity firm needs your expertise and will refer to this as “skin in the game”, but you need to realize that your equity share may not turn into cash for a long time (if ever).
  • Promissory notes, another common component of a private equity offer, do sound promising – but there are innumerable ways to structure one and your payout will likely be unsecured and subordinate to third-party lenders if you don’t negotiate hard for yourself. 
  • Escrow accounts, held by a third party, retain a portion of the purchase price for a specified period (typically 12-36 months). Escrow accounts are frequently set up to protect the buyer against a breach of reps and warranties laid out in the definitive agreements and, more recently, to offset a negative purchase price adjustment. The escrow provides the buyer with a readily available method to cover its losses. 
  • Holdbacks. These are like escrows, but the buyer simply holds on to a portion of the price for a specified period. These are even less desirable than escrow accounts as at least with escrows there’s a third-party account holding the funds. With holdbacks, the buyer is effectively sitting on a portion of purchase price proceeds, requiring considerations of collateral or guarantees of the buyer’s obligation to pay the withheld funds. 

Each of these financing options can be structured in countless ways, unique to your situation, and you should work with your deal professionals to study any tax implications, voting rights and restrictions the buyer has placed on them.

It is generally safe to assume that the buyer could be motivated to delay or make payments to you contingent on performance. Comparing offers “apples to apples,” you may very well find that the best offer has a lower price but is less risky, due to the higher ratio of cash to speculative financing options. As we say in the deal business, “cash is king.”

Myth #2: It will be just like selling a house.

Sellers are frequently surprised by the typical timeline and process of selling a business. The average house sells in weeks, while the average time to sell a business is nine to 12 months. A successful sale of a business requires a great deal of planning and a year or more to control expenses, drive sales, document the operation and develop key staff. Potential buyers need to be pre-qualified and then, as they perform due diligence on your company, you need to perform due diligence on the buyers. Unlike a house sale, the sale of a business involves confidentiality and intricate “base case” and “upside” financial models. The nuances of the letter of intent and definitive purchase agreement demand extraordinary attention to detail and in-depth discussions, as numerous variables can impact the amount and timing of proceeds paid to you. Even after you close the deal, if part of your payment is in the form of delayed or speculative compensation (see Myth #1), you continue to be on the hook helping the new owner run the business successfully. The process of selling a company takes far longer and is infinitely more complex than selling, well, just about anything.

Myth #3: I already have all the trusted advisors I need.

Many business owners believe they don’t need the help of deal professionals to sell their business. You already have skilled accountants and attorneys who do fine work for you, but are they experienced in working on complex M&A deals?

You get one real shot at selling your company, and the outcome will impact the rest of your life. A seasoned deal-professional will provide value beyond merely executing a closing, and each type of professional serves a specific purpose.

An experienced deal-professional is driven to get you the best possible deal and has a deep understanding of the market, the multiples, the financing options and the documentation. And what about the all-important confidentiality? If word gets out that your company is for sale, you can damage your reputation with customers, vendors and employees – all of whom are critical to selling your company successfully.

A deal-professional will guide you through the difficult waters of the deal process and, although the financial outlay for this level of expertise may not be insignificant, the deal professional brings value to every aspect of the deal by finding more money in the deal, enhancing terms, and seeing subtleties that people who don’t do M&A every day will miss. It may be tiring, but it’s true: you wouldn’t hire a general practitioner to perform your heart surgery.

Myth #4: The LOI and definitive agreements are “standard.”

Expect, and demand, that your M&A attorney digs deep on the documentation. A thoughtfully negotiated and comprehensive Letter of Intent (LOI) establishes specific and critical deal terms prior to drafting the purchase or merger agreement, rather than engaging in the more arduous process of negotiating deal terms through extensive (and expensive) drafts of those definitive agreements.

An effective LOI establishes whether there really is a “meeting of the minds” between the parties that can survive the rigors of the transaction process.

Negotiating a comprehensive LOI at the beginning of an M&A deal substantially improves the likelihood of successfully closing the transaction, is more cost-effective for both parties and makes the drafting process more efficient and better coordinated. Although most of its provisions are non-binding, the LOI is often considered to be the good faith understanding of the parties and a roadmap for the definitive agreement.

Myth #5: Selling my business will be easy.

Said no successful seller, ever, because it’s simply untrue. Deals are hard, competitive, messy, exhausting, often contentious, and take a long time to complete. Buyer and seller are pitted against each other.

Statistics time and time again indicate that the best deals come out of a competitive auction process, where numerous buyers are approached, screened, and given a chance to put forward their best offer for your company; in other words, you may receive several offers to evaluate and have multiple potential buyers to meet.

Are you prepared to rework financial statements, objectively value your company, populate and monitor a data room, screen buyers, conduct tours, negotiate a deal, and handle frequent bouts of pre-deal jitters …. all the while continuing to run your business profitably? Selling your company will be an exhausting and emotional experience.

We Can Be Your M&A Deal Partners.

Putting the same level of effort into your sales strategy that you’ve put into every other strategy you used to build the business over the years can put you on the path to maximum results. At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we have represented buyers and sellers in hundreds of M&A transactions.

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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New Attorney Miles Williams

We are thrilled to announce that lawyer Miles Williams has joined our business and transactional practice group. An entrepreneur himself, Miles knows exactly what it takes to run a business and how to relate to clients. Click here to learn more about Miles and his experience. 

‘Acqui-Hire’ Transactions: Their Place in the M&A Universe

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What Is An Acqui-Hire?

The purpose of a typical merger or acquisition is to acquire the customer base and other assets of the target company. However, in certain cases — and in certain industries in particular — companies are acquired exclusively for their labor talent. This type of transaction has come to be known as an “acqui-hire,” and technology companies in Silicon Valley have been utilizing this quasi-hiring process for years. The practice is now also becoming more prevalent in non-tech industries throughout the U.S. 

When Are Acqui-Hires Used?

Hiring a qualified and proven team can be highly competitive. The demand for top talent in the technology sector in particular often dwarfs the supply. As a result, major players like Google, Facebook, Apple, and Amazon have become creative when recruiting and hiring the most highly skilled employees.

In an acqui-hire, companies onboard an already-cohesive team of employees who have experience working in the acquirer’s industry and who have a specialized skillset. An acqui-hired team is often tasked with a particular project or goal within the acquiring company and given extensive autonomy, which can reduce the time and costs of post-acquisition integration. 

How Are Acqui-Hires Structured? 

The target companies of an acqui-hire are often startups that were successful in raising initial funds in an early round of financing but were unable to secure additional funds in later rounds, and therefore are low on cash. These companies may sometimes position the startup for an acqui-hire instead of simply closing their doors.

As a result, and because of the nature of the purchase price structure (discussed below), current investors of the target company will typically receive some return on their investment but do not usually get back more than their original investment. Many acqui-hires: 

  • Are priced on a “per-head” basis. In other words, the majority of the purchase price is allocated to paying for each team member hired in the form of an upfront cash payment, future equity incentives that vest over a period of time (e.g., 3-5 years), or future payments under an employment agreement. The amount allocated per employee can range from a few hundred thousand dollars to $1 million or more. 
  • Result in the winding-down of operations for the target company. Sometimes, the legal structure of the target company remains intact for liability reasons, or sometimes the entire entity may be acquired so that it doesn’t have to manage a separate winding-down process. 

Benefits and Inherent Challenges in Acqui-Hires? 

Acqui-hires can give buyers quick access to top-notch, proven teams through a quicker and more simplified deal structure as compared to a typical M&A transaction. As mentioned above, because of the autonomous nature of the team being acquired, buyers may be able to limit the costs of a complex post-closing integration associated with traditional M&A deals.

From the seller’s perspective, an acqui-hire can often be structured to give their investors some return on investment versus a complete write-off and their employees a better landing than they would have had were the company to have simply shut down. 

On the flip side, acquiring companies in most M&A deals face an uphill climb when it comes to keeping top talent from the acquired company. Despite the financial incentives intended to keep employees with the buyer for a set period of time, many employees nevertheless choose to find other opportunities.

Moreover, after installing the new team, buyers often still have to contend with lingering morale issues and general integration speedbumps. For some employees, the culture change associated with an acqui-hire is too much to overcome, and they will leave the acquiror as soon as they are able.

Finally, there are numerous pre- and post-closing liability considerations for sellers to undertake (and for buyers to diligence with each particular deal) before entering into an acqui-hire, including ensuring that the board undertakes a fair process in approving the deal, ensuring that the company’s creditors will be paid, and identifying and addressing potential tax issues.

Considering An Acqui-Hire? 

Acqui-hire transactions make sense for small companies that have top talent, but perhaps are short on capital. Some companies looking for an innovative edge and an expedited hiring process might find aligned interests with those small companies. The benefits of acquiring a team of proficient employees are many for certain large acquirers, but the prospect of an acqui-hire presents unique considerations that should be addressed and handled by business transaction specialists.

Linden Law Partners has been lead counsel on numerous complex M&A deals. We have helped business owners across a wide variety of industries achieve economic outcomes from high-stakes transactions. Contact us to set up a consultation so we can discuss the options with you and your team. 

© 2021 Linden Law Partners, LLC. All rights reserved.

Colorado Super Lawyers Recognizes Pat Linden For Work in M&A

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

Colorado Super Lawyers

Super Lawyers® is a rating service of 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 to the Super Lawyers® list.

Click here to 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 edition.

Post-Closing Considerations for M&A Sellers

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Rarely do 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. Selling owners and key employees of acquired private companies almost always both play a crucial post-closing role in the 2-to-5-year period after the initial sale. The buyer (particularly any private equity buyer) will lean heavily on selling owners and existing management to continue operating the business day-to-day post-closing.

This helps the buyer to learn and acclimate to the purchased business. The continued involvement of the selling owners and key management after the closing is usually a condition imposed by buyers to proceed with the transaction. Given this reality, there are some fundamental post-closing management considerations that are pivotal for selling owners to prepare for before the transaction closes. 

Post-Closing Considerations:

Second Bite at the Apple for Sellers 

Many buyers require sellers to “rollover” a percentage of their equity into the buyer’s post-closing entity to incentivize the selling owners to have a “stake in the game” going forward to align their interests toward a lucrative second sale of the business down the road. In private equity, for example, the typical “second bite at the apple” horizon is between 3-5 years.

(For more on private company rollover considerations, see our previous article here). If structured correctly, the rollover equity can provide sellers with additional and potentially significant financial upside on the buyer’s subsequent sale of the business.

Sellers should carefully vet and validate the buyer’s valuation model to ensure the value of their rollover equity is what the buyer says it is as part of negotiating the overall transaction purchase price. Caution should also be taken to ensure the valuation cannot be manipulated after closing or determined based on subjective factors solely at the discretion of the buyer.

In addition, because sellers will only hold a minority stake after the sale and will lack overall control of the business, it is critical to feel comfortable around key provisions in the post-closing governing agreements (like an operating agreement or shareholders’ agreement) that will impact the sellers’ retained equity.

Such items include ensuring the adequacy of anti-dilution rights, equal participation rights on sales or subsequent financings, and other rights that prevent the buyer from taking actions that disproportionately impact the rollover equity of the sellers relative to the buyer’s equity.

Employment Agreements for Sellers

It is common for selling owners to continue in management employee capacities post-closing, which means that employment terms (and often detailed employment agreements) will be expected and important for the buyer and sellers. The stakes in employment agreements can become particularly high if a separation from employment can impact the rollover equity of the seller (or if an employment separation can impact the obligations of the parties related to earnout payments if they are part of the deal).

(For more on earnouts, see our article here). Well-advised selling owners will negotiate for severance on terminations “without cause” or for “good reason” (terms which themselves can mean very different things depending on how negotiated) and look to avoid the ability for the buyer to repurchase their rollover equity.

Buyers, and particularly private equity buyers, will routinely endeavor to negotiate equity repurchase rights based on prices “determined in their subjective discretion” often payable over years with little or no collateral. 

Sellers should and will normally push back on these positions to ensure they will get the full benefit of the value of their rollover equity, whether or not they are 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 is a substantial interrelationship with the employment agreement that should be identified and properly drafted.

Sellers would be naïve to think buyers will automatically offer up favorable terms to sellers on these aspects of the deal. That is rarely the case and savvy sellers and their advisors should plan to negotiate these terms to obtain mutually fair and sensible outcomes.  

Equity Incentives for Key People

In addition to incentivizing sellers after the sale, most buyers and sellers collaborate on and implement a post-closing equity incentive plan for key employees (which can also include participation by selling owners) to help keep those key employees working for the acquired business. These financial incentives most typically take the form of stock options, LLC profits interests, or restricted stock grants.

Sometimes key employees who are optimistic about the prospects of the business and the opportunity to participate in the second bite sale will inquire about opportunities to invest some of their own cash in the post-closing entity for a class of ownership on par with that of the buyer and the sellers.

Buyers and sellers alike often wait too long in the process to begin to formalize and fully negotiate the post-closing equity incentive plan for key employees (as talented employees will pay attention to these items and will frequently negotiate on them). 

Conclusion 

Selling owners have a lot more to think about than just the price at closing as the general expectation is that they remain with the acquired business after the initial sale, usually with continued skin in the game via rollover equity. The strength and viability of that equity position are often highly dependent on a post-closing employment relationship. Equity incentive arrangements for key employees will also affect the landscape for both buyers and sellers beyond the initial sale.

Linden Law Partners has guided many sellers through these obstacles and opportunities as part of the M&A deal process, always looking for ways to maximize the post-closing success and financial outcomes for sellers. Contact us today to discuss your options if you are evaluating the sale of your business. 

© 2021 Linden Law Partners, LLC. All rights reserved.

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