Ira Halperin heads up Meltzer-Lippe’s Corporate /Business Practice Group. With both 25 years of experience as a lawyer following 15 years as a CPA, he’s facilitated many successful M&A deals. When the Deal is closed and the money is in the bank, is it over?
Question: It ain’t over til it’s over. For business owners the sale isn’t over on the closing. What risks lie ahead?
Ira Halperin: It’s critical for business owners to understand the concept of indemnification. When a buyer buys a business, the seller makes representations and warranties. They’re basically facts that the owner is stating about the business. For examples a statement that all of the assets are owned by the company and nobody else has a claim against those assets. It’s a fact that all of the inventory is saleable in the ordinary course of business; that accounts receivable will be collected within an agreed upon amount of time; there are no environmental issues on the property – all kinds of factual things.
If any of these statements turn out not to be true and the buyer suffers damages as a result, then the buyer has a claim against the seller for indemnification, meaning the seller will need to protect the buyer from damages suffered and make him whole i.e. write a check
Reps, warranties and covenants, to the extent they get breached, will cost the seller of the business a considerable amount of money through the indemnification provisions in the document. So it is very important that a seller be 100% accurate, understand how the document works, exactly what actions they can and cannot take post-closing, what the reps and warranties are all about It is so important that they spend the time to go through – with a skilled M&A attorney – every one of these reps and warranties as well as covenants. Covenants are promises to do something in the future, or to not do something in the future – for example, refraining from competing or refraining from soliciting any employees or customers of the company going forward.
At the same time, there is a significant non-legal risk for business owners in these transactions: the risk that expectations don’t align with reality. As I said before, this is a process that takes time. There will be ups and downs in the process; oftentimes, the buyer will demand things, or try to demand things that require additional negotiations. It is important for an attorney to work with their client on developing patience and understanding of what’s going to happen in the transaction, as opposed to what they contemplated before they signed the letter of intent or term sheet to sell the business.
Question: What are the most common roadblocks to reaching a successful M&A deal?
Ira Halperin: The vast majority of deals get done, but roadblocks can appear when 1), a business takes a substantial downward turn, causing a buyer to reconsider either the purchase price or the acquisition in its entirety, or 2) — and this is the one that is more common – trust is lost between buyer and seller. Loss of trust typically happens when the seller has provided information but omits material facts (whether intentionally or not), or the information provided to the buyer is not entirely accurate. Conversely, you can get to a point where the seller has concerns about the buyer, particularly where a buyer is providing a note or some sort of earn-out and thus the seller is relying on the buyer to pay that consideration sometime after the closing.
Question: What role does an attorney play in terms of preserving trust between buyer and seller?
Ira Halperin: The first thing that an attorney has to do in any transaction is to make sure that the client understands that this is a process that takes time. You don’t put a company up for sale today and sell it in a week. It takes time for a buyer to do their diligence prior to buying the company. Diligence means they’re going to be kicking the tires of the company for weeks, possibly months, depending on the size of the deal. The buyer is going to be sending in a team of accountants and lawyers to review documents and to analyze financial statements to ensure that what they think they are buying is what they’re actually buying.
In many cases your client is an owner who’s very good at running his business. But he’s never sold a company before, so he doesn’t know what to expect. Thus he has to rely on an expert advisor to guide him through that process. A lot of what an experienced M&A attorney has to do is to make sure that the client understands what’s involved and provide advance notice as to what’s coming up so the client isn’t surprised when things happen along the way . Unfortunately, if an attorney doesn’t have prior experience in these sorts of transactions, it’s difficult to guide the client through the whole process