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M&A transactions are stressful for all of the parties involved, and particularly for the seller because the sale of one’s business is usually the most significant and meaningful transaction of the selling parties’ life.  Moreover, the consequences of a failed or “busted” deal can be financially devastating for a seller and its owners and potentially taint the company as “damaged goods,” in additional to saddling the seller with a substantial amount of transaction fees and expenses.  There are several steps that sellers can take in order to increase the probability of a successful M&A transaction for a privately‑held company.  While there are many other steps that should be considered, below are a few of the more important matters that should be considered.

1. Advance Preparation

Most companies entering into an M&A transaction are not prepared and require a substantial amount of corporate clean‑up or “housekeeping.”  Issues that are commonly encountered include the following:

• Incomplete or non‑existent corporate books and records (including stock ledgers and minute books), partially‑executed contracts, incomplete employee and personnel files (including missing or partially‑executed employment agreements, covenants not to compete, non‑disclosure agreements, and stock option plans and option grant agreements, among others). Buyers will always insist on reviewing all such documents as part of their due diligence investigation.  Having to delay a transaction while such documents are updated or prepared in the first instance (or located) is not only embarrassing, but also signals to the buyer that the seller is unprepared and does not have its corporate records in order, which usually causes the buyer to expand the scope of its due diligence investigation and “dig deeper.”  Delay in an M&A transaction always harms the seller because the more time that transpires, the greater the possibility of events occurring either internally with the seller (such as a down quarter, the loss of a key customer or the departure of a key executive) or in the macro‑economy (such as the outbreak of a war, a terrorist attack or a recession) that could derail the transaction.  Complete copies of all relevant corporate books and records, governance documents and material contracts (including all Exhibits and Attachments) ideally should be uploaded to an electronic data room for the transaction and be readily available for access by or delivery to the buyer and its advisors upon request.  A comprehensive and thorough Deal Audit in advance of a seller going to market will help identify “housekeeping” matters that need to be addressed.  Conducting a Deal Audit early in the process will allow the seller to address the issues that are identified on its timeframe and determine how to resolve them, without having a buyer and its counsel “looking over their shoulder” and dictating how corporate “housekeeping” matters are addressed.
• A comprehensive review of all material contracts in connection with a Deal Audit will give a seller the opportunity to identify contracts that contain consent or notice requirements or change of control provisions that will need to be taken into considered as the transaction progresses.
• A thorough Deal Audit will also be invaluable in helping the seller and its counsel prepare the Disclosure Schedules to the M&A Agreement. Preparation of the Disclosure Schedules is a very time‑consuming process, yet an absolutely critical step in an M&A transaction.  The Disclosure Schedules are in essence a seller’s “insurance policy” against post‑closing indemnification claims and escrow or holdback deductions.  Properly prepared Disclosure Schedules will shield the seller and its owners from post‑closing liability for alleged breaches of representations and warranties in the M&A agreement.

2. Experienced M&A Advisors

An experienced team of M&A advisors is essential to a successful M&A transaction.  That team includes an M&A lawyer, an accountant, a tax advisor, and an investment banker, and often a valuation professional.  It’s imperative that an experienced M&A lawyer be engaged.  As a general rule, the seller’s in‑house counsel and regular outside counsel is not equipped to hand a complex M&A transaction, and certainly this is not the time to hire your brother‑in‑law who does divorces or car wrecks!  I have what I call the “5x Rule.”  When I’m retained to try to salvage an M&A transaction that has been botched and run off the rails, I tell the client that it generally costs five times more to salvage a derailed M&A transaction (if it can be salvaged) than it costs to do it right from the outset.  Moreover, an M&A transaction of any consequence is not the time to try to represent oneself.  While I often hear of smaller transactions on which the seller did not retain experienced advisors, those deals often run into trouble and the seller always “leaves money on the table.”  As the saying goes, “he/she who represents himself/herself has a fool for a client.”  A lawyer who understands the nuances and intricacies of M&A transactions and who has done numerous transactions is needed to guide the seller and its management team through the process.  The same is true with respect to the accountant and tax advisor.  M&A tax and accounting issues are very specialized and complicated and full of traps for the unwary.

3. Investment Banker

The seller in an M&A transaction is generally well‑advised to hire an investment banker to guide it through the process, interface with prospective buyers, and assist in the structuring of the deal and the negotiation of the transaction documents.  An experienced M&A lawyer or accountant who regularly works on M&A transactions will be able to make introductions to investment bankers, and generally several should be interviewed to ensure there is a “personality fit” with the seller and its management team.  The investment banker will identify and vet prospective buyers in order to avoid wasting time with “tire kickers” or parties who do not have the financial wherewithal to consummate a transaction.  Ideally, the investment banker will be able to run an auction process for the transaction in order to maximize the purchase price and obtain the most favorable terms possible.  An experienced investment banker is worth their weight in gold in an M&A transaction.   That said, care should be exercised in engaging an investment banker and reviewing and negotiating their form of engagement agreement.  The initial draft of investment banker’s engagement agreements are generally very one‑sided in favor of the investment banker and many of the terms and conditions of those agreements are negotiable.  The seller’s M&A counsel should be enlisted to negotiate the investment banker’s engagement agreement.

A word of caution about investment bankers.  There are several investment banks that I call “Seminary Investment Banks.”  Those Seminar Investment Banks (“Seminar iBanks”) “cold call” business owners and invite them to attend seminars and workshops at which they talk about mergers and acquisitions and the M&A process and “pitch” their ability to market and sell middle market companies.  At those seminars a lot of glossy marketing materials touting the Seminar iBank, along with various white papers, brochures and materials are distributed to attendees.  Part of the “pitch” is that the Seminar iBank is the leading middle market M&A investment banking firm in the United States (or the world).  A long list of “awards” and recognitions that the Seminar iBank has received is also generally presented, with no indication of who made those “awards” or any indication whether the granting body is independent from the Seminar iBank, or the legitimacy of such “awards.”  These Seminar iBanks then exert immense pressure for the company to enter into an engagement agreement and pay a large retainer (typically in the $40,000 ‑ $60,000 range) for the investment bank to prepare a valuation on the company and a marketing package.  However, often Seminar iBanks are not able to bring buyers to the table and close a transaction.  Seminar iBanks make the majority of their income from retainers, and only a small percentage of their income from success fees earned from consummated and closed transactions.  An experienced M&A lawyer or accountant will be able to refer sellers to experienced and capable investment bankers and help them avoid becoming entangled with a Seminar iBank.

4. Non‑Disclosure Agreement

Sellers should insist that an appropriate Non‑Disclosure Agreement (“NDA”) be prepared and executed with each potential buyer before any confidential or proprietary information is disclosed or a Confidential Information Memorandum delivered by the investment banker.  The NDA should also include a broad confidentiality and an employee and customer non‑solicitation or “no‑raid” provision, especially when a strategic buyer or competitor is involved.  The seller should not simply rely on the form of NDA typically used by the investment banker.  Rather, at a minimum, the seller’s M&A counsel should review the investment banker’s form of NDA before it’s circulated to any prospective buyers.

5. The Negotiation Process

It is generally advisable to have either the investment banker and/or the seller’s M&A counsel take the lead on all negotiations.  They are experienced in such negotiations and understand the nuances and consequences of certain very specific terms that are unique to M&A transactions and are sensitive to their impact on deals.  It is generally best not to have the seller’s CEO take the lead on the negotiations because, due to their financial stake in the transaction and emotional investment, they may let their emotions get the best of them and cause the negotiations to devolve into a yelling or screaming match, which is never productive, can permanently damage relationships, and in extreme cases, kill deals.  M&A negotiations are a “roller coaster ride,” with ups and downs and new issues coming to the surface every day, which often frustrates CEOs.  In addition, a dispassionate and unemotionally involved negotiator is best equipped to evaluate the seller’s position on various issues and whether they are weak or strong.  The negotiator can then avoid overplaying a strong position and risk possibly driving away potential buyers, or misplaying a weak position and risk losing credibility with buyers and their advisors.

6. Letter of Intent

After an NDA is executed with a prospective buyer, the next document that will be negotiated with a buyer will be a Letter of Intent (“LOI”).  A properly crafted LOI will lay the groundwork for the transaction and address such critical issues as the seller’s valuation or the anticipated purchase price or a price range, deal structure, tax treatment, the scope of the representations and warranties, materiality scrapes, “sandbagging,” payment of expenses and regulatory filing fees, representation and warranty insurance, indemnification and the applicable “baskets” and “caps,” escrow or holdback amounts or percentages, the exclusivity period, among other critical issues.  Ideally, all of those issues will be agreed‑upon at the outset and set forth in the LOI.  It is imperative that the seller’s M&A counsel and tax advisor be involved in negotiating the LOI because certain concepts can be imbedded in an LOI that will have material financial significance for the seller.  A seller’s deal leverage is at its maximum the day the LOI is signed because buyers are anxious to get deals under LOI and “locked up.”  Once the LOI is signed, a seller’s leverage drops off precipitously.  Accordingly, it’s often possible for sellers to include terms in an LOI that will not be agreeable to buyers later if left for the definitive M&A agreement.

Buyers will want to enter into an LOI in order to “lock up” the transaction and provide for an exclusivity period (sometimes also referred to as a “standstill” or “no shop” provision) in order to (a) afford the buyer time to conduct due diligence on the seller and its business and operations, (b) prevent the seller from exploring competing offers while the buyer conducts its due diligence, and (c) all the buyer to arrange financing.  Sellers sometimes resist granting exclusivity, although in a significant or complicated transaction an exclusivity period will always be required.  A seller should only grant exclusivity after the buyer has made a meaningful and good faith commitment to the basic terms and conditions of the transaction, including a purchase price or price range and demonstrated a serious desire to pursue the transaction.  A well‑drafted exclusivity provision should incentivize the buyer to complete its due diligence, secure financing and commit to the transaction in a timely manner.  Buyers typically request a 30 – 60 day exclusivity period (although these periods have become much longer since the outbreak of the COVID‑19 pandemic), and those periods can be expected to be longer in large, complicated transactions.  Sellers, on the other hand, will want to keep the exclusivity period as short as possible, and sellers may want to consider getting an exclusivity fee if the buyer wants a lengthy exclusivity period in order to compensate the seller for granting exclusivity and taking itself “off the market.”  In addition, sellers should make certain the exclusivity can be quickly and easily terminated if the buyer offers terms that are materially worse than those provided in the LOI, is not able to obtain financing, or loses interest or ceases to diligently pursue the transaction.

A word of caution about LOIs.  LOIs are virtually always non‑binding (other than a few provisions, including the exclusivity provision and provisions dealing with access to information, indemnification, costs and expenses, governing law, jurisdiction and venue, and confidentiality, all of which will always be binding and legally enforceable).  Some sellers get lured into signing an LOI without having their advisors review it first with the argument that, because the LOI is non‑binding, there isn’t any downside to signing an LOI.  Signing an LOI without having experienced M&A counsel review first is always a mistake.  First, some of the provisions are legally binding, such as the exclusivity provision, and a lengthy exclusivity period will in effect take the seller “off the market” until the exclusivity period runs.  Second, while it is true that most of the provisions in an LOI are not binding, the reality is that LOIs are “morally binding,” and buyers and their counsel will later point to those provisions in the LOI and argue that any later changes requested by the seller are attempts to “re‑trade” the deal.

7. Deal Terms

The deal terms of any M&A transaction will be crucial. The issues that typically are contentious and heavily negotiated include the following:

• Purchase price adjustments and mechanics
• Scope of representations and warranties and materiality and knowledge qualifiers
• Amount of indemnification escrow and the holdback period
• Whether the escrow is sole source of recovery for breaches of the M&A agreement
• Indemnification exclusions, such as “baskets,” “caps” and carve outs
• The fundamental representations
• Covenants applicable between signing and closing
• Fee and cost allocation for necessary consents and governmental approvals such as a Hart‑Scott‑Rodino filing
• Closing conditions
• Termination of the M&A agreement

8. Employee Issues

M&A transactions typically involve several issues related to the seller’s employees, including retention of employees and the treatment of employee stock options.  Any continuing executives may want to enter into an Employment Agreement with the buyer.  Similarly, thought will need to be given to preventing any executive‑level employees who will not be retained post‑closing from sabotaging the transaction.  Any “Golden Parachute” payment obligations and the applicability of the federal Worker Adjustment and Retraining Notification Act (the WARN Act) and any so‑called state “mini‑WARN Act” requirements must be carefully evaluated and complied with, I necessary.

9. Keep “Eyes on the Ball”

An M&A transaction will be very time consuming for management personnel and can be distracting.  It is imperative that the seller’s management team keeps its “eyes on the ball” and continue to manage the company and its operations because a buyer will closely monitor the seller’s financial performance between signing and closing and compare it with the seller’s projections, and a bad quarter or missed projections can cause a great deal of buyer concern and potentially jeopardize a transaction.

10. Takeaways:

• Prepare for the transaction
• Delays harm sellers and can kill deals
• Hire experienced advisors
• Keep “eyes on the ball”

This article is provided for educational and informational purposes only and is not intended to, and should not be construed as, legal advice.  Readers should consult their lawyer regarding the applicability of the information discussed herein to their particular situation and facts.