Breaking Down Legal Preparations for M&A
When owners prepare for to sell, the only legal advice I ever give is for them to get a good M&A lawyer, but here are some general things owners should consider.
First, get a good M&A lawyer. If your long-term corporate law firm has a strong M&A team, that’s perfect. Be sure they aren’t too busy and know how to focus on companies of your size. Also, be sure their staff is large enough to handle all the paperwork. The firm should have a backup attorney if your main attorney gets too busy, sick, or decides to retire before you sell.
The worst-case scenario is a one-person firm divorce attorney (or other non-M&A specialist ) trying to do an M&A deal. I liken it to a podiatrist doing brain surgery—they’re doctors but with their own specialty. You can still have your favorite attorney work on the deal, but you will need to bring in another firm that has M&A experts. The firm should have both M&A experience and internal or external resources in the fields of taxes, estate planning, real estate, HR, environment (especially for PCB shops), and other relevant areas.
An M&A attorney with extensive experience can help an owner prepare for a sale. Some of the main issues to consider:
Operating agreement: It is critical to keep the operating agreement up-to-date, especially if a company has several owners. An owner must show they have the authority to make decisions. It is a good idea to update this agreement every time there is a change in the company, so put it on the annual checklist.
Stock certificates: Make sure this is current. There is nothing like finding out in due diligence that some certificates are missing or old partners are still listed as stockholders. A buyer wants to know that no one will show up later and claim ownership.
Non-competes/employment agreements: The U.S. Fair Trade Commission (FTC) recently released a ruling that makes most non-competes invalid. Some of the exceptions are for owners and highly paid executives. The ruling has been challenged, so things may change. Nevertheless, your attorney should review all employee-related agreements. Also, if the owner has promised verbally to share any of the proceeds with key employees, it should be documented in writing.
Supplier/customer agreements: Many owners allow these agreements to become dated. Having strong business agreements can increase the value of the company. Your attorney can check whether there are changes in control clauses and help you update all agreements.
Leases: Even if the business owners own the building in a separate entity, an updated lease is important. If the landlord is unrelated to the business, the lease should be checked for change of control or other clauses. The timing of when to discuss a sale with the landlord is tricky and depends on the relationship. Landlord consents can be difficult to obtain quickly. The last thing you want is for the landlord to hold up a deal.
UCCs: Almost every company has open UCC forms that should have been terminated long ago. Taking care of these in advance can help due diligence go more smoothly.
I-9s: Buyers are looking at these forms more seriously. Be sure that all your employees are documented.
Licenses/permits: Some permits can transfer with the business, others do not, and yet others have conditions based on the location of the business.
Legal issues or lawsuits: If there are any current or pending legal or other issues, be sure to document them and keep buyers updated. Any issues may cause buyers to think twice or to add more to escrow.
Education: An owner should become familiar with the types of documents that are needed to complete a deal, such as Indications of Interest, Letters of Intent, Asset Purchase Agreements, and the other agreements. It seems to go on and on, but if an owner is familiar with the agreements in advance, it becomes less of a shock. Also, become familiar with the main subjects of the Purchase Agreement. Getting educated on the various documents and major terms can pay off big in reducing expenses and stress down the road. Owners can also choose to have their attorneys educate them at $500+ per hour.
Due diligence preparation: Your attorney or M&A advisory firm can give you a checklist to work on to prepare for due diligence. It is ideal to start working on this list years in advance. It is also good corporate policy to get these ready as a course of business and to keep them updated. (I also wish I were 20 pounds lighter and could hit my drives 300 yards.) Any preparation is good preparation.
From selecting the right M&A attorney to updating agreements and being prepared, the more an owner spends time in advance on legal matters, the smoother the deal will become and the more everyone will be able to focus on the goal of closing.
Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.
