A lot of M&A ego and marketing talk focus on a transaction’s purchase price - that top line number of what the buyer is paying the seller for the assets or equity being purchased. Deal size can be a fun metric to throw around – it’s quick, it’s easy to understand, it’s often an impressively large number to non-M&A people, and it’s a common factor among diverse transactions -- but it can also be irrelevant to the job of the M&A lawyer.
Whether a deal is for a half million dollars or five hundred million dollars, there’s a good chance that it is the most important thing in the client's professional life at the time, so doing it right is what matters – and it’s critical to bring the right tools for the job. For the M&A lawyer, that’s the right transaction structure, an understanding of the client's industry and cash flows, careful consideration of the goals of the client, and the ability to keep all the people and pieces involved in a transaction moving through the finish line.
In that regard, there may not be a lot of difference between the $2m and $20m transaction -- and the closing documents may be indistinguishable unless you know where to look for the price. So, while dropping an 8-figure number may be an impressive party trick, it doesn’t necessarily mean much for folks assessing the M&A chops of a lawyer or firm.
If size alone doesn’t change the nature of a transaction - what does?
There are three factors that can complicate a transaction. Complexity of the Assets, personalities involved, and volume and type of risk identified or inherent to the deal. Any transaction can have these features, but very large transactions always have at least one. This is why pre-transaction planning is critically important to a smooth transaction.
The confidentiality and Letter of Intent phases can make or break a deal, and if a deal is going to be broken, this is where to do it. This phase is not just for doing the initial arm-wrestling involving structure, price, and terms. This is also where the lead M&A lawyer on each side of the project has an opportunity to dig into the specifics of the transaction and get a sense of the deeper factors involved, including assets, personalities, and risk. We regularly encourage clients to build the right team, and this is the lawyer’s opportunity to follow that advice internally.
So, what do these considerations look like?
Risk - Risk tolerance is a business question. Managing risk is a legal issue. Every transaction has risk -- and so managing risk, understanding it, mitigating it, and allocating whatever is left over is the bread and butter of M&A work. Often, risk can be readily managed through standard representations, warranties, and indemnification provisions. The volume and type of risk is typically less in smaller transactions, and when a business is being bought or sold by a family or small, involved owner group, risk tolerance can usually be hashed out and agreed among the group.
In transactions involving larger companies there are often passive investors and a capital structure involving government contracts and programs, and banks and other lenders Each of these parties comes with additional duties, obligations, notices, and covenants on the part of the buyer and seller involved. Here risk tolerance is a trickier issue and is often not borne equally among the stakeholders. Even if risk and risk tolerance can be defined in simple terms, the magnitude of risk may exceed the comfort levels of the parties involved. In these cases, the transaction needs risk mitigation provisions carefully drawn to suit the requirements of these stakeholders.
The range of options here is both deep and broad. There are transaction structures that can be drafted in, like deductibles, baskets, time or dollar amount limits, or special indemnification additions or carveouts. There are also third-party tools like representation and warranty insurance. Careful attention to the procedures and time limits ensures that the parties can proceed with a firm understanding of how problems that may arise will be communicated, addressed, and paid for.
In small and middle market transactions, standard risk mitigation provisions may go without much comment -- but any time risk mitigation motivates parties, we can expect these provisions to be hotly negotiated. This can create an entire sub-negotiation, often involving individual owners or creditors for whom special risk mitigation measures and takes a lot of time and coordination at a time when things are already moving quickly. Management of these deal factors is often best handled by a second M&A lawyer, who can focus on the ins and outs of risk mitigation and serve as a second set of eyes to make sure that risk management provisions work in the context of the client's goals for the whole of the transaction.
Complexity of Assets
An operating business is a complicated network of assets that must be herded toward productivity every day. A careful inventory of the assets of a large business can run hundreds of pages and point to thousands of pages of related diligence material. Land, furniture, contracts, inventory, customer lists, patents, trademarks, recipes, processes, production equipment, buildings, and more all must be listed and reviewed to ensure that the parties understand how they are owned and how they will be transferred in the transaction. Consider that something as commonplace as a website involves leased server space, data privacy issues, use terms, owned intellectual property, leased intellectual property, and a host of contracts, and it becomes apparent that understanding and properly managing the transfer of the asset base involved in a large transaction is a heavy lift.
Adding to this, many asset types require a specialist review to ensure that transfers are documented and recorded properly. Real estate and other titled property must be properly transferred and recorded with the appropriate government offices. Special care needs are to be taken with real estate to ensure that there are no hidden liabilities or obligations to the parties transferring it.
Real estate interests also call for substantial knowledge of market conditions and regional practices. For this reason, M&A lawyers often add a real estate specialist to the team when dealing with interest in real estate.
Intellectual Property often involves state or federal registrations and can be complicated by questions as to ownership, usage rights, and security claims. Intellectual property specialists have the knowledge and tools to assess these and other concerns relating to intellectual property so that the documents appropriately transfer ownership as the parties expect.
Employment and Benefits is a specialized and technical area of law involving a complicated web of state and federal regulations that can vary based on the location and conditions of employment. Improper handling of pension and benefit programs, collective bargaining agreements, and other employment related items can carry substantial liabilities for unwary parties.
When transaction structures involve securities – especially if new securities are being issued as part of a transaction. It is imperative to ensure that all the securities laws and regulations of the appropriate jurisdictions are attended to. M&A lawyers have varying levels of comfort with securities matters, but transactions involving new securities, new investors, passive investors, or securities issues to employees typically benefit from review by experienced securities counsel.
Tax planning is a key component of most transactions. While typical tax structures can be managed by M&A counsel and a tax advisor with M&A experience, it is not uncommon to bump into issues that straddle the gap between legal and accounting issues. For this reason, most M&A lawyers have tax counsel on speed dial.
Anticipating life after closing is vital for buyers and sellers in M&A transactions. Even on the sell side it’s not all champagne and exotic beaches. An important facet of planning for life after closing is making sure that the money, equity, or assets that a party gets out of the transaction are properly brought into accord with that client’s estate planning documents. For an M&A participant with no estate plan, it is even more important to ensure that the incredible amount of time, energy, and effort invested in the transaction process bears benefits that flow through to his or her personal life regardless of death or disability.
Easy access to and rapport with these and other legal and professional specialists and knowing when to call in help is a valuable skill in a M&A lawyer, making for more efficient, higher quality, and more cost-effective transactions.
Personalities
A big part of the M&A lawyer’s job is working with owners and stakeholders is getting through all the conversations, tasks, and decisions that accompany what is often a life altering transaction. Clients come to us with goals involving far more than money, and a diverse array of philosophies, approaches, and understandings of how to get things done. Maintaining an even keel through the ups and downs of a lengthy and high stakes process can be a challenge when client stakeholders are on the same page. Internal differences or animosity with the party on the other side of the table can make relationship management as big a part of the job as is putting together the actual documents.
Different clients and counterparties work in different ways, and it can be beneficial to have members of the M&A team who can relate to and address the specific interests and concerns of each of the client stakeholders in the way that is most appropriate for that person.
So, when assessing the capability of M&A lawyers and firms for a large or complicated transaction, look deeper than a single lawyer’s bio page highlights. A deep bench of knowledgeable M&A lawyers and a variety of legal specialists who have experience in applying their knowledge to a M&A context can go a long way to ensuring an efficient transaction that is carried out properly both in terms of the deal itself, but also in understanding and managing the complex web of assets, personalities, and relationships involved.
Buyers and sellers have distinct needs in the business transaction process. When selling a business, it is crucial to have strategic legal guidance to avoid critical errors as you only have one opportunity. On the other hand, buyers must identify risks and reduce vulnerabilities effectively. Stock Legal offers a specialized mergers and acquisitions practice to act as your reliable advisor whether you are planning an exit or seeking growth through a merger or acquisition. Our attorneys aim to safeguard transaction value while offering practical solutions for any challenges that may arise during the process
Should your company be poised for a sale, merger, or acquisition, we invite you to reach out to us. Let's explore how our expertise can support you in accomplishing your strategic goals and objectives.
