Corporate Finance

Involve legal advisers early in corporate acquisition, sale process

For sellers, preparation is essential to success in a corporate merger and acquisition (M&A) transaction — and engaging advisers in the early stages of the process is a crucial step in helping businesses anticipate what will be needed to get the deal done efficiently, says Toronto corporate lawyer Chaim Sapirman.

“There’s definitely more preparation required as a seller, and it all comes down to proper preparation and giving thought to how the seller would like the transaction to play out,” says Sapirman, partner with Torkin Manes LLP.

One of the biggest mistakes a seller can make, Sapirman tells, is not bringing their advisers on as early as it makes sense to do so — including, lawyers, accountants, or investment bankers, for example.

“Their advisers will help them identify weaknesses in their position, the challenges, and a good adviser will start to prompt the seller to think about how they deal with these issues,” he explains. “They will help give the client a sense of how the deal process will unfold, help the client anticipate what to focus on, when to focus on it, and consequently, take some of the pressure off of the client now that they are not trying to figure out on their own what is next in the transaction process,” adds Sapirman.

A good adviser, he says, will help manage the client’s expectations with respect to what’s going to happen, response times from the other side and whether the negotiation process is going well or heading off-course.

Indeed, one of the biggest reasons a seller may want to engage their advisers early in the process, says Sapirman, is to identify any skeletons in the closet that may need to be discussed or dealt with as part of the negotiation process.

“That can derail a deal, so, as an adviser, having that insight at the beginning is always a good thing.”

For a deal to go smoothly, it is also essential for sellers to anticipate any third-party impediments or requirements to completing the transaction, says Sapirman.

“In our experience, the third-party items are the ones that either derail or delay a deal and are sometimes the hardest parts to manage. I’m referring to, for example, getting a landlord to consent to a transfer of a lease or to a change control of the tenant, getting a minority shareholder’s consent, or dealing with a secured lender. In certain businesses, there may be regulatory or governmental approvals that are needed.”

Third-party items need to be thought about well in advance, says Sapirman, as often, the process to get an approval can take weeks, if not months.

“Getting the legal advisers involved early allows that process to be started and identify those third-party requirements much earlier so you can anticipate and build those into the timelines, whether that’s in the letter of intent, but also in terms of the expectations of both parties. And without that, everyone’s just disappointed when you realize at the last minute you need an unanticipated consent that’s now going to take six weeks to get,” he says.

Another key step in terms of preparing for a sale, says Sapirman, is for sellers to take a good look at their corporate documentation, records, legal contracts and similar items of the seller's business.

Ensure that the financial records are up to date, the financial statements been filed for prior years, any material contracts that really drive the business are up to date and in writing, and whether there are written employment agreements or other contracts that the purchaser or other interested parties are going to be asking for, he adds.

“Giving thought about putting documentation together will not only give the client the ability to make informed decisions and provide informed information in the negotiating process, but is also a very big step towards facilitating a later part of the process, which is preparing the disclosure schedules and providing full disclosure to the other side in anticipation of a deal or signing an agreement,” he says.

This process, says Sapirman, can either start once a company has an interested buyer, or when a business is planning to put itself on the market.

Before going into the negotiating room, sellers should also be sure to turn their minds to what they are expecting out of the deal, says Sapirman, starting with the purchase price they’re looking for.

“But, it goes beyond just the purchase price, to all those things that can carve away the purchase price — which debt is going to be paid at closing, which debt is going to be assumed by the buyer, for example, what escrows is the seller willing to accept in the deal, what holdbacks are they willing to accept? Are they expecting to be paid fully at closing or are they going to be okay if it gets paid out over a period of time after closing?” says Sapirman.

And finally, although smaller, closely held private companies may not wish to let management and staff of the business know they’re considering a sale, Sapirman stresses the importance of finding ways to minimize the impact the process has on the ongoing management and functioning of the business.

“Principals can become very distracted with negotiating the deal, pulling together the appropriate documentation and updating financial records and ensuring that the purchaser or the other parties is satisfied to complete the deal takes a lot of work,” he says.

“I’ve seen many times where the business starts to suffer because the principal is also the sales guy and now he’s splitting his time between preparing for a deal and meeting with clients, and sales dip and often enough, the ultimate purchase price will depend on the final financial numbers of the company. The business suffers and then ultimately the purchase price is going to suffer,” adds Sapirman.

As a result, he says, sellers need to give thought to putting a team together — both internally and externally in terms of advisers — to assist with the process.

“Figuring out what you can parcel off for others to deal with and helping sellers create this efficient loop of support is important.”

Ultimately, says Sapirman, selling a business involves a number of moving pieces — from employees, to contracts, to debt, and stock option agreements in certain situations — and requires an appropriate expectation as to the work involved.

“If you get your lawyers involved early to get a sense of what’s going to be involved in getting the deal done, and to the extent necessary, delegating and allocating the work out either to your professional advisers or to internal people, the deal should flow a whole lot more smoothly,” he says.

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