It is probably clear to everyone who follows our blog consistently that we truly believe business teams in middle-market companies should be empowered to wade through many contract negotiations on their own. Negotiating the sale of your company is not one of them.
The sale of your company is a major, and probably the ultimate, transaction for any business owner. In addition to having many opportunities to generate a higher total payment, the sale of your company, regardless of the value of the company, may come with many potential and unexpected liabilities. You don’t want to be that sucker who is left holding the bag when the buyer negotiated a deal that gives it all the upside with plenty of downside protection.
As the owner of a middle-market company, you should expect your attorney to help put more money in your pocket for the sale of the company by advising on the following:
- the structure of the sale (e.g., a stock sale versus an asset sale versus a merger);
- ways to bridge valuation gaps by way of an earn-out, royalty fee on retained assets, rolling over seller stock into buyer stock, creative tax structuring or other mechanisms;
- negotiation of post-sale continued involvement in the company through employment agreements, consulting terms, or additional perks such as health care premiums or paid expenses; and
- minimizing taxes paid on the sale by ensuring a tax-efficient structure, an appropriate purchase price allocation and consideration of all other tax implications that will affect your post-tax proceeds.
The risks to you as a seller of your middle-market company are at times even greater than your upside. This is unfortunately even more accurate when the buyer has an attorney but the seller does not have one. Some of the risks that we protect our clients against include the following:
- permitting the buyer to hold back sales proceeds (i.e., retained by the buyer) rather than placing them in escrow with an independent escrow agent;
- leaving more funds than necessary under the circumstances in escrow and for longer than necessary;
- costs and fees of obtaining third party consents or transfer taxes;
- handing over cash (pretty close to literally) because of the purchase price adjustment mechanism and agreed-upon working capital target;
- giving broad representations and warranties without limiting them to those specified in the agreement rather than any oral statements;
- taking on all costs related to employees’ terminations;
- uncapped indemnification on all representations and warranties rather than on certain limited ones;
- allowing potential liability for breaching representations and warranties to remain outstanding longer than necessary;
- proper handling of protected customer data (especially if in the health care and financial services industries);
- assuring that the buyer lives up to its promises if it assumes obligations, such as lease payments or warranty obligations; and
- giving too broad of a right to set off future payments against obligations (including disputed obligations) owed by the seller to the buyer.
As you can tell, we just need a chance to work a little magic and protect you where it can hurt the most. For attorneys like us who deal with these issues on a regular basis, it is straightforward to negotiate these issues on behalf of our clients. It is not that straightforward for business owners and executives of middle-market companies who do not have the same experience. Therefore, when entering into a life-changing transaction, such as the sale of a company, middle-market companies should engage good, experienced M&A counsel. It will make the transaction easier and more likely to close while increasing the post-tax dollars and lowering the risk for the business owners.