After flagging an issue for a client which no one had asked me to comment on and accidentally unearthing a much bigger issue requiring significant cleanup, a colleague told me that the central issue to my practice is I don’t stay in my lane on transactions. Admittedly, I struggle with focusing on pure legal points, likely due to my work with high-growth companies where the focus is on resolving issues before they become so entrenched that they are impossible to resolve. However, for those of you that appreciate non-legal legal advice, I wanted to share some problems I’ve seen worth considering.
- What is the plan for employees? Making sure the seller’s employees understand how they will be treated under the new regime, be it benefits, compensation, management styles, etc., is a determining factor of the success or failure of a transaction post-closing. A buyer needs to have a consistent, scalable and cohesive plan to integrate employees (which ideally includes a one-page or similar document which clearly sets forth material changes relevant to employees). A seller needs to have a thorough understanding of how they will socialize a buyer with their employees in both form and substance. Although some aspects of the post-closing integration may be difficult for employees, buyers and sellers alike should focus on communicating the benefits employees will gain by joining a larger enterprise (e.g., infrastructure results in less time spent on non-essential tasks, dedicated resources previously unavailable to employees, additional perks, etc.) and controlling the message on possible disadvantages. Trying to address employees and integration on an ad hoc basis can result in an unwieldy confederacy and disgruntled employees and few things are worse than a busted deal due to a late-stage employee revolution.
- What are you getting? Did your diligence and QofE pick up the fact that seller’s insurance costs are due to grandfathered policies and your carrier won’t insure the property without a significant and immediate capital infusion? Is the seller actually willing to utilize and implement economies of scale changes factored into the buyer’s pro forma models? Is the consideration the seller receiving all cash or some mix of cash and “other stuff” and, if the latter, does the seller (and his/her attorney) clearly understand what that is and how it will realize value? Has the seller spoken with relevant post-closing parties (e.g., regional leads, accounts payable, human resource team members, etc.) he/she will deal with on an ongoing basis from a day-to-day perspective to make sure personalities, expectations and direction are simpatico? Does either side foster a toxic culture where negativity permeates the organization (see point 4)? The less ambiguity there is in how the relationship will function after the closing helps preclude misalignment down the road.
- Are your documents unambiguous? Some attorneys make the mistake of favoring ambiguous terms which could be construed in favor of their client in lieu of clearer terms which are less advantageous. Wherever the parties land on deal points, the language in the documents should not leave room for interpretation. I once read an earn-out provision in a purchase agreement where (i) the measurement period was not clearly stated and (ii) there were no guardrails or even a definition with respect to the determining metric (EBITDA in that case). Not only did you not know what time period was being measured, there was no way to clearly ascertain what exactly the parties were measuring. Regardless if you’re a seller or a buyer, such ambiguity is a recipe for disaster and can lead to litigation post-closing.
- Is the counterparty a perpetual malcontent? Transactions are partnerships and partnerships hit speed bumps. No matter how well thought out and planned they may be, unforeseen contingencies will arise, and the attitude of the parties will determine how well they weather the storm together. Working with an ill-tempered counterparty can culminate in disastrous results. One rarely gets everything they want from the other side in any transaction but there is a difference between spirited negotiations and an irascible disposition. Better to cut your losses and walk away than enter into a partnership doomed to fail.
