How can companies stay on top of contractual matters?
Securing landlord or third-party contract approvals to a sale often takes weeks or longer to secure. If this is going to be an issue in your company, plan ahead and start the process as early as possible — recognizing that the deal may fall apart, so don’t jump the gun too soon.
Check all contracts for change of control provisions to ensure compliance with those provisions.
Start the process early with your lawyer to go over representations and warranties that are likely to be included in a purchase agreement. You will need to be thinking about scheduling exceptions to representations, insurance coverage, environmental matters, undisclosed liabilities, and numerous other matters that will be the subject of representations and covenants in the purchase agreement.
Start thinking about the letter of intent. Will it be binding or nonbinding? Will it go into extensive detail so you know upfront whether you will be able to resolve all material business points at the letter of intent stage? Will there be an earn-out? Will there be a financing contingency? Will you have to provide seller financing? How will the deal be structured? Will there be a standstill period?
Who should be involved in the process and what should be communicated to them?
Locate and engage suitable M&A counsel, accountants (if you do not already have one) and an investment banker to assist in the sale. If your golf buddy is your lawyer, chances are he may not be up to the task of doing an M&A deal. You will need a lawyer that specializes in M&A because it is complicated and part of the negotiations revolve around what are ‘market’ terms in the current environment.
There is often tax structuring necessary to secure a tax efficient sale, so engage tax experts early in the process. The M&A law firm you use will likely have this expertise.
Discuss with your investment banker (if you plan to use one) what they believe is the current market valuation for a company such as yours in today’s market so your expectations are met when the company is marketed. There are investment bankers who handle middle market as well as larger, or smaller, deals. M&A counsel can help you select a banker for your deal.
Even though you think you know all the buyers in your market niche, investment bankers have big rolodexes and have contacts with strategic as well as financial and foreign buyers. Although the investment banker will charge a fee, you can often get a significantly higher price using an investment banker. This is not essential but certainly something to consider carefully.
Jonathan R. Hodes is a partner and chair of the M&A Practice Group at Stubbs Alderton & Markiles, LLP. Reach him at (818) 444 4508 or [email protected].