Lots of lessons learned yesterday about averting M&A disaster by managing your lawyer.
The NAPL client-member in question is a successful privately-owned print and graphic communications company looking to grow by strategic acquisition. A local competitor is facing terminal financial challenges and is open to "doing something". With my help in the background, the potential buyer (a $10 million annual sales company) negotiates and signs a formal letter of intent pursuant to which they will stand to gain somewhere around $3.0 million of annual revenue by virtue of acquiring the seller's general intangible assets.The letter of intent comes together nicely within a week or two.
Now the problem begins internally, as the client's lawyer prepares a first draft of the Asset Purchase Agreement.......55 pages of legalese. All technically proper contract language but WAY OVERKILL for this kind of transaction. "Why?", you ask. Because the buyer is getting all these customers, there's really not much risk because of the way we've structured the deal.....minimal cash, lots of future risk based royalty payments, full rights to set off...... so why is the lawyer going nuts in preparing this mega-doc? I'll do a blog post on successor liability next week. Suffice to say, the lawyer is trying to protect his client from theoretical risks of being nailed by the seller's baggage.
Problem is the seller is going to freak when he sees this Asset Purchase Agreement. Surely this will kill the deal. If I was on the seller side, I would advise my client to call the buyer, say thanks, but here's the document back, tell your lawyer to try again with a more appropriate and much simpler document.
After all, this is NOT the sale of a "going entity". If it was, all those representations and warranties would be totally appropriate. This is a sale of one asset, the general intangibles. It isn't even "all or substantially all" of the seller's assets. Ooops, I'm getting into successor liability mode. That's not the point.....
The point is that the seller will lose patience weeding through this legal thicket. They are not a well-oiled management team that has its house in order to respond to all this disclosure, due diligence, and legal documentation.
Remember, this is crisis mode, distressed sale.......creditors, employees, partners are all "nervous".....the pressure is on, the stakes high.....every day that goes by is painful ...there is barely any time on the clock.....the seller is a proud person, coming to realization that the dream is about to come to an end.....but at least there is a decent sale of the intangibles, the customers will be taken care of, value will be preserved......But how to get past this legal minefield set up by the buyer's attorney?
Being sensitive to the seller's perspective, even though in this case my client is the buyer, I urged the buyer and his attorney to vastly scale back the document to make it easier and faster for the seller to deal with. As an example, the letter of intent was clear on the definition of general intangibles. Why does the Asset Purchase Agreement create a new defined term that includes nonsense like "equipment maintenance records" when we aren't buying equipment?
We lost 2 full days, incurred management time and who-knows-how-much in legal fees.....all of this was INTERNAL, just the client and their attorney.......all because the attorney chose an overly complicated template for the draft Asset Purchase Agreement.......
We also could have lost the seller's confidence, he's probably thinking, "Why is this taking so long to get that document? What bad things are they putting into it? Are they getting cold feet? Don't we have a detailed Letter of Intent that everyone signed off on?"
Lessons learned:
- M&A is more art than science, and there is wide latitude on what is an appropriate legal document, so it is essential for the buyer to manage his/her attorney;
- Managing your attorney includes internal agreement on the scope of the paperwork, determine how extensive should be the representations and warranties in light of the risks of the transaction and how it is structured;
- The time frame between letter of intent and closing is fraught with uncertainty, as people are on edge.....even little things like the complexity of the legal documents can affect perceptions and shape how people react....be sure to manage communications and expectations; and
- Remember, if you are not buying a "going entity", go easy on the Asset Purchase Agreement to save on legal fees, unnecessary delay, and aggravation!
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