Legal advisers are playing an increasing role in business acquisitions. In the process, the work of acquisition advisors and lawyers is shifting closer and closer together. Especially in smaller SME takeovers, lawyers are already regularly acting as dealmakers.
Business acquisitions
If you are an entrepreneur looking to sell a business, the first thing you often do is go to your accountant. After the necessary discussions, the decision is then made - if it is a good accountant - to hire a professional acquisition advisor. Together with the takeover advisor, an information memorandum is drawn up and the search for a suitable buyer can begin. When that buyer is found, the (initial) negotiations begin, and if all goes well, a letter of intent or even a preliminary purchase agreement is usually drawn up.
Nothing seems to stand in the way of a quick deal. Until then a lawyer is called in who then faces the agreements made for the first time. Naturally, he sees risks for the seller, would prefer to renegotiate certain points and as few warranties and indemnities as possible in the contract.
It becomes even more of a party when the other party brings in a lawyer as well. Negotiations start all over again and the many (amended) draft agreements fly back and forth. This can sometimes take months. The momentum slows down, the initially positive mood turns and it won't be the first time that the deal is called off out of frustration by one of the two parties.
Acquisition process
To avoid the above problems, we see that especially in small business acquisitions, the acquisition advisor either picks up the legal piece himself or the lawyer is brought in at an early stage to then play the role of process director. From a Brookz tour of small and medium-sized law firms it appears that especially for smaller business acquisitions in small and medium-sized companies with a deal value of up to one million euros, the lawyer - whether forced or not - is increasingly taking on a dealmaking role.
The main reason for this multidisciplinary approach is that a lawyer gets involved in the acquisition process earlier and thus can even act as a process facilitator. Indeed, a common complaint among M&A lawyers is that they get involved at a (too) late stage of a transaction, often at the stage when acquisition contracts need to be worked out. To save costs, some entrepreneurs leave much of the preliminary work, such as drafting a letter of intent, to the corporate finance advisor.
The disadvantage is that negotiations about risks, responsibilities, warranties and indemnities have already been done by an acquisition advisor, whereas therein lies the added value of a lawyer. Of course, lawyers and acquisition advisors often work together in an acquisition process, but lately the M&A lawyer is moving up in that process, taking the reins more firmly in his hands. Such a directorial role by a lawyer can be advantageous to the entrepreneur, because a lawyer is already setting the lines, monitoring the timeline and lining up everyone involved in the final stage anyway.
One-stop-shop
Another advantage is that with an acquisition lawyer as a process monitor, the pace of the business acquisition is maintained. In an SME acquisition, the modern lawyer has the necessary financial knowledge, allowing him to take a leading role in valuing the business, arranging financing and taking into account the bank's requirements with respect to guarantees and indemnities. In the meantime, the drafting of the letter of intent, the examination of the books, the (continuing) negotiations and the finalization of the various contracts begins.
For entrepreneurs, the complete acquisition process becomes a lot clearer; he no longer has to switch between an accountant, an acquisition advisor, a tax specialist and a lawyer to manage the total deal from start to finish. Moreover, the cost of all these advisers also forces the average SME to make a choice. A deal-making M&A lawyer responds to this as a one-stop shop, guiding the acquisition process all the way through to closing at the notary.
Research
The above development is also in line with a recent study by the University of Amsterdam on the role of lawyers in business acquisitions. This shows that personal style and the character of a lawyer largely influence the final agreement and sometimes even the price, Christel Karsten concludes in her dissertation based on studying 151 private purchase agreements.
In doing so, she looked at whether the contracts reflect more the economic deal conditions or rather the influence of the individual lawyer. Conclusion: law firms and individual lawyers exert significant influence on takeover deals through their personal style, approach and preferences. This is reflected, among other things, in the content of a contract, the course of the negotiation process and the amount of the price, Karsten said in her doctoral research.
This makes it important for entrepreneurs to choose a legal adviser whose approach, style and risk perception are a good fit for the company and the nature of the business acquisition.
'Lawyers, it turns out, are not limited to legally laying out the economic circumstances surrounding the deal when drafting acquisition contracts. Their style and character traits - such as personal risk appetite - appear to have a major impact on the final agreement, such as on the form, number and type of warranties and conditions. This can even affect the acquisition price. 'The more expertise a lawyer has relative to the counterparty, the more advantage he or she is able to gain for his client,' Karsten said.
10 Tips from acquisition lawyers
You want to put your business in the shop window, but what legal aspects should you actually pay attention to when sell a business? We asked legal specialists for 10 do's and don'ts.
#1 Being ready to sell
"Make sure the company is 'sale-ready' and start well in advance. Look carefully where the risks are and try to eliminate them wherever possible. If you want to get the maximum sales price, you have to be able to give guarantees. The owner must also be ready to sell. It often happens that a DGA has not thought through the consequences of selling the business for his own future. This can cause problems during the sales process, for example because the selling entrepreneur has unrealistic expectations. So think about this well in advance. If necessary, find a coach who can guide you in this.'
(Sebastiaan Palm, Marxman Advocaten)
#2 A good start
'Before you enter the acquisition process, meet with the buyer's adviser and lawyer. You negotiate more efficiently if you know each other a little and there is an atmosphere of mutual trust. That way you work as colleagues on a transaction that does justice to both parties.'
(Eric Spreij, Van den Herik & Verhulst Lawyers)
#3 The buyer's perspective
'Look at your own business through the buyer's lens. They usually look at things like employee pension plans and intellectual property differently than you do. Suppose a manufacturing company has been selling special clamps for car disc brakes for years, achieving healthy annual sales of seven million euros. In such a case, the buyer's adviser will immediately want to know about intellectual property. You have to cover that kind of question in your offering.'
(Jan Floris Holsteijn, Qisolute Advocaten)
#4 Be clear
'Be clear about what you want and what you think is important. That's different for everyone and really isn't always about money. Sometimes it's important to keep the bust of Grandpa, the founder of the business, in the lobby. I have also sometimes had a clause included in a purchase agreement that the staff never has to work on Sundays.'
(Harm van Efferink, Haagstate Advocaten)
#5 Never underestimate the importance of the LOI
'The biggest mistake you can make as a selling entrepreneur is not to call a lawyer until after due diligence and the letter of intent. An LOI is actually the most important document in the entire acquisition process. It guides the final purchase contract. Both legally and financially, an LOI must be correct. Therefore, pay adequate attention to it. Also pay attention to the framework for the purchase agreement and the risk allocation, which is included in it. The wording is very important. For example, if a buyer states that he gives the "customary warranties," remember that what is customary today may not be tomorrow. And who says you can't deviate from that which is "customary"? Stay on your toes, every word counts.'
(Terry Steffens, Fort Lawyers)
#6 Dare to walk away
'Preserve your right to withdraw from the transaction until the purchase contract is signed. That right is not standard in an LOI, but it is very desirable to include it. In any case, it is smart as a seller to record a lot early in the negotiations, so that there are no surprises in the final process.
(Eric Spreij, Van den Herik & Verhulst Advocaten)
#7 Cultural differences I
'Keep in mind differences in corporate culture. You often have to explain to foreign investors how some things are regulated here. For example, Americans in particular find Dutch regulations on co-determination and the role of works councils rather strange. Something to keep in mind in deals with the British: in the Netherlands we have a duty of inquiry for the buyer and a duty of disclosure for the seller. In the UK, 'what you don't ask, you don't get' applies.
(Jeroen Schras, Yur Lawyers & Consultants)
#8 Cultural differences II
'In international transactions, you need to know the business culture of the country. For example, English and American parties expect a comprehensive contract, which often takes some getting used to for a Dutch entrepreneur. With foreign listed companies, there is a lot of focus on warranties and indemnities in the purchase contract. The negotiation culture can also differ considerably from country to country. An Englishman always bangs his fist on the table at some point during negotiations. French businesses are organized top-down, and negotiations with them involve a lot of pushing and pulling. It's good to prepare a client for these kinds of cultural differences.
(Maarten van Dooren, Van Iersel Luchtman Advocaten)
#9 Transaction Insurance
'In larger acquisitions, Warranty & Indemnity (W&I) insurance policies are becoming more common. These insurances cover the seller's liability for breaches of warranties given by the seller to the buyer. Especially in exits by private equity investors, this type of transaction insurance is popular. With transaction insurance, you buy off outstanding liability. You can use it to close out a fund, which is especially attractive for private equity. In addition, a S&I makes the whole acquisition process a little easier. You don't have to spend as much time and effort trying to limit liability as much as possible if you're acting for a seller. But keep in mind that the vendors are largely foreign, which means that documentation must be in English. It also comes with a hefty price tag, with fees quickly approaching 100,000 euros. For transactions under ten million euros, transaction insurance is therefore often not interesting.'
(Harm van Efferink, Haagstate Advocaten)
#10 Go with a professional
'More and more parties with little experience in drafting contracts are entering the M&A market; think accountants and corporate finance advisers. They think they can do it, but are not legally trained enough and do not realize the consequences of using the wrong words. Whether something, for example, is a mistake or a breach of contract does matter, and you have to be well schooled in contract law in particular to properly supervise mergers and acquisitions. Larger acquisitions also involve managing a whole team of lawyers and tax specialists. It's better to leave that to a professional.'
(Kees Borstlap, Dommerholt Advocaten)
