Buyer and seller are on the same page, time for an acquisition lawyer. And suddenly it's no longer about opportunities, but about risks and guarantees. Gone is the good atmosphere and the threat of negotiations breaking down. 'Talking about risk ironically brings risk.'
Sell a business is a complex and delicate process. Crucially, there must be a degree of trust between buyer and seller. As the talks become more serious, a lawyer often comes into play. He or she looks for snags, eyes, risks, points and commas. He or she puts those on paper. Rightly so, but fun is different, especially for a seller who, as a result, is served adjustments in the sales price, warranties or an indemnity clause for dessert.
Too many such surprises can thoroughly damage the trust gradually built up. That's according to Brookz s "Dealmaker or Dealbreaker" study . Thereby, a buyer demanding too many guarantees from the seller is the third most important reason for a deal breakup.
Don't make company sales legal too quickly
If so, is it wise to delay welcoming the lawyer for a long time? Or is the pain generated by the lawyer necessary for a healthy deal? According to entrepreneur Arjen Bos, you should "never make an acquisition process legal too quickly. Bos is an entrepreneur with extensive acquisition experience.
As managing director of The Employment Group - parent organization of labor intermediary for the construction industry Tracé, temporary staffing company for painters Faber Personeel and, since this year, technical recruitment and selection agency KP&T - Bos has been involved in a handful of successful deals and multiple negotiation talks.
Bos enjoys the acquisition process in which buyer and seller meet for the first time. "That should go in a flow, where everyone has a successful transaction as their goal. For Bos, establishing agreements early on can cause "you sometimes stumble over side issues.
Bos: "As a buyer, you don't want to talk about risks right away. The best businesses are built by people with passion, not fear. By starting to talk about risks during an introduction, it quickly becomes tedious.'
Still, discussing the side issues is necessary, Bos believes. "It's never fun to discuss the details of a cohabitation agreement either. No one wants to think about things you'd rather not go through. But in our industry, where claims usually involve labor compliance, the risks cannot be ignored. Paying a few percent too little or not paying the right pension has major consequences.
Mapping risks
Back taxes for social security payments, pension contributions and payroll taxes can cover several years. That easily involves tons or millions in potential claims.' That has a lot to do with the flex laws that apply to the temporary employment industry. In takeover processes, Bos therefore always engages lawyers specialized in the flex industry.
There are very few lawyers who know how to do that. The few who are good at it regularly help us identify risks.' Those risks often emerge after a thorough audit. Bos recognizes the conclusion from Brookz s research that unexpected results from a due diligence can lead to a deal being broken.
He illustrates this with an example: 'If a temporary employment agency that we want to buy has not complied with the legislation on hirer's remuneration, and does not remunerate its temporary workers in accordance with the clients' collective bargaining agreements, this is a double risk. On the one hand, it creates the risk of retrospective levies; on the other hand, implementing the hirer's remuneration legislation means a lower profit margin in the future. That can collapse the deal.'
Indemnities and warranties
But risks don't have to lead to a breakup. The vast majority of risks lead to the signing of an indemnity or warranty agreement. Warranties often involve agreements regarding future revenue, customer relationships or agreements with suppliers.
Remarkably, researcher Lex van Teeffelen notes that guarantees, in particular, meet with resistance from sellers. "That is remarkable. After all, indemnities have an eternal life. Guarantees are always tied to a term.' According to Van Teeffelen, guarantees are an accepted phenomenon in negotiation processes. 'Take turnover guarantees; although sellers would rather not give them, they are common enough.'
Limit amounts and terms
According to Els in 't Veld, lawyer-partner at DVAN, sellers nevertheless more often place restrictions on indemnities. 'They are then willing to give indemnities, but also set limits on the amounts for which and the periods within which they can be sued. This is understandable, because sellers want to know where they stand financially after the sale. They want to be able to get on with their lives.'
In 't Veld supervises many transactions in the agri and food sector. Common risks in transactions in that industry? In 't Veld: "We regularly map out the composition of products for buyers. In food, there can be major risks such as food being recalled from the market. That costs entrepreneurs a lot of money.'
Risky conversations
Turning down a deal is something In 't Veld Veld encounters only occasionally. Risks, on the other hand, play a role in every transaction. Many risks are easy to agree on. Suppose the company you buy has a contract with software vendor Microsoft for software use with a limited number of licenses. If in practice the company uses more, Microsoft could theoretically send an invoice for back payment.
For that risk, you could ask for an indemnity. But sellers obviously don't want to have such a sword of Damocles dangling over them forever.' Instead of limiting term or amount, adjusting the deal price can also be a solution. Does the process of sharing risk between buyer and seller affect mutual trust?
Talking about risk ironically comes with risk, In 't Veld also recognizes: "You can have a big fight over warranties and indemnities. Her tip for preventing a loss of mutual trust is to create clarity early in the process and make agreements about the distribution of risks, which both parties record in consultation with a lawyer.
'Draft agreements don't have to keep going back and forth between buyer and seller. Ideally, one party draws up the draft, after which the other party reviews it. Then both parties agree on the most important points including the risk allocation. After that, only some tinkering is required.'
Engage a lawyer earlier
Involvement of lawyers in the process ideally starts with the letter of intent, according to In 't Veld. "Buyers and sellers often think lightly about letters of intent. They are often formulated in such a way that they are binding contracts at certain points - in other words, more than just intentions.
There are plenty of business owners who have not realized what they have agreed to in such a contract, and when drafting the purchase agreement, they may be confronted with an intransigent counterparty with the position that binding agreements have been made. That can lead to the deal falling through.
Negotiate yourself
Hiring a good lawyer costs money, but limited so diligence or incomplete agreements cost even more money. So despite the cost, for Van Teeffelen it is a no-brainer to hire a good lawyer for every transfer. 'Lawyers are expensive, but you'll get that out thick and thin. The buyer has a duty to investigate.
If he fails to do so, he can hardly hold the seller liable.' Finally, a piece of advice for both buyer and seller: Never let two lawyers speak. Van Teeffelen: 'If you are entrepreneur enough, you drive the negotiations, not your lawyer. You put your own signature. Or pull the plug yourself.'
