This month’s blog focuses on one of the most critical business decisions an entrepreneur ever makes: selecting an M&A attorney for selling their middle market business. This is top of mind because I recently almost saw not one, but two deals go off of the tracks because of a poor choice of counsel.
Choosing the right M&A attorney for your middle market business boils down to assessing whether he or she is the right“fit”. So, how does a business owner decide which attorney is the right fit for them? I’ve worked with many great M&A attorneys and some not so great and everything in between. My experience suggests that incorporating the following “common sense” questions and considerations into your decision-making process will help you make the right choice.
Size and Complexity
The size and complexity of your likely transaction is a great place to start assessing whether an attorney is the right fit. If your likely enterprise value is going to be in the $25-$35 million range, you want to work with M&A attorneys who regularly negotiate deals of that size, as opposed to billion dollar deals. Think about it; do you want to be the big fish in the pond or the small fish in the ocean? Neither really, what you really want is the right size for you.
Similarly, if your business is international in scope and scale and as such you have foreign subsidiaries and employees, make sure your deal is not going to be the first time the attorney has faced the common challenges of closing a deal across International borders, currencies and legal systems. Likewise, as deals get larger in size, you will have to clear certain governmental hurdles like The Hart-Scott-Rodino Act, which requires approval from the FTC for transactions north of $75 million of enterprise value. Ask the attorney to talk about the last couple deals he was involved in closing to see if his experience is relevant to the size and complexity of your likely deal. Similarly, you can ask them what challenges and/or issues do they anticipate needing to overcome based on your anticipated transaction.
Staffing can be a tricky discussion when working with law firms. The bottom line is that you should demand and receive senior level attention when selling your business. You deserve nothing less given the investment you have made in the business, not to mention the fees you will be paying for their services. That said, it’s common in most law firms that deals will be staffed with both senior and more junior resources. You just want to confirm what roles the various team members will play so there are no surprises.
Similarly, try and avoid situations where you have two senior attorneys and no junior folks. It is good to have back-up, but two Sr. attorneys on every call debating each point with each other can lead to excessive fees. Also, you want to avoid the “bait and switch” tactic that has become more common, particularly at the largest firms. Do not assume that the person delivering the pitch is the person who will handle your transaction. Many more law firms use senior partners to secure business, but more junior staff to actually manage the transaction. Be sure to ask about the continuity of the team – will the team that starts your transaction be there until the end? Also, ask tough questions about the role of each team member. Can you identify the entire team that will be working on my transaction? In your experience, how often does this team change mid-transaction? Who is going to work day-to-day with me, my investors and my management team? Who will be the project manager?
To be clear, you want to not only understand the capabilities of the lead attorney and his or her team, but also the capabilities of the firm. At the end of the day, you need a good understanding of the type of transaction you’re expecting. More specifically, does the firm have experienced tax, patent, and employment professionals so that when it comes time to review the purchase and sale agreement that you do not need to introduce new law firms into the mix. Ideally, select a firm that has all of the key legal capabilities to get your transaction done under one roof.
Also, be sure and reference check to gauge capabilities. Reference checking allows you to dig into the individual lawyer’s capabilities as well as the firm’s capabilities. How were the communication skills? Negotiation skills? How was their advice throughout the process? Were there any surprises? References provide firsthand accounts and insight that may raise additional questions to ask a perspective M&A attorney.
One of the things that can be maddening during a deal process is when you’re working with an attorney that does not share your sense of urgency for getting the transaction closed in the most efficient and expeditious fashion. In our experience, once the LOI is signed and exclusivity begins, time can become the enemy since there are so many factors you don’t control that can derail your transaction that, hence the sense of urgency. Invariably, this relates to the bandwidth of the attorney. Naturally if their plate is already full before they add you to the mix, don’t be surprised when they ask for more time to review documents and the like.
Similarly, make sure that their calendars synch with the process timeline. The last thing you want to happen is for them to take off for a two week vacation right in the middle of executing a transaction. It’s not only disruptive to the momentum of the deal, but also means things that should take a couple days, take weeks if not longer.
As I’ve said before, you don’t want to be penny wise and pound foolish when it comes to retaining an experienced M&A attorney. That said, you should understand the likely cost of executing a transaction of similar size and scope. In some cases, experienced transactional lawyers will give you a fixed amount option, but I find that most attorneys stick to their tried and true hourly wage approach. We’ve seen hourly wages range from $200 to $800 per hour depending on the size, prestige and address of the firm and attorney. If that’s the case you might want to ask them to “ball-park” the number of hours they anticipate a transaction of your size and type might require, so you can do the math.
A related consideration I’ve heard more senior M&A attorneys make (that if verifiable can be compelling) is that while their billing rates might be higher, they complete their work more efficiently and therefore be a more cost effective option relative to the less experienced attorney with a lower billing rate. Again, getting the specifics, even if they are estimates will help your assessment when it comes to evaluating the cost. Another best practice (when dealing with any outside counsel) is to put a cap on the amount you are willing to spend and make sure the attorney keeps you posted as to where you are against the cap. While it may not stop spending creep, at least it will eliminate big surprises, enable thoughtful discussion, and conscious decision making. You can also have constructive debates about your charges and how the team is being used in process as opposed to waiting until the deal is over.
Approach to Deal Making
Every deal that gets done reflects some level of risk sharing and compromise. The key question to ask your potential M&A attorney is how they think about and ultimately negotiate the tradeoffs between risk and reward. More specifically, ask each M&A attorney to discuss their approach to dealmaking. Is it best characterized as constructive and collaborative or do they believe a successful negotiation is based upon winning every single point at all costs (scorched earth). Similarly, is their application of the law more practical, or academic? Said another way, are they the type of attorney that is going to zero in on the key and most impactful terms and conditions, or are they going to try and nail down every conceivable risk that can be imagined. Do they focus on the right hills to die on, or do they chase ghosts that represent negligible risk.
Hiring an attorney with M&A experience in your industry or sector can also be a great asset during the process. While working with a preexisting attorney that brings familiarity and continuity is a plus, nothing beats sector specific experience. It’s not uncommon that we find ourselves in the sometimes “sticky” situation of questioning the dealmaking credentials of a preexisting corporate attorney. Don’t fall into the trap of believing that your banker is getting some form of a kick back from bringing in another M&A attorney. Their primary compensation is coming in the form of an accomplishment fee so their motivations are aligned with the business owner of getting the right deal closed. We’ve experienced the downside of going with a familiar attorney, but one that had limited deal experience even though they reassured the business owner that their firm had plenty of experience doing deals.
Once you’ve gotten beyond screening for M&A experience the next screen should be do the understand the nuances of dealmaking in my industry and/or sector. For instance, if you are a software company has the attorney ever worked on software M&A? if not, are they going to be prepared to negotiate the myriad of issues around intellectual property, open source licenses, deferred revenue treatment, etc. Similarly, do they and their firm do enough deals in a particular sector to know what are “market terms” for things such as non-competes, indemnity escrows, caps and survivability. It’s entirely reasonable to ask the attorney what their experience suggests on some of the key provisions/issues that are likely to be negotiated. Are their answers pragmatic or theoretical?
In the End, Chemistry Counts
Don’t underestimate the importance of chemistry and trust on your selection of a M&A attorney. Selling a company is a long, emotional and stressful undertaking for owners and managers alike. Entrepreneurs spend years building their businesses and the decision to sell is a difficult one. Add to this, the process has its inevitable ups and downs and can create a great deal of stress in the process. Your M&A attorney may be accustomed to the M&A roller coaster, but you may not be entirely ready for the ride. Hire an M&A attorney who will be sensitive to how the process may impact you and your team. Also, keep in mind that all legal related communications coming from buyer’s attorney will pass through your investment banker as well, but in the end your attorney is the last stop.
Trust is paramount. At the end of the day, weighing all of these relevant factors when assessing the fit of an M&A attorney will be time well spent and integral to the successful close of your deal. As such, plan on interviewing 2-3 firms so you have a good understanding of your choices. Your investment banker and/or other trusted advisors will be more than happy to share his or her recommendations, input and logic with you.