The Legal Dance: When to engage lawyers and what to tell them.
Often, we are asked by firms engaged in a partnership (via acquisition) dialogue several questions surrounding when they need to have legal representation in the transaction.
Most would be sellers aren’t familiar with the cadence and specific steps of a M&A transactions, and thus what they don’t know can become daunting or downright scary. Most of your time spent along the journey will be vetting the cultural fit and business terms of the transaction directly with your prospective new partner and your advisors. Ultimately, you will need to get your lawyers involved.
There are two primary points of the M&A process where we see sellers retain legal counsel.
- The Letter of Intent
- The definitive documents (purchase/ partnership agreements)
In general, we would suggest working with lawyers who are not only familiar with M&A transactions, but specifically in the wealth management industry. There are definite nuances specific to our industry that if your lawyers are unfamiliar with will lead them to try and apply other industry standards to this transaction. Their lack a familiarity is detrimental to the overall dialogue and will cost you money as they learn on your dime. So, hire a M&A firm who has done several transactions in our industry.
Letter of intent
In our opinion, a seller should not invest significant time and money in legal expense on the Letter of intent. Of course, have your lawyer review the LOI, but instruct them to only identify any major items that are of concern, do NOT let them try and re-write this document. The reason is letters of intent in this industry, are typically non-binding agreements. They contain the base deal terms that will live in the definitive documents. While you certainly want a LOI with apt detail, and representative of what the parties agree to, this is not the place to spend substantial dollars. Most buyers use the LOI as a
- Indicator that they have a serious potential partner
- A trigger to set in motion the official Due Diligence, transition preparation and legal drafting of documents.
- Mechanism to be locked in one on one with you to determine if it’s a real deal, without you negotiating with other parties (stand still provision)
Once the LOI is signed, the buyer is going to spend substantial time and money to move the transaction to the finish line. They engage their internal transitions team, they initiate official Due diligence, sometimes including a Quality of Earnings report, and they fire up their legal counsel to prepare your definitive documents. They will likely spend (a lot) more money than you will to get the deal done, thus they use the LOI as the indicator that you are indeed serious.
The buyer would prefer not to have substantial changes to deal terms post LOI, but in most transactions something will change from the LOI to the final docs. So don’t spend too much time and expense having a lawyer word smith the LOI to death. We expect the most significant (binding) item in the LOI is a stand still feature which essentially means you are not going to negotiate with any other party post signing the LOI for a period, say 60-90 days, to allow you and your new partner the opportunity to go through the remaining process without the noise of other buyers. This is standard and should not be viewed as a negative.
The definitive documents
This is the place to have your legal team focus their time and efforts. The definitive docs are where the action is. All the provisions of the LOI, and a lot of detail that wasn’t in the LOI will be in these form agreements. Have your legal team dig into these agreements and modify them according to what they feel is acceptable.
A word of caution. Most buyers, in particular the larger ones, will not want to change much in their definitive documents. The basic rationale is they don’t want every set of deal docs amongst all their acquisitions to be materially different. If they did, the enterprise value of the firm would potentially be degraded due to the lack of consistency of their form agreements with partners. Think of it this way, once you are on the other side of the deal, and presumably a shareholder, you will want the next acquisition they do to be just like yours. I would expect that the larger the firm, and the more acquisitions they have done, the more rigid they will be in amending their base agreements. They will get very frustrated with lawyers who don’t heed their position up front, essentially “don’t try to re write these agreements”. So, know who you are dealing with, else you will waste a lot of money, and time only to wind up in the same place where you started.
Allen Darby is CEO of Alaris Acquisitions, a mergers and acquisitions consulting company for the wealth management industry. Contact him at allen.darby@alarisacquisitions or by telephone: 704-756-7160. Book time on Allen's calendar here.