(but Here’s Why It Sometimes Is)
A common theme of questioning I get in the early stages of a Buy-Sell representation is: Does this Have to be a Fifty Page Purchase & Sale Agreement? or Is This Going to Cost Me Tens of Thousands of Dollars in Legal Fees? The short answer is No, it rarely will for the deals we transact. The longer answer (and the two most common words out of any attorney’s mouth) is: It Depends. Sigh. Ok, on what, you ask? Well, here are some of the key variables…
Major Factors Impacting Complexity (and Length) of PSA:
- Stock vs. Asset Purchase
o Generally speaking, our asset purchase transactions tend to be less complex, therefore require less drafting relative to stock purchases
- Type of Entities Involved
o Tax and corporate governance matters need to be carefully considered in structuring the agreements and related documentation. This includes everything from taking 338(h)(10) tax elections to accommodating a 401(k) (ROBS) acquisition, to converting out of an S-Corp so owners can have multiple classes of equity and related rights.
o Number of owners: both for the target seller and the buyer – the more owners (shareholders or members), generally the more complexity
- Geographic Scope of Business
o Transactions involving businesses that conduct substantial activities in other states and/or other countries are necessarily more complex
o Larger employee bases (50-75+), unionization, workforces in multiple jurisdictions
o The docs may have to accommodate requirements of the lender(s) with respect to specific terms in the PSA (and, which may also include building and/or equipment inspections, formal valuation reports, personal financial statements, and life insurance)
Major Factors Impacting Budget:
- Extent of Desired Involvement in Due Diligence
o How much do you want us involved/performing your due diligence (either for Buyer, or assisting with responding for Seller)? This is largely a function of your risk tolerance and the…
o Experience of your internal management team, and CPA/tax advisors in M&A transactions
- Extent of Desired Involvement in Negotiating “Business” Terms
o Intermediaries/Brokers: we like it when they are involved. The process tends to be more organized and under the guiding hand of an experienced deal-maker. Clients can usually “leverage” this resource to achieve substantial consensus on the detailed terms and conditions, leaving us focus on addressing any remaining concerns.
o The more “push back” from the counterparty (the party on the other side buying, or selling the business, as the case may be), the more we are likely to be involved in multiple “revs” of document draft exchanges. For instance, where they are desirous of channeling all of the definitive agreement negotiations through their legal counsel, and they are taking entrenched positions. On the other hand, often-times an effective strategy is to bring the principals and/or intermediaries back into the fold to be front and center negotiating many of the details of the business terms that weren’t addressed in the LOI, with legal counsel stepping back in the limited scope of raising material legal issues and ensuring the language drafted reflects the parties’ agreement.
- Experience/Sophistication of the Counterparty
o Quality of accounting and record-keeping. It probably goes without saying, but the more organized and experienced the counterparty is, the smoother and less expensive the process is going to be for all involved. This is one reason why sometimes the “small” deals can end up being as time-consuming as a much larger one.
o Experience of their legal counsel in M&A transactions, and the quality of their document templates (to the extent we are using the counterparty’s templates) also weigh heavily in the mix.
At the end of the day, the PSA is one big exercise in risk management. Our role is to help clients 1) spot the potential risks, 2) understand them – which involves discussion of probability and magnitude of impact – then 3) address them. We “address” them by helping clients prioritize the issues (i.e. which are you willing to “trade”, and which are “show stoppers”), taking a solution-oriented approach toward achieving consensus with the counterparty, then carefully drafting them in the PSA. It’s an approach developed through nearly 100 transactions. Experience matters, and we hope ours will result in an efficient, successful transaction for you.