One of the most powerful decisions you can make when choosing to sell, acquire or merge a business is the decision to engage with a commercial lawyer to work with you through the process. The commercial lawyer you choose and when you engage them can significantly impact the negotiation process, the end result and what each party will be able to do once the deal is done.
In this article we explore exactly what a commercial lawyer does and the benefits of engaging a commercial lawyer for mergers and acquisitions and explore how to get the most out of the process.
What are the advantages of engaging a commercial lawyer for mergers and acquisitions?
The main benefit of engaging a commercial lawyer is the ability to have their experience guide you through the process. A commercial lawyer can help you understand the entire sales process and navigate the journey from negotiation to settlement. They can flag the key elements of the transaction, highlight areas of risk and provide you with strategies to help you anticipate and navigate the process and importantly, to get the best deal.
What benefits do commercial lawyers offer sellers?
Helping you get prepared to sell your business
The more prepared you are, the stronger your position will be. It’s important to engage a lawyer who will work with you to understand the current status of your business and who can assist you to transition your business to make it more attractive to potential buyers. An experienced commercial lawyer can help you make impactful changes to maximise your exit.
Identifying your goals and deal-breakers
All business owners have different goals and beyond the excitement of the deal, there are serious questions about your future that you need to explore. An experienced commercial lawyer can ask you the questions that you might not realise you need to consider and help you identify your goals. They can then help you develop a strategy for making those goals a reality. A commercial lawyer can also assist you in identifying your deal-breakers and decide when to walk away.
Providing you with clarity
Engaging a commercial lawyer will help you gain clarity. As a seller you will need to consider and workshop the following issues.
What are you selling?
Are you selling your entire business or are you selling components of it? Does this include your business name and your intellectual property? It may be possible for you to sell some parts of your business and not others.
What can you sell?
Do you know what you own, what you lease and what you licence? A commercial lawyer can help you identify what you can sell and how you can transfer things you don’t own outright.
Do you have assets that you haven’t valued that need protecting?
If you document the “way we do things around here” will it make your business more attractive to a purchaser? A commercial lawyer can help you identify the key documentation that will make your business look and feel more professional and cohesive and which an incoming buyer will be looking for as part of their due diligence.
Can you see your business accurately?
As business owners it is easy to get bogged down in the technical and day to day operations of your business. A commercial lawyer can help you see your business from the perspective of a buyer, they can look at your operations and structures and help you identify assets that you didn’t even realise were valuable or areas for improvement, before putting the business on the market to avoid issues in the due diligence phase of a sale.
Do you have the right business documents in place?
A commercial lawyer can look at your existing operations and help you identify gaps in your business documentation. They can assist you by documenting things such as that key contract that brings in a large chunk of your revenue or secure the supply terms that were previously a handshake deal – all arrangements which any buyer will require to be documented before a sale.
Where is your personal exposure?
A commercial lawyer can review your existing business agreements and identify your areas of exposure. Many business owners provide personal guarantees in key supply contracts, and it is important that these get addressed in any sale.
Do you understand your structure and does it facilitate what you want to do?
A commercial lawyer can help you work through structure-based considerations such as:
- Does your current structure allow you to dispose of the assets you wish to dispose of and keep the assets you wish to retain?
- Does your structure make it harder to sell your business in a way that is appealing to buyers?
- Do you own everything in the right entity, or do you need to transfer some of your business assets into a different entity?
- Who else should you talk to and when? A commercial lawyer can help you identify what third parties you need to have a conversation with, such as your financier, landlord, accountant or other advisers, to ensure that the sale process runs smoothly and you achieve the best outcome you can from the sale.
Protecting your assets
When you engage in the sale of your business you provide various information about your business to the potential buyer. When you work with a commercial lawyer the parties enter into Non-Disclosure Agreements and control the release of information to ensure that your assets, including your intellectual property such as clients lists and know-how, remain protected and important information such as supplier lists are not able to be used by the buyer if the sale doesn’t go ahead.
Structuring the sale
When it comes to selling your business and the assets there are a number of ways to structure the sale, such asset sales, share sales and earn outs. A commercial lawyer can talk you through the various positives and negatives of each option and help you tailor the appropriate sale structure for you.
Exploring the reality of mergers
When you are merging it is important to really understand who you are merging with and what your business will look like after the sale. The transition from business owner to part-owner is significant and you need to carefully consider what issues are important to you. A commercial lawyer can work with you to help you understand the important issues such as how decisions will be made, your ongoing obligations and responsibilities, what operational decisions you will have a say in, the costs associated with the merger and the exit strategy if it doesn’t work out.
Top tip for a successful sale
Understand that it’s never too early. You might think that you don’t need to engage a commercial lawyer yet because you aren’t ready to sell, or you haven’t negotiated a sale, but that is the perfect time to engage a lawyer. When you start the process early you can be prepared and start making the changes needed to make your business more attractive to buyers in the future.
Start by compiling your key business documents such as supply contracts, leases, employment contracts and finance documents, and then make an appointment to have a business “health check”. That will allow an experienced commercial lawyer to review the key aspects of your business and help you identify the gaps that need filling to prepare for a successful sale.
What benefits do commercial lawyers offer buyers?
Knowing what you are buying
Businesses are complex organisms with lots of components. There are a number of key areas that should be explored before you sign on the dotted line. A commercial lawyer can help you navigate the due diligence process to identify exactly what you are buying and from whom, and to manage any potential risks or downside. They can guide you through the various searches, investigations and reviews you should undertake and advise you on the results. This process is critical because it ensures that there are no legal circumstances that impact the value of the business and allows any issues to be addressed as soon as possible.
Structuring the deal
There are numerous structuring options available to you when you purchase a business. A commercial lawyer can work with you to identify your current business and asset structures, areas of risk and exposure and your goals and aspirations and suggest the appropriate structure to protect your assets and maximise your future business opportunities.
They can also:
- Assist you in the practicalities of establishing entities and transferring assets.
- Review the seller’s current structure and recommend the appropriate way to acquire the business and associated assets to reduce the risk you are taking on.
- Prepare any agreements between your entities such as personal property leases, commercial leases, loans and service agreements.
- Work with your accountant to ensure that the structure of the purchase is the best one for your tax and financial position now and moving forward.
Closing the gaps
A commercial lawyer will help you to identify the areas of exposure in the business you are purchasing and provide solutions to help you close any gaps. From ensuring material contracts such as leases, supply agreements and licences are in place, to ensuring that assets are correctly transferred and key employees are retained post-purchase, the experience of a commercial lawyer will help you address any issues identified in your due diligence. In addition, where new documents or agreements are required, a commercial lawyer will help you negotiate the terms of these key contracts.
Helping you navigate the negotiation process
A commercial lawyer can help you identify and negotiate the key issues that matter to you. They can ensure that the big-ticket items and any representations that have been made to you by the seller about them and the business and its performance are incorporated into the sale contract.
Dealing with security interests
A commercial lawyer will undertake the settlement process for you. As part of this stage, they will ensure that any assets the seller transfers to you are transferred free of any encumbrances and security interests.
Protecting your investment
A commercial lawyer can help you identify the value in the business that you are purchasing and provide solutions to help you protect these assets. Areas they will explore with you include:
- Key persons: Who are the key persons in the business and how can you secure their on-going involvement?
- Key contracts: What are the key contracts in the business and how will these be assigned or transferred to you?
- Key clients: Who are the key clients and how will they be transitioned to you?
- Training & tuition: What training will the seller provide to you and when will this occur?
- Intellectual property: What intellectual property exists, who owns it and how will it be transferred to you?
- Seller’s actions post-settlement: What will the seller be entitled to do after settlement?
- Will the seller be restrained in any way: Such as from contacting clients, engaging in competing business activities, or poaching staff. And if so, for how long?
Preparing your business infrastructure
Your relationship with your commercial lawyer doesn’t end when you purchase or acquire a business. After settlement your commercial lawyer will work with you to set up and maintain the legal infrastructure necessary to operate your business. They will work with you during your business lifecycle and provide advice and support as you face key issues and challenges. They should be there for the journey to get the most out of the relationship.
Top tip for a successful acquisition
Show a commercial lawyer the terms sheet before you sign. One of the best tools in the acquisition of a business is the terms sheet. A terms sheet clearly outlines the key sale terms and provides the basis upon which the acquisition documents are negotiated. By engaging a commercial lawyer at the terms sheet negotiation stage, you will ensure that all elements of the business acquisition are adequately addressed, and all verbal discussions are captured. Early engagement means you will have visibility of the key legal issues early and start off on a strong footing.
Top tip for a successful merger
Consider culture and alignment. When it comes to exploring a merger opportunity, one of the biggest issues is culture and alignment. It is important for you to understand the key aspects of your culture both spoken and unspoken and ask questions of the other party to ensure these are aligned. We recommend that you take the time to identify this aspect of your business and how it operates to ascertain your must-haves and deal-breakers, then meet with staff at various levels of the other organisation to see if they share the same business philosophy.
What are my next steps?
At MacDonnells Law our experienced team can guide you through the sale, merger and acquisition process and work with you to get you the best result.