Optimizing the Role of Legal Counsel in M&A

17 Feb Optimizing the Role of Legal Counsel in M&A

Shoot The Moon

Optimizing the Role of Legal Counsel in M&A

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EPISODE TRANSCRIPT

Mike Harvath  00:06 

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. Revenue Rocket is the world’s premier growth strategy and M&A advisor to tech enabled services companies, and with me today are my partners, Matt Lockhart and Ryan Barnett. Welcome guys, 

Matt Lockhart  00:28 

Thanks, Mike and great to be here. Got an interesting discussion. You know, I like to give updates from the Great White North here in the middle of winter, the beautiful Minnesota where golf courses are opening tomorrow. So you talk about a little upside down world here, but Ryan, how you doing? 

Ryan Barnett  00:54 

Yeah I am doing great. Really looking forward to this topic today, as we each week, we discuss things that we see in our practice. So we’re M&A advisors for IT Services companies. We help buy companies, sell companies, on behalf of our clients. And a lot of what we deal with is really in the deal flow. And as we start to get deals together, and you start to piece together a letter of intent, you start to work through due diligence, and you start to get through things, at some point, you end up bringing in lawyers on both sides. And what we want to look at today is Mike, Matt, the general theme. What are some common things and themes that you’re seeing when working with legal counsel, and how do you really keep them on track to help a deal get done. And so, Mike, I’d love for you to set us up. You know, why was this topic on your mind today? And let’s just get us going. 

Mike Harvath  01:48 

Yeah, sure will. Thanks, Ryan. You know, lawyers are required to get an M&A transaction done. You need to have a legally binding agreement between the parties. Where you document all of the agreement within the four corners are all the terms of the agreement within the four corners of the document, as it’s called. In order to close it is smart, prudent and required, and to that end, you need to have a m a lawyer, someone who’s familiar with Mergers Acquisitions, who does them on a very regular basis, I would say, is, is really the focus of their practice, working on your behalf. You need someone who works on deals in your industry and at the similar size to your firm in a perfect world, and you need someone who is what we often call a deal maker, not a deal breaker. Sometimes we see lawyers who want to negotiate every little thing that could be negotiated, or want to weigh in on the business terms of the agreement versus stay in their lane around the legal terms of the agreement, and that can create problems and inefficiency for you in working with your lawyers. So what I want to talk about today is you know how to manage your lawyer to an efficient outcome where ultimately you can get their cost effectively, and you can get there very timely and a time in a time efficient manner. 

Ryan Barnett  03:33 

Yep, thanks for getting this going. As you said, lawyers are critical to transaction here at Revenue Rocket, we’re, as we often say, we’re not accountants and we’re not lawyers, but we have to deal with those. It’s as we go through transactions, having a great view into the company and understanding the financials is core to striking a deal, and understanding that legal process is also core. So Matt, I know that you even come from a family of lawyers, right? And we’ve talked about this podcast before, but you know, what are the key responsibilities of that M&A lawyer, and how are they different than an advisor from Revenue Rocket? And that’s my first question. And B, you know, when should you get a lawyer involved in that process?  

Matt Lockhart  04:16 

Yeah, sure, Ryan, I think it’s to Mike’s point, you can’t get it done. There’s good, there’s bad, there’s great, right? And all flavors in between, you know, maybe let’s start with your second question, when to get them involved. You know, obviously all of our clients have legal relationships, and they’ve had these legal relationships and the establishment of their firm, you know, for contract matters and or issues that that come up with their firm, oftentimes what we see is, is that they is that, you know, sometimes. Sometimes founders and and business leaders think that, well, I’ve got legal representation and, and, but to Mike’s point, does is that business lawyer that they have involved experienced in M&A transactions and, and oftentimes not. Right? So when you are considering a transaction, I think that it’s a good time to understand if your lawyer has the representative experience and or are there partners in that firm that have the, you know, required M&A experience, and the M&A experience that is relevant to your particular firm. Now, that’s different than getting engaged. Right getting engaged, it can be appropriate to be to to start getting a lawyer engaged in the LOI process. Oftentimes, that’s not an absolute requirement. Sometimes just giving them notice as to where you are at in the process and giving them a view into the LOI is, is, is good, whether or not they get on the clock and and and have work to do on the LOI is, is really somewhat dependent upon the complexity of the LOI. Remember that almost all LOIs, the the binding terms, don’t really have a distinct impact on the deal themselves, so maybe sometimes in the LOI process, more often in the post LOI due diligence process, when It really comes to the absolute necessity of having legal representation, which is part and parcel to all of the specific legal documents and the completion of the ultimate legal document that purchase agreement, employment agreement, potentially shareholder agreements, buy, sell agreements, etc, etc. That is the the distinct value and need of having that legal representation in place. And I think that that Mike made, also a really good point of distinguishing with your M&A lawyer. What are the specific legal aspects of an agreement? And there’s oftentimes a gray area in between the legal and the business decisions within an agreement. And then there are aspects which are, you know, more purely business aspects of a transaction, of a relationship that are, are not as important from a purely legal perspective. 

Ryan Barnett  05:20 

So if I think through this right, the lawyers real role in the M&A transaction, and a lot of it is a lot of risk that they’re dealing with on both sides. The actual documentation of the agreements that are coming through, these are extensive documents that really require expertise on the M&A side. Mike, have you seen like a generalist lawyers be able to pull, be able to work effectively within the M&A process? 

Mike Harvath  08:55 

It’s pretty hard. Ryan, I mean, we’ve seen what we’ll oftentimes call general practitioner lawyers, or lawyers that review contract business law, try to do it, but oftentimes they don’t know what’s market. There’s a term that you’ll hear from lawyers and M&A advisors, what is market? What are the market norms within a particular industry? You know, we can bring that experience to bear. But if your lawyer doesn’t have understanding of the specific risk mitigation approaches, tactics and norms within an M&A transaction within the world of technology and IT services, then they’re not really going to add a lot of value to the discussion, they’re going to get hung up on minutia. And anytime your lawyer gets hung up on minutia due to usually due to lack of experience in a particular domain, because they’re learning as they go. That costs you money, right? It’s a direct correlation to. The legal fees, and the deal is how much time your lawyer spends on your deal. And if they’re smart lawyers with a lot of experience in in your industry, in this case, IT services and that’s what they do. They do M&A deal that’s their main purpose for being then you’ll find it usually to be a pretty efficient process, because they won’t have to be learning as they go around things like cap and basket around liability or escrow terms and time and amount, and you know, a variety of things that are standard fare in purchase agreement.And I think also because of that, you want to make sure that, again, back to beat the drum here on the experience that you know, they probably worked with advisors either with us in the past, because we certainly know lots of lawyers that work in the space or other M&A advisors that work in the space. So there is an already established working relationship which can make it much easier for you and more efficient. And when I say more efficient, that translates into, typically, a lower billing amount or a less expensive legal bill as you work through a transaction. So bringing in the right people and the advisor and M&A lawyer side is actually way to save money and further fortify your ability to get a transaction done. 

Ryan Barnett  11:44 

And it makes sense, Mike, both of you, Mike and Matt, have talked to the past about lawyers kind of trading deal points and trying to look at kind of a point here or a point there. Is that constructive in the M&A process? Matt, maybe you want to run with this is, is there, I guess, I guess a general question is like, I mean, how do we make sure that we’re looking at getting that deal moving forward, compared to kind of going off on one side of each other and and horse trading a bit? 

Matt Lockhart  12:19 

Yeah, Ryan, it’s, it’s an art and a science, right? One of the things that we do, I think we do it pretty well, is to set the stage appropriately, right? And when our clients enter into a letter of intent, we make sure that everybody is is intentional, if you will, pun on words intended in terms of what they’re trying to do in moving forward. You know it obviously a deal is not done, and the the quote, unquote marriage isn’t certified until a deal is closed. But entering into that letter of intent shouldn’t be done lightly, and it should be done with the quote intent to proceed and and complete the transaction, and so ensuring that corresponding legal counsels understand that and understand the excitement is is absolutely critical, and then as early as process as possible in the legal process, identifying the main issues that need to be resolved and agreed upon, and setting aside those main issues from all of the other issues and and really guiding our clients to be aware of those and and, and working with their lawyer in terms of, what is the strategy to come to agreement, what are the boundaries that are acceptable and, really being involved in getting ahead of those major issues and then also coaching and leading the corresponding legal counsel to be as efficient and effective and timely with all of the other issue, you know, all of the other legal points, if you will, and and so you you can, you can save time and be as efficient as possible. At times, helpful to have ongoing all up. Calls most lawyers like to sort of oftentimes, you know, say, Well, no, I, I’ll work with I’ll work on this alone, and they’re just more comfortable in that space. But at times, if there’s challenges, having all up calls in which they can be reminded of the intent of both parties and clearly communicate what is business decisions versus non business decisions as a means to help the corresponding legal counsels move things along sooner rather than later. So it is important, you know, and as a listener, if you haven’t been through it before. All you know, legal points aren’t equal, obviously, and yet, get involved early with your counsel as to the points that are going to be most important.  

Ryan Barnett  15:56 

And Matt Mike, I’ll throw this your way, but when you when you get that first agreement. So let’s say you’re selling your firm, and the buyer passes over the agreement. And agreements I’ve seen can be almost on wielding their their law, they’re they’re big agreements. Matt, I think you just keyed in on something important, which is you’ve gotta focus on the the key things that are not the minutia, but what are the key terms, Mike? Are there advice on that you can give listeners, on helping everyone guide their lawyer towards keeping things moving and supplemental to that? What is, you know, what is the expected time frame for legals participation, kind of post due diligence, and Canadian that legal agreement wants to do, just agreed upon in that closing document happens, 

Mike Harvath  16:55 

yeah, from the time we see, I’ll answer the first question or the last question, first, which is, from the time we see a legal agreement till the time it’s negotiated the deals close is probably 30 to 60 days. I’d like to say 30 days, more than 60 days, but that’s kind of a typical timeline. A best practice for that is to get the original agreement from the buyer. Typically, they offer the agreement, not always, but I would say the vast majority of time, the buyers will offer that first agreement. If you’re a seller, you should then have your sellers Council red line that agreement, review why they redlined what they did with you, point by point, and get your alignment and agreement on that you may tell your lawyer at that time that a certain thing isn’t important to fight about you don’t care about this particular point could be anything from you know, the length of your escrow hold back for your reps and warrants to the amount of a particular indemnity is going to be in The agreement, but you should be clear with your lawyer early and often about what’s important and what’s not before the red line goes across, and then when the red line comes across to back to the buyer, it’s typical that either there’s an issues list or the red line comes across back to council, and that a best practice would be to hold an all hand meeting with the buyer, the seller, their respective council to page, flip the agreement and go through each issue and discuss its business intent and relevance in the deal. And whoever you know, if it’s your council that red lined a specific point, they could make their case for why they did that. And likewise, the buyer who originally authored the language could make their case for why they authored it the way they did. And if there’s discussion or an impasse, as the folks that drive the business intent and the desire to merge or acquire or sell, you can add clarity and provide guidance to your council at that time in the open. And the advantage of that is, in our experience, is that most of the issues in the agreement actually get resolved, and that call, it can take a long time, it can take hours, but many of those issues get resolved, and then you typically get down to a handful of salient points where you may have a disagreement, and in that first meeting, it might be a takeaway that either side will propose coming back with different language, and that’s a good logical step to attract the ones that you couldn’t resolve on that first call. And then when they do that, some of them will be able to be resolved between you and your council. Say, you know, the new proposed language is fine, or the new. One’s language isn’t fine, and we’re going to propose something else. And so you resolve a few more issues, and then you send what’s called the turn of the document, which is when it goes from your lawyer after their input, back to the other side and vice versa. Then you have another call to resolve what remains open until you’ve resolved all of the open issues in the agreement. Now, it’s common that this agreement will come in stages, and that you’ll start with a definitive purchase agreement. Shortly after that, you may get a shareholders agreement if you’re going to what’s called role equity, if you’re a seller, you’re going to have to do that and legally fortify it between all the parties and the lawyers. There may be an employment agreement if you’re staying on. There could be, you know, a variety of other agreements pursuant to the business that would need to be attached, depending on the nuance of the transaction. But in general, if you follow this rhythm of trying to have open negotiations, versus conferring just with your lawyer, and then having the lawyer take it across to their lawyer, and they have to confer with the other side, and then it comes back across, and you do that again, our experience is that you can save a material amount of time and money negotiating in the open versus not. And we’ve seen sort of extremes of this, where, you know, if people refuse to do that, you may have upwards of, I think, the record, I’ve seen 32 turns on a purchase agreement where the parties and the lawyers didn’t want to negotiate in the open, they wanted to do it with their client offline. Took a long time to get that transaction done, and the fees were exceptionally high all the way to I think we’ve done Su is about five or six turns, if everyone’s open, in the open, in a very short period of time, getting the document fortified and complete, particularly if people come to the conversation, both your lawyer and yourself with a desire that you’re here to Make a deal, not make an obstacle and find a path that everyone can live with in sort of finding the middle ground within the agreement. And so I think certainly best practice means you’re more open and transparent and timely than not. I think there has to be a reasonable cadence of those meetings. Likely they shouldn’t go more than a week, or there should be between them in an effort to get things closed in a timely manner. 

Ryan Barnett  22:50 

Absolutely, I think those are all great points, the collaboration, bringing things in the open. Don’t kind of avoid that, going back to each respective table. Matt, I’d love for you to just tell you know, can you help tie some of this together? Why is this so important? Why? Why is managing and handling lawyers something that starts to become critical in that M&A deal flow?  

Matt Lockhart  23:15 

Yeah. I mean, again, the intent is that two parties have seen an opportunity in in which there’s, you know, real value creation for for both parties, right? A you’re you’re going to do better together. If, in the case of a seller, it’s an opportunity to find a great home and and transition that is super important objective, right? So there’s, there’s real value to be had, and, and you know, you’ll hear often time kills all deals, right? And so if a legal process becomes overly arduous and, or challenging and, or negative, combative. Well, that has, you know, that puts a deal at risk and and again, the there’s a real opportunity for value creation for all parties. And so, you know, the more that you can minimize that, the better and the more efficient. And to Mike’s point, open and transparent, the you can be in the process, the faster and easier and less painful that process is now another you know, something that’s sometimes lost in the process. And, you know, lawyers are lawyers by nature. And they like to they they like to win, and sometimes they like to fight. And you know, it’s kind of why they got into the business in in one way. And so sometimes they may lose sight that their client. Clients have a real desire to go win with the corresponding party, and if those legal negotiations bog down and or, you know, become challenging, there’s a risk to the relationship. And the most important part is, once the deal is done is moving forward together and going and creating that. You know, one plus one can equal four or five or six opportunity. Well, if there’s challenges in the agreement and and there’s negative feelings, you know, between the parties, the principals and and the partners, if you will, moving forward. You know that’s that’s a risk to, you know, the realization of that opportunity. So it can be a risk to the deal. It can be a risk to the relationship. It can be emotional and painful, and that’s hard. Another point is is, you know, remember that both firms need to continue to operate successfully, and this is can be an undue distraction that can take away time from continuing to operate and lead the business. And so it is. It is in everyone’s best interest to go into it with the understanding that both parties want to proceed and get a transaction closed, and they want to do so as efficiently as possible so they can move on to the to the fun work of growing a business together. And so it really is critical. Yep, it’s it’s also the end of of a deal. And so, you know, emotions can be heightened naturally because of that. Change is in the air, and the the easier this can be, you know, the better. 

Ryan Barnett  27:08 

I think that’s a great point. There can be such visual, visual reactions to seeing the legal agreements and and the first time reading through it, especially if you’re not coming from a legal background. And it can be something that is a sellers, and I think especially sellers, when they first see that turn, they can really, it can be a bit overwhelming. At the end of the day, you’re trying to come up to an agreement to work together, come up with a deal that is that what that you’ll have to work together in the future. And so getting through this is critical. Mike alternates, really for wrap up, but is there any lesson that you’re willing to share that you wish more clients knew about handling lawyers? And then I’ll feel free to wrap up. 

Mike Harvath  27:55 

Yeah. Sure thing. You know, lawyers are there to help mitigate risk for you, that’s what your lawyer does. You will never eliminate all of the risk in an M&A transaction, even though you may have lawyers that try to do that or as near to that as possible. But when you get into the final minutia, oftentimes it doesn’t matter all that much. I was taught by a very sage M and A advisor investment banker one time that said, you know, the last probably 5% or final mile of the negotiations usually doesn’t matter all that much. You know, to win a deal point here and win a deal point there. He said, The overarching value around the combination and the value it will create cannot be forgotten, or even in some cases, the whole deal scrubbed for a very minor deal point right at the end. It doesn’t make sense. But oftentimes people can auger in on those and just say, look, if I don’t win this deal point, because both sides typically in a deal that gets done feel like they gave too much. They both, if you ask them independently, will say, Wow, I really had to give a lot on that deal. And if they’re both saying that, they’re saying that as a seller or a buyer, and the other side is saying the same thing, that it’s probably the right deal. You met in the middle, you made compromise, you thought about win, win, and you’re going to need support in making some of those decisions. That’s why advisors, M&A advisors and investment bankers are involved. That’s why lawyers are involved. That’s why your accountants involved. Because you need that expertise and that deal savvy of how to get these done. And. Right? Because it’s easy to get worn down. And you know what? I often say, there’s like 150 things to negotiate in a purchase agreement, being a little bit facetious, but there’s certainly many, many of them, and oftentimes you just get deal fatigue from having to make decisions, and you need to lean on your advisors and partners to help you keep your eye on the prize and to move forward and to make a practical decision. Lawyers and parties can get stuck on deal points that don’t matter, just because they’re getting bogged down in their respective roles or making the decision. So I would encourage you to give direct and clear guidance to your lawyer, take their input. I would say the same for your M&A advisor, and be decisive. Come to the deal thinking about win, win, not win, lose. It’s not how these work. The people that successfully get deals done are ones that are looking for, you know, a place they can go together, that they can’t really go apart, and that they’re wanting, really, all the parties to win and come to consensus and compromise in that spirit. And with that, we’ll tie a ribbon on it for this week’s Shoot the Moon podcast, I encourage you to tune in next week. We’ll unpack further ideas and growth strategies and M&A tips and tricks to help you get your next deal done. So with that, make it a great week. Take care.