Lexi Grant (L): Andrew, welcome.
Andrew Ritter (A): Hey, nice to talk to you again.
L: Yeah, you have helped lots of entrepreneurs through the legal parts of selling a business, including me.
We got to work together a couple years ago when I sold a content site, and you supported me as my lawyer through that process, which I really appreciated.
Can you talk about some of the common mistakes that you see sellers make?
A: Sure. So I think one thing that you and I talked about a lot is, well, what’s the appropriate time to get help?
And one thing I think you often see is you see people wait a little bit too late in the process to bring in legal.
And the right point in the process probably depends on what sort of process you’re running.
So if you’re working with an investment bank, an M&A broker, a business broker, M&A advisor, something like that, I think the right point in the process is usually their engagement letter to have a real sort of M&A lawyer that knows what’s market can help guide you through that.
And I’ll probably talk more about that.
If you’re not going that route, then I think the appropriate time is when you have an LOI or a term sheet or something else that’s going to provide a big picture overview of the transaction that you’re agreeing to.
And what you see a lot of first time sellers do is they wait until they’ve already basically agreed to a deal. So they wait until they have an LOI or a term sheet and sometimes reasonably sort of into diligence.
And then they say, “Okay, now I need a lawyer just to pay for the transaction.” And it’s very hard to revisit some of the points that have been agreed to in the LOI or the term sheet when you come in at that stage.
And if you take just one sort of example, so many deals can be structured as asset deals or equity deals. And if it’s structured as an equity deal, you can decide whether or not you’re going to structure it as an asset deal for tax purposes, which is maybe a little confusing, but it’s a really common sort of thing to deal with, which is, “Hey, we’re going to buy your business, we’re going to buy the entity, but we’re going to structure that so that we’re taking ownership of the equity, but we’re getting asset deal treatment.”
What an inexperienced seller isn’t going to know is that there’s negotiation points that you can have around that about, well, “How do I, seller, get compensated for the incremental tax costs associated with what people will call “basis step up”?”
And certainly once I think you get above probably around like 20 million or so, it becomes pretty common to get what people call “gross up,” where seller basically gets compensated for those incremental tax costs. And if you don’t even ask for it, you’re not going to get it. And if you don’t have it in the LOI or you don’t have it in the term sheet and you go and you try to ask for it down the road, once you’ve already agreed to that basis step up—that asset deal style structure—it’s really hard to revisit something like that. It’s a big sort of economic point.
Same thing with earnouts. There’s a lot of nuance to how you structure an earnout. Once you sort of papered it in the LOI, really, really hard to sort of revisit that later on. And so I think one of the biggest things is just, well, what’s the right time to get help? And you got to bring them in early enough so that they can help on those big picture sort of points.
L: Let’s pause right there because I think there’s, let’s talk about that one a little bit. ‘Cause that one is really big, and I see a lot of founders make that mistake too. Can you talk about what an LOI is and what it helps a founder do?
A: Sure. So there’s many different M&A processes. I think a very, very common one is that whether it’s the first step or it’s the second step, it can kind of vary is—at some point there will be what’s called a “letter of intent,” which is a non-binding it could be two pages. It can be seven, eight pages. Sometimes it can be longer. Sometimes you can attach a term sheet to the letter of intent, but it’s a non-binding offer that basically says, “Hey, here are the terms that we’re agreeing we’re going to buy your business on. Here are the terms that you’re going to be employed big picture post-closing. Here are the conditions to us moving forward with the transaction has those sorts of things.”
Then, oftentimes it also has certain binding provisions. So it’ll have exclusivity, which basically says, “Hey we’re going to invest. We buyer are going to invest a lot of money trying to buy your business. Once we sign this LOI, what we don’t want you doing is shopping the deal while we’re doing diligence and we’re spending money on lawyers, drafting documents.”
So for some period of time, after you sign this LOI, you’re going to have to stop talking to other people. You’re going to have to end any kind of current communication. Sometimes it’ll say that if you get any offer, you have to, let the buyer that you’re under LOI know. Sometimes the buyer’s draft is going to say you have to give them the details of any offer that comes in during the exclusivity period, which I think sellers typically push back on. But you’ll have exclusivity and then you’ll oftentimes have confidentiality. Sometimes confidentiality is a simple it’s just saying, “Hey we’re bound by the NDA and the NDA applies to the LOI.” Sometimes there will be a little bit more of a fulsome sort of confidentiality provision in the LOI. Those are typically the only two binding points.
I think if you’re not represented, you can end up—especially if you’re not represented—you can end up with other binding provisions. Like a “binding diligence provision” is not an uncommon thing for a buyer to throw into their LOI. That basically says that you have a contractual obligation to give them everything that they ask for in diligence, which is off market for executed LOIs and you should push back on and you can have it, but it’s typically a non-binding provision because you don’t want to say, “Hey, I don’t want to share X with you because I think if the deal doesn’t happen, X is going to create risk for my business.”
You don’t want to have contractual breach risk associated with balancing. “How do I get the deal done while protecting what I own?” Right? So that shouldn’t be a binding provision. But LOIs are usually that sort of point where we say, Hey, are we aligned in principle on what the deal is going to be? And you, even on a non-binding basis, there’s a lot of value in having that in writing. Right? So you make sure everyone’s on the same page because you’re going to invest a lot of money after that.
So, I mean I think I said earlier, $20 million deal is a reference point, like just to use that as an example, especially for the buyer and especially if they’re using debt. They can invest five, six thousand, six hundred thousand or more. Lining up debt, doing due diligence, hire an accounting firm. You know, maybe if it’s a tech driven business, hiring someone to do a tech audit. I mean, very, very involved process where they’re going to invest a lot of capital and you want to make sure people are aligned.
And same on the seller side—I think a little less on the sell side from a dollars and cents perspective because you’re not hiring all these other firms to do due diligence. What we are doing is extending a tremendous amount of time and effort facilitating that diligence process before you even get to spending a bunch of money on legal that takes away from doing what drives value for you running the business.
Before you invest in that process, which in many instances especially for smaller businesses that are more owner operated, you can see right in the financial performance during those couple of months—two, three months—you want to make sure that this is a deal that you want to you want to expend those resources on.
So the LOI is or the term sheet or sometimes you’ll hear it called an “IOI,” although an IOI usually is something a little more preliminary that says an IOI stands for indication of interest. So an indication of interest might say, “hey, we’re interested in the business and we think the value is somewhere in like a range of X to Y.” So it’s a little bit less definitive.
Those things and getting to that sort of signed big picture document that agrees on the major points, even on a non-binding basis—super valuable, super important. And it provides the framework to get from there to to a closing, to getting the deal done.
Even though it’s simple and often times done pretty quickly, and even though it’s non-binding, it’s not a great negotiating position to come back a month later and say, “Hey we actually didn’t have good advice when we agreed to that. We want to change it.”
No one like that, they dig in, they resist probably tease you up where the trade, so to speak, and getting whatever point you need is not really very favorable to you. So as much as possible, you want to—unless something comes out after the LOI—make sure that you’re fully advised and really thoughtful about what you agreed to an LOI. Because that’s the framework that you’re going to invest a lot of time, money, and effort into.
L: Most of your negotiating power, as the seller, is before the LOI, you’re saying. Or a lot of it is the powers. You have more leverage at that point.
A: It certainly arguably goes down after that point. Once you agree to exclusivity, once you’re sort of bound to pursue a deal with them for some period of time, yeah, that has a negative impact on your leverage.
And especially if you’re running a competitive process. So if you’ve hired an investment bank and you’ve got six bidders that are all sort of—which is a good sort of nicely competitive process—if you’ve got six people that are putting in LOIs that maybe, maybe not mark it up in auction drafts or a purchase agreement, maybe give it an issues list, whatever. But that are competing to be the person that you’re going to move forward with, your leverage is really high then because you effectively have a process that is designed and is very effective at getting people to negotiate against themselves. And once you sign the LOI and give them exclusivity, that dynamic is gone, largely. Now you’re sort of negotiating with them and the leverage shifts a little bit more in their favor. So yeah, I mean, your leverage is definitely higher pre-LOI, especially the better the process, the more competition.
L: Yeah, that makes sense.
Before we talk about more things to watch out for, can you tell us a little bit about you and what kind of deals you typically work on?
A: Sure. Happy to do that. My name is Andrew Ritter. I’m a corporate partner at Wiggin and Dana, which is about about 170 lawyers, East coast based firms. We’ve got a presence from, from New England down to South Florida. We’re a full service firm. We’ve got litigation, we’ve got corporate, we’ve got real estate, we’ve got estate planning, all sorts of other things. I’m in the corporate group, but I focus on M&A.
Our M&A group is what I’ll call lower middle market, middle market group, which basically means we focus from deals on the few million up to $500 million. We probably do a couple handful, couple handfuls of deals between a hundred and 500 million each year that we do a lot of deals, between ten and a hundred.
And then we do some smaller deals, enough where that’s certainly part of what we do, but it’s a smaller part of what we do.
And that’s kind of what we’re just built to do.
We’re industry agnostic. We don’t do—there’s not any sort of particular industry that we focus on. We’ve done deals that I think almost any industry you can think of. So a lot of tech deals, SaaS deals, tech services deals. We work with strategics, we work with private equity firms, we work with portfolio companies, we work with tech venture backed companies. We work with family owned businesses that are multi-generational any sort of business you can think of. And that sort of range of value we’ve worked with probably every type that is out there.
The one thing we don’t do—I think a lot of us have done it prior in our career—but we don’t do now is we don’t do what are called “take privates.” We don’t do deals where the target is a public company because those deals you need to be built a certain way to handle those transactions. And we’re not built to do that. That’s not what we’re focused on.
So we do private target transactions, or maybe it’s a public company that’s carving out a division. And we’ll do that sort of work.
L: Would you, would you work on a deal that was like half a million dollars? I know, because you and I have worked on a deal in that range together. Is that still something that you take on if someone’s listening to this podcast and wondering whether they’d be a fit?
A: Yeah, definitely. We’re very flexible. I think thoughtful about how you efficiently approach a process based on what sort of business you’re talking about, what sort of size.
There’s a lot of different flavors to small six-figure deal. So you can have just conventional small business. And we do those deals. The way we try to do it is just be very thoughtful and efficient and streamline the process and there’s little things you can do: you can try to minimize the scheduling burden that you have, and obviously simplify the legal documents and not introduce unnecessary complexity.
Like there’s a lot of that, which is unfortunately, on the sell side, oftentimes, to some degree driven by the buyer. And so you kind of have to work with buyers’ counsel and make sure that they’re rowing in the same direction and trying to keep things simple.
And I think that’s what we had in our deal. I remember right, I think the buyer in our transaction proposed a 10- to 12-page purchase agreement. I mean, that you can negotiate efficiently, right, especially because you’re not handling things with the level of nuance you might see in a hundred million dollar deal. So, the negotiation’s just a little bit simpler.
There are other flavors to it too. So I mean, there are six figure deals that are acqui-hire deals where the deal itself is six figure payment, but there’s seven figures of value that’s contemplated post-closing and various forms of compensation. Those deals are a little bit harder.
You know, there’s distress deals, where maybe it was a business that raised $15 million of capital, but is now selling for six figures. Those are a different animal and those are challenging, but we definitely do it and we just try to be thoughtful about what type of six figure deal is it?
What level of complexity is appropriate for the deal? And we figure out a way to land there.
This is true when we worked together, too. Certainly not the cheapest option for that. You can find people will do a $500,000 sell-side transaction for $2,500, but I think you’re getting what you pay for.
And if you’re a very experienced person in a transactional context, especially M&A context, maybe that’s fine.
L: For the record, I thought you were reasonable when we worked together and so people know you work on an hourly basis, correct?
A: Correct. Yes.
L: I appreciated that you tried to keep the simplicity, keep it simple and try to get rid of some of those complexities, both for the cost purposes, but also for me, personally, because that made it easier on me.
A: I think this is true of a lot of smaller sell-side transactions: It was just you running the business and running the process. You can only do so much. It’s important for you from a bandwidth perspective that whoever you’re working with—whether it’s me or someone else—keeps it simple for you and doesn’t overwhelm you with things that you just don’t need to get into.
Your process had some ups and downs, like if I remember, which many, many deals do, especially honestly, many smaller businesses, sometimes the sale process can be harder because it’s too small for what I’ll call a conventional investment banking process that really drives and creates that structure.
And what was I think key is that just being transparent and having that open dialogue about, “Hey, here’s where we’re at. If we do this this is how it’s going to affect the cost. And let’s be thoughtful about sort of how we’re proceeding and what we’re doing and where we’re investing.”
In our case, I think it worked out well.
L: Yeah. I could tell you enjoyed working on that kind of deal. So, I’m just curious, from a personal perspective—because I know you and I have talked a little bit about how you’ve worked on a few different side projects; you’re interested in working on a SaaS business—what do you find interesting about these types of transactions?
A: That’s a good question. I started my career doing larger deals and that’s great. I’m not going to bad mouth them. Great way to learn and get great experience, and they’re very interesting, intellectually challenging blah, blah, blah. You can talk about how they’re great for a long time, but there are drawbacks depending on perspective.
One of the drawbacks I think I found is that oftentimes you’re working with people that are very experienced or almost always. Working with someone who’s very experienced themselves. Sometimes it’s in-house counsel who’s been an M&A lawyer for a decade and could do the transaction push comes to shove, but they don’t have the bandwidth because they’re in-house and they have a lot of other responsibilities. So, you’re working with someone that kind of knows everything you know. And you’re still as deals get really complex, there’s not black and white answers and so there’s still plenty of opportunity to add value, but it’s just different.
Or you’re working with a private equity professional who’s done hundreds of deals. And very, very experienced and you’re still adding value, but again, a little bit difficult context to add outsized value.
I think the nice thing about what I’ll call lower middle market, middle market, small business transactions is more often than not you’re working with someone that’s an entrepreneur on the sell side and you have an opportunity to help someone go through a transaction where maybe they’ve never done one, or maybe they’ve only done a couple. And there, there’s a real opportunity to add outsized value because you’ve done hundreds and they’ve done none or one or two. And I like that. I really enjoy that.
It’s not that that’s the only thing I do these days. So we do plenty, like I said—I think a little while ago—we do plenty of private equity deals, we still work with very experienced transactional people and that’s great and that’s fun.
But the unique thing about working with people like you is that opportunity to guide someone through something that they have no experience with. And I think there’s a certain… it’s satisfying.
L: I was going to say: I could see how that would feel satisfying.
I don’t even know if you remember this, but I actually remember a moment in my deal where you really supported me that I appreciated, which was: We had a conversation with a buyer who was rather patronizing during the conversation. And I kind of shrugged it off. Being a woman in a male-dominated field, sometimes it’s not that uncommon. So I kind of, I shrugged it off. And then I remember after the call, you said something to me like, “Hey,”—and you didn’t use these words, but basically like—”that guy was kind of being a jerk.”
And that’s where it rolled us into the process of ending up choosing a different buyer to go with, and I sold the company to somebody else. And, again, you might not remember this cause it might’ve been a small moment to you, but to me, I really appreciated you noticing that red flag and calling it out for me as someone who was new to this process and needed that support.
A: I’m guessing I said it in a slightly more colorful way.
A: I do remember that part of the process sort of generally. I will say that bullying behavior, especially with inexperienced sellers—this is something you deal with a lot.
And sometimes it’s patronizing. Sometimes there’s that sort of that overlay. And sometimes there’s not, but the sort of bullying aspect or leveraging, “Hey, we know what we’re doing. We do this all the time. Who are you to question our process?” When they’re telling you something that is significantly off market or significantly sort of pro buyer and ideal sort of terms for them or approach, it’s really, really common. And you just have to, I think, be thoughtful about—you want to be constructive. It doesn’t help to get in some sort of pissing match with the buyer.
L: But that’s why we need someone like you to advocate especially for a first time seller.
A: Because oftentimes people want the founder CEO to stick around to some degree or maybe some maybe a large degree of post-closing. Especially when you’re talking like a private equity buyer. So you deal with what people call rollovers where you roll over a portion of the equity right into the buyer or into the, whatever the post-closing structure is going to be. And you’re anticipated to stick around and become their partner.
And I think it’s also important to be thoughtful about—how people treat you in a deal is how people treat you when they’re under stress, generally speaking. But you also have to assess: Is this person that I want to be a partner with?
I think usually once you get far enough into the process, you’ve had an opportunity to assess that. And there’s definitely deals that people will walk away from at the LOI stage because they’re like, “I can’t work with this person. I don’t trust this person.” But I think you have to be thoughtful about that throughout the process.
Oftentimes, an M&A deal is not a one-off moment in time. It’s the beginning of a longer relationship. And that doesn’t mean that you don’t still deal with that sort of behavior.
Sometimes there’s like a Dr. Jekyll, Mr. Hyde sort of dynamic where there’s one person on the buy side, that’s the person who’s super friendly, that’s talking about how great it’s going to be and how they’re going to take care of you and how they can’t wait to work together and have that sort of like personality and you click, and it’s great.
And then you work with the person on the buy side that is less so. That, I think, complicates the dynamic. That is one of the unfortunate aspects of what we do, but it is what it is. It’s part of the process. It’s a stressful transaction for everyone. Sellers selling something that they built, put a lot of time, effort, or money or combination of those three things into.
And the buyer is spending a lot of money. And that’s stressful too. They don’t want to get burned. So you have to navigate that.
L: Yeah. So, we talked about the LOI. Are there other mistakes that you see sellers commonly make?
A: Well, I guess to go back to what I think I said first, which is: The investment bank engagement letter. There are mistakes to be made there. Because I mean a reputable bank what the sort of starting ask is going to be. And there’s some market things that you negotiate if you have an M&A lawyer that’s done a lot of those. But not everyone starts at that reasonable pro service provider starting point.
Sometimes you see sort of what I’ll call wonky things in an M&A context. I had an instance recently where they were basically talking about value based on a company that’s growing 100% year over year. Obviously, that’s a good growth rate. Eight figure EBITDA. Great business to want to sell. They’re working with an advisor that was telling them, “Well, the valuation is going to be based off three year average EBITDA. We think it’s going to be around the range of X, and I’m going to need a success fee when we sign an LOI. And we’re going to have this tiered structure that’s completed in the first like $8 million of value”—all of which sort of says that there’s someone that focuses on million-dollar deals.
I think, even in that context, is probably like a former accountant or someone that worked in-house at a company, sold a transaction said, “Hey, I’m going to advise people on how to do this now.”
That’s not how companies with eight figure EBITDA with 100% year over year growth rates are valued. I mean, it’s trailing 12-month EBITDA, sometimes it’s projected EBITDA for the year. The multiples that you’ll see if you’re selling a business for a million are not the businesses that multiples you’re going to see if you’re selling a business that has eight-figure EBITDA. Very, very different multiples.
The valuation information that they were receiving was 30% to 50% of what more experienced advisors ultimately said, “Hey, this is probably what you’re worth.” I think you have to look out for that.
LOI success fees—you should not pay one. If you get an LOI and you sign an LOI with an unfunded sponsor, there’s a significant likelihood that that deal’s not going to close. And so, should you pay a six-figure success fee for that? No, you should not.
Then there’s some other just typical sort of market negotiating points: How are you going to handle an earn out in the success fee? What happens if you don’t sell, but you raise capital?
Things like that.
What’s the tail period or residual period? Once those relationships end, they did a lot of work, they created interest in your business, potentially. Or that’s certainly what they’re trying to do. If you complete a transaction within a reasonable period of time after their engagement, they should get paid. That’s the rationale. But that residual period, that period of time after their engagement where they’re entitled to get paid, you can see a lot of different proposals for that. You see people that propose three years; I think markets usually around 12 months. I think things like that you see people that enter into engagements there on terms that were probably worse than they could have been.
I think another thing is sometimes I think people approach M&A with what I’ll call a residential real estate lens. And what I mean by that is residential real estate generally is as is, whereas once you sell it, you have no sort of meaningful go forward risk. If it turns out that there was a flooding issue that you satisfied—some states have you have to disclose what you actually know about as long as you satisfy that obligation—if it was something you didn’t know about, comes up a month after you sell your house. As a seller, generally speaking, residential real estate, that’s not your problem. That’s not your risk. I think a lot of people that are inexperienced with M&A transactions and are doing a smaller transaction, that’s the context that they’re coming from.
They’re coming from this, “Hey, once I sell it I don’t really have risk; I need to worry about perspective.” And that’s not how M&A with one exception, which we can talk about, which has become more common since probably like 2019, which is what people call “non recourse reps and warranties insurance deals.” Other than that, which is a unique animal and not something you’re going to see in a $500,000 or a million dollar deal because you can’t get the insurance.
Deals are definitely not as is where it is, which basically means you, the seller are protecting the buyer against various buckets of risk. And that’s one of the big things that you hire your lawyer to do is to negotiate that risk allocation and try to minimize the risk that some of the money you get at closing for your business, you have to give back in the future. And if you’re not aware that that’s one of the big part of the dynamic of selling a business, then I think you can agree to things that are really not fair to you; that are not favorable to you. You need to be informed about the risks so that you’re factoring that into your calculus when deciding to give up this thing that you built for a set amount of money.
L: Yeah. Speaking of giving up the thing that you built, can we talk a little bit about non-competes? What’s normal in a non-compete clause and what should sellers look out for? What might they want to change?
I remember we talked about this a little bit when I sold. We adjusted it a bit to give me a little bit more flexibility on what I could do in that space after the sale.
A: Yeah. First thing, non-competes in an M&A context are incredibly normal. As a seller going into selling your business, especially if you are an owner operator, you’re active in the business day to day, it’s not a reasonable expectation that you’re going to be able to go and sell the business and then immediately do the exact same thing. Generally speaking.
L: I don’t want to interrupt you, but I think that’s shocking to a lot of first time sellers. They’re like, “Wait a minute! All my network and all my knowledge and my skills are all in this one space. You’re telling me I can’t build another business in this space?”
A: The answer to that is the buyer doesn’t want you to cannibalize the thing you just sold to them for a meaningful amount of money. But that is hard because people say, “Well, how am I going to make a living?” And the answer to that is you really need to be comfortable with the amount of money you’re getting in the sale to give up what you’re giving up.
But it’s a pretty firm expectation that if you’re selling a business and you’re meaningfully involved as an owner-operated, that you’re going to have a non-compete.
The question is: What’s the scope of the non-compete? What’s the length of the non-compete? And, are there carve outs?
I think those are probably the three biggest things.
Let’s talk about length first, because I think that’s also something very surprising to people. Like if you’ve only ever agreed to non-compete, non-solicit in like an employment context, and you’re thinking about how a lot of states are getting rid of non-competes in an employment context, almost all of the states that are doing it, they have carve outs for M&A. So this idea that non-compete, non-solicits are not enforceable. Without getting into it, sure, there’s some truth to that in the employment context. That is not a good way to look at non-competes in an M&A context, because generally speaking, they’re much more enforceable.
And the term, so maybe you’re used to saying, “Hey, I’ll give you a one-year non-compete, non-solicit in some sort of employment partner context.” Whatever. That’s not what is normal in an M&A context. Honestly, the term that I agree to or see on both sides of the table, whether I’m buyer or seller side, what I see the most often is five years. Their deals will go down to two. The most common is probably five years, four or five years, which is not, that’s a shock to a lot of people because it’s a long period of time.
The scope though, is super important. Oftentimes what you’ll get from a buyer, like let’s say you’re selling to Amazon and you get your purchase agreement from Amazon. There’s two sort of big picture main ways in which they can define the scope of the competing business that what you’re not allowed to do:
One is to say that you can’t basically compete with the buyer or the target. And that means you can’t compete with Amazon because you’re selling them a $750,000. And I’m not using this because I’ve seen Amazon do this. It’s just because they’re a big company that does a lot of stuff.
But it’s a very big difference to say you can’t do anything that Amazon or your business does, or you can’t do anything that your business does.
From a seller’s perspective, it should only be, “I can’t do anything that the business I am selling to you does as of the closing date. Or as reasonably anticipated planning to enter into whatever.” You don’t want to have this scenario where you’re protecting way more than you actually sold to them.
The point of the non-competing non-sales is to protect the asset that you just sold to the buyer. Scope should be limited to what you sold. It shouldn’t be everything the buyer does, which drastically expands the scope.
And then I think the other thing to be—I’m going way beyond the three things I said I was going to do—I think the other thing to be thoughtful of is like, especially if you’re going to post closing employment, you’re probably going to have multiple non-compete non-solicit provisions. Or if you get like an equity rollover, you can find examples where you have three.
You’ll have the one in the M&A deal and the purchase agreement in connection with which you sold the business, like there’s a non-compete non-solicit there. You might have one in your employment agreement that has a broader scope. So is everything that the buyer does or your new employer does, but for a much more limited period of time and arguably a little bit less enforceable. And then if you have an equity interest in the buyer, there could be other non-compete non-solicit obligations that are connected to that. And so you have to be aware of there’s probably—especially if you have post-closing involvement, there’s probably going to be more than one—you have to be thoughtful about what’s the interplay and like, what am I really agreeing to and how long am I going to be bound?
Now, generally speaking, I think when you really get down to it, like that immediate reaction of, well, this is what I do for a living. How am I going to make a living if I need to? If you really get down to, well, what does this specific business do, right, in your space and what is it that you’re not allowed to do? There are ways in which you can leverage the value, leverage your skill set outside of that business, outside of that niche. That vertical, whatever.
Like you, for example. You’re leveraging the same skills you built in the last business you sold, but you’re doing something that’s not competitive in a different space. I think oftentimes when you kind of sit down and think about like, well, “What am I really giving up on this?” You can sort of think about, “Well, there’s other ways in which if I wanted to leverage my skills, I could make money that protect the business I just sold.”
When that’s not the case, you can negotiate carve outs and the carve outs are tough, but it’s a conversation that can be had.
So for example, I sold a business that was owned by a lawyer and we did negotiate a carve out because they wanted the ability it was not a, it was not a law firm. It was a legal tech business. They wanted a carve out so that they could go back and work in a law firm in a BD capacity, which you could argue in some ways was competitive, but for the carve out, but it wasn’t what people were really concerned about.
So, we got that carve out, we got that put in and they had the ability to go and still leverage their skillset in a very specific way so that they could have that comfort and make some money. Those sorts of things where you’re saying, “Hey, this is very broad because we want to protect the buyer, but I really want to do X and I don’t think X is going to hurt you. Can we all agree on that?” Those are the sort of examples where you see carve outs. But it’s a conversation you have with your lawyer and you know, you should raise your concerns, be very open, and you know, and you know, if there’s a reasonable basis to ask for it, then you should ask for it and try to get land in that reasonable place.
L: I like that because I think that idea applies to more than just carve-outs around the non-compete. There might be other things that are important to you, but it doesn’t really matter to the buyer or it’s not going to make a material difference to them, but it makes a big difference to the seller. And just advocating to think through the best ways to get those things written into the deal.
A: Yeah. I mean, you have to be careful with it, too.
If I remember right, this is something that we talked about when we worked together—you don’t want to increase complexity to the point that the value of what you’re getting is less than the cost of that complexity. So you have to be thoughtful about how much do I really want to put in the legal document and how much do I want to negotiate?
But where there’s significant value to you to get a clarification. Go get it. Go ask for it. And at least land in somewhere where you can be agreed.
L: This has been super helpful and really practical, which are my favorite kind of interviews. Is there anything that we haven’t covered that you think is important from a legal perspective specifically for founders who are thinking about selling?
A: So my knee jerk reaction is I’m a, I’m a nerd, so I can talk about M&A all day. So there’s a ton of things we haven’t covered.
The only other thing that I wanted to mention that we haven’t touched on is just that, when you’re selling a business, there can be a lot of pressure to provide buyers sometimes an extreme amount of access to your business.
One piece of advice I find myself having to give to earlier first time sellers pretty often—and that is something I think they struggle with—is that you have to balance facilitating their diligence and giving them that access with what position are you going to be in if the deal doesn’t close?
I had a recent transaction with a seller that I’ve worked with for a long time in other contexts done a lot of work with them. Very, very smart, very experienced business person that I have a ton of respect for. I gave the advice that “Hey, you shouldn’t let them have access to your team and you should be very careful how much you communicate with your customers and you should push back about some of those things.”
We had a good conversation about it, and ultimately they decided that they wanted to really facilitate the buyer getting to know the team and getting communicating with customers and getting them comfortable because they wanted to get the deal done and a big part of it was team fit.
Unfortunately, I hate—I’m not a big fan of saying I told you so, but in this instance, like that sort of blew up. The buyer said some things that really upset the team. And it turned out that it was really not a good fit and the deal ultimately didn’t happen. Now you had a context where you’d sort of been very transparent with your entire company that you were pursuing a transaction and who you’re pursuing it with, when it was going to happen, and the transaction didn’t happen. That’s very suboptimal.
I see that happen a lot. I have the experience to say: As much as you want to be enthusiastic, you have to be careful. Because most deals, most smaller deals in particular are done on what’s called a simultaneous sign and close basis, which basically means no one is signing anything binding until the closing date until you actually transfer control, which means right up until the last minute, people can either come up with an unreasonable ask or just walk away.
I’ve seen that on my side, too. I’ve seen someone get cold feet where you’ve spent a lot of money negotiating a transaction lining up, lining up financing, and then you get to the time to close and say, you know what, I just can’t give up my baby and I just walk.
It’s both sides of the table deal with the same risk. You have to keep that in mind on the side of the seller and you have to be careful. Ideally, you have a small sort of group of people that are the sort of key members of the team that are under the tent, so to speak, and are aware of the transaction and participating in that process as small as possible, frankly, is ideal from the sell side.
And then on customers, not every business needs to, for example, anonymize the customer list. Some people do, but not every not everyone does. But you should be thoughtful about that and what’s appropriate. You should be thoughtful about what level of access you give the buyer and talking to your clients. What is certainly in a larger deal with an experienced bank that’s helping protect the seller and shepherding through that process is pretty normal is.
Let’s say, the top three to five customers—there might be a customer call the night before the day, a couple of days before you’re about to close when all the documents are fully baked and everything’s pretty much negotiated and the risk of not closing is very, very low. There’s a lot of work that goes into controlling those calls and thinking about what’s allowed to be said, what’s allowed to be asked; the kind of putting guardrails in place.
But you can find a bunch of examples where you’re selling a $750,000 business and someone says, “Hey, I want to very early in the diligence process, I want to have a meeting and basically ask whatever I want to your top five customers.”
If that deal doesn’t close, is that a conversation? Even if you have an NDA—an NDA is worth what it’s worth, which is not always a lot. Even if the NDA does its job, even if they don’t misuse that confidential information, you have to be thoughtful about “Do I want to have this affect the dynamic with my customers a few months down the road if the deal doesn’t happen.”?
The buyer is always going to push for, “Hey, you got to convince me, you got to protect me, you got to give me the diligence information.”
But I think experienced buyers that are being reasonable and the key word there is being reasonable, like they will understand that you have to balance the deal against protecting the value that you’ve built in the business. Sellers sometimes are afraid to do that because they don’t want to be unreasonable. They don’t want to sort of blow up the process.
But this is your business. This is your asset. This is your thing to protect. You should feel empowered to reasonably protect it. The type of things I’m talking about are kind of inherently reasonable.
You’re not committed to buying my business, so I’m not going to let you talk to my most important client and have a one-hour conversation. That’s not an unreasonable thing to say. I think it can get themselves in difficult, tricky situations sometimes and to watch out for.
L: Yeah, that’s a really good one.
Andrew, if people want to reach out to you, connect with you, what’s the best way for them to do that?
A: Email’s the best. My email’s firstname.lastname@example.org, A-R-I-T–T-E-R at Wiggin.com.
L: Say that email one more time.
L: Perfect. Thank you so much for taking the time. I appreciate it.
A: No, thank you. It was great.
L: This was great. You did a great job.
That was Andrew Ritter of law firm Wiggin and Dana, which is one of our sponsors at They Got Acquired.
You can learn more about Wiggin & Dana at their website, wiggin.com. That’s W-I-G-G-I-N.com.
If you’d like legal support from Andrew around selling your business, you can email him directly, as he mentioned, at email@example.com.
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Thanks as always for listening. We’ll see you next time.