Diving deeper into the finer points of an M&A transaction

By: Giorgio Andonian

As a business changes hands, the process for both buyer and seller and can become emotionally fraught and highly complex. The intricacies of navigating regulations, oversight requirements and labor laws can make the entire Mergers and Acquisitions (M&A) process seem overwhelming. Enlisting the help of professionals such as qualified M&A attorneys is a critical part of successfully executing the sale of a business, and recently Giorgio Andonian, Managing Director of FOCUS Investment Banking, LLC, sat down with Gregor Hensrude, Managing Shareholder of Klinedinst Attorneys, for a deeper look at what takes place during these transactions.

According to Hensrude, one of the most surprising aspects for sellers is the extensive requirements of legal due diligence. “Many sellers, especially those who haven’t maintained regular corporate records, are often unprepared for the demands of this process,” he says. “For instance, locating share certificates from the 1980s can be a daunting task. Processes like these require considerable effort, which sellers are generally unaccustomed to.”

Sellers have spent decades or in some cases generations operating their businesses, managing their staffs, and laying the foundation for long-term success. But along the way, many haven’t had the time or resources to think about what it will take to successfully sell their business when that time arrives. Hensrude points out that post-sale certainty is vital, citing the potential for issues to arise related to purchase price holdbacks, the duration of escrow, and the requirements for additional amounts which might need to be returned.

These terms are critical as they provide assurance to the sellers regarding their financial and operational standing post-transaction. “Most M&A deals are structured to leave these kinds of pre-closing risks with the seller,” he says, adding that as a seller’s attorney, he frequently explores opportunities to shift risk to the buyer wherever possible. Essential strategies include identifying existing risks, ensuring the seller assumes no post-closing risks, and negotiating caps on indemnity obligations to provide sellers with a clear understanding of their maximum potential liability.

“We focus is on avoiding liability for unknown risks, such as unfiled wage-and-hour claims or insufficient privacy policies,” he says. “Issues like these can lead to breaches of representations and warranties. Our approach helps minimize the seller’s exposure to unforeseen liabilities that could reduce the purchase price.”

Intellectual Property (IP) also has the potential to become a contentious part of the M&A process, and companies can take certain steps to protect aspects like trademark rights prior to making a deal. These intangible assets are usually transferred during the sale, making their protection vital to the overall transaction value. “For businesses like tire dealers, for example, brand value is significant and ensuring proper trademark registration and protection is crucial,” Hensrude says. Experienced attorneys can help sellers secure those kinds of protections prior to entering into any type of sale agreement.

Labor laws are another area where legal challenges can arise in the midst of an M&A transaction. In states like California, known for stringent labor regulations, sellers must be vigilant about employee classifications, wage compliance, break documentation, and other labor practices. Post-closing, sellers often remain liable for any pre-closing employment issues, making it critical to identify and mitigate these risks beforehand.

Another significant challenge for sellers is the potential tax liability resulting from the sale, especially when substantial figures are involved. “Early planning and consultation with tax professionals are essential steps in this process,” Hensrude says. “Trusted tax advisors play a crucial role helping sellers navigate tax implications and optimize their post-sale financial outcomes.”

Other disputes that commonly arise – and require the intervention of qualified legal counsel – post-transaction can be related to holdbacks and the fulfillment of conditions tied to pre-closing liabilities. Disagreements may arise over when these conditions are satisfied and how to handle potential liabilities. Most post-transaction issues, however, involve minor details, such as responsibility for specific bills.

Hensrude says that effective dispute resolution mechanisms are critical to avoid litigation or arbitration, which can be costly and time-consuming. Arbitration may be favored by many lawyers, but it has its drawbacks. It’s essential, Hensrude says, to tailor dispute resolution clauses to fit the specific needs and circumstances of each client.

Lastly, Hensrude points out that pre-closing confidentiality is crucial, as premature disclosure of a pending sale can disrupt business operations and relationships. Ensuring robust confidentiality agreements and practical measures to maintain secrecy is vital to protecting the interests of both parties involved in the transaction.

“Navigating the complexities of M&A transactions requires meticulous attention to due diligence, contractual terms, risk management, intellectual property, labor issues, financial and tax considerations, dispute resolution, and confidentiality,” he says. “By understanding and addressing these critical areas of the M&A process, all involved parties can achieve smoother transactions and more favorable outcomes.”