M&A Monday:* When should I engage an M&A lawyer (and who else do I need)?

I get asked this question a lot by new independent sponsors and searchers.

Let’s back up and discuss the lifecycle of an M&A acquisition and which partner you need at which stage.

M&A Monday: When should I engage an M&A lawyer (and other partners)?

I get asked this question a lot by new independent sponsors and searchers.

Let’s back up and discuss the lifecycle of an M&A acquisition and which partner you need at which stage.

There are five phases in acquiring a business: (1) Search; (2) LOI submission (3) Post-LOI to purchase agreement; (4) purchase agreement to closing (5) Post-Closing.

Here is what happens in each phase and when to engage, which partner.

1. Search Phase. This is when you try to find a target that you like. You speak to brokers, filter website listings, execute any off-market strategy, and start underwriting deals that you like. Your main partners during this phase will be brokers, buy-side advisors, and anyone else who may be helpful in your search. While an M&A lawyer can help connect you with the right people (clients often call me to workshop a deal), this is not the time to engage a lawyer.

2. LOI Submission. Now you found a target you like. The numbers pencil out and you have a preliminary structure in mind. I advise having a call with the broker or seller and asking them, “What do you want to see in my offer?” Find out what is important to the seller, build rapport with the broker or seller.

When you know you are serious, if you are an experienced sponsor, you can draft an LOI and submit it (sign it, first). If you are less experienced or the deal requires more nuanced structuring, this is the time to reach out to an M&A lawyer. Different lawyers have different engagements for LOIs. Some charge hourly, some charge a fixed fee.

If less experienced, or going with an SBA loan, this is the time to reach out to an SBA loan broker. I have worked with Matthias Smith , Jerry Freedman , and Bruce Marks, MBA, CMAA , and each of them will make a material impact on your deal. A good loan broker will help you understand whether the deal pencils, if tripping up an SBA reg, if you will qualify, and then will help keep the lending workstream on track throughout the deal.

My Independent sponsors (above $10m in EV) pursue different financing partners at this stage.

3. Post-LOI to purchase agreement. After the LOI, you start your diligence. Sometimes sponsors engage with their M&A lawyer right away, and sometimes they wait to confirm quality of earnings before starting legal. I have worked with Mitch Petracca, CPA (Petracca Group), Chris Barrett, CPA and others. A good QoE provider is worth their weight in gold. They will confirm whether the broker juiced-up financials are accurate, what working capital should be, and whether all those add-backs are accurate. Depending on the business you also want to engage in other diligence specialists, like HR, medical, intellectual property, and tax. Make sure you reengage with the loan broker as well. At this point your team should be, M&A lawyer, QoE provider, Loan Broker/Lender).

When the legal process kicks off, your lawyer will send a due diligence request list and start reviewing legal diligence as it is provided. In parallel, the buyer’s lawyer drafts the legal documents. This can include a purchase agreement and ancillaries (Bill of Sale, IP Assignment, Assignment and Assumption), promissory notes, escrow agreement, management agreement, consulting agreement, rollover agreements, restrictive covenant agreements, as applicable (depending on asset v. stock). Then, as the purchase agreement is close to final, we usually form the buyer entity and start drafting the operating agreement/bylaws/shareholder agreement).

4. Purchase Agreement to Closing. Once the PA is signed, you should kick into overdrive on the loan process and closing conditions: third-party consents, employee meetings and offer letters, customer calls, transition planning meetings, and finalizing investor documents (if any). Your team will be M&A lawyer and lender.

5. Post-Closing. Congratulations! Take one minute to celebrate, get some sleep, have a closing dinner, and hold tight for a roller coaster first year. Often your law firm will transition you to a fractional general counsel practice for ongoing corporate support. Do not expect that to be your M&A lawyer. As an M&A lawyer I am like a brain surgeon – you need me for a very specific and important time in your life. Then, you don’t need me again until you do.