The People in Your (Dealmakers) Neighborhood: Part 4 – Meet Your Lawyer
The Anatomy of a Deal Newsletter November 23, 2021
We now conclude our walk through the Dealmakers Neighborhood with a look at the role of the attorney. So this month, I’ve asked…uh…myself…to share some thoughts about the role of the attorney in your next deal.
We all know and love a good lawyer joke. But believe it or not, the right lawyer is not only an indispensable part of your deal team, an experienced deal-focused lawyer is necessary to help you accomplish the two main objectives in any deal: getting the deal done and making sure you actually get the deal you thought you were getting.
So let’s dive in and talk about the role of the lawyer on the deal team!
“The minute you read
something that you can't understand, you can almost be sure that it was drawn
up by a lawyer.”
One of my pet peeves is when I’m called in to “write up the paperwork.” Part of that is probably my own ego, but it also goes to an even bigger point: clients who see their lawyers as “mere scriveners” or “paper pushers” don’t appreciate the value that a good lawyer brings to the deal. While there is certainly an art to drafting legal documents, that’s only part of what your lawyer should be doing. More importantly, the lawyer should be advising you about deal structure, negotiation strategy, deal risks, potential post-closing risks and liabilities, tax impacts, and much more.
In a single sentence, the lawyer’s job is to get the deal done and to make sure that you get the deal you thought you were getting. For sellers, this means that they get their purchase price and get to keep it with minimal risks of post-closing clawback by the buyer. For buyers, this means that they get the business they thought they were getting, and if the post-closing reality is something different from what they were promised, they have a way of being “made whole.”
While that sounds simple, it’s not. M+A deals are incredibly complicated and involve a host of substantive issues, ranging from corporate law, to employment law, to environmental law, to tax law, to property law, and much more. You need a legal team that can confidently identify and handle all of these issues in a strategic, coordinated and effective way.
And on top of that, there’s a whole other set of skills needed just to understand how to get a deal done. Once the letter of intent is signed, the lawyers essentially take over responsibility for getting the deal closed. That involves everything from negotiating deal terms, documenting the deal in definitive deal documents, facilitating due diligence, obtaining required approvals, and more. It’s not at all uncommon to have a closing checklist that is 10-20 pages in length. All of those steps have to be recognized and completed in the right order, with expert precision.
It’s the legal team’s job to make sure all of that happens and to be in constant communication with the client to help them understand what’s next and what they’ll need to do to get to closing. A good deal lawyer not only has to be knowledgeable in the substance of the transaction, he or she must be incredibly skilled at project management and communication.
are three sorts of lawyers - able, unable, and lamentable.”
- Robert Smith Surtees
That value mentioned above is only realized when you have the right lawyer and you get him or her involved at the right time. I know it sounds self-serving, but the lawyer should be one of the first people you hire on your deal team. If you wait until after starting an auction process with an investment banker or after a letter of intent is negotiated with a potential buyer, you’ve probably already limited the value your lawyer can bring to the deal.
I’ve worked on a number of deals where the client negotiates the letter of intent before getting the lawyer involved. After all, it’s non-binding, right? Who cares? Well, you really should care because the letter of intent sets the tone for the whole deal and represents a key point in the seller’s deal leverage. If you miss the opportunity to negotiate all of the key considerations at the letter of intent stage, you may well find it’s too late to do that later.
In addition, for sellers, there’s real value in doing a “dry run” into legal due diligence with your legal team prior to the buyer showing up. Your legal team can help you identify potential issues before they become real issues and help you fix them before they threaten your deal.
And the added bonus? Doing this work with your legal team on the front-end through diligence and the letter of intent negotiations will help your attorneys get the deal done quicker and more efficiently.
A big part of the lawyer’s value is the experience of having done dozens of transactions similar to yours. If you view the lawyer as your strategic partner in getting the deal done and let him or her share that wisdom with you from the start, you’re much more likely to get to a successful closing with minimal surprises or threats to the deal.
“To me a lawyer is
basically the person that knows the rules of the country. We're all throwing
the dice, playing the game, moving our pieces around the board, but if there's
a problem, the lawyer is the only person that has actually read the inside of
the top of the box.”
You don’t call a cardiologist for a hangnail, and you don’t see a podiatrist for a heart condition. But amazingly enough, I see too many clients using their personal attorneys to negotiate a complicated M+A transaction. While it’s understandable that a client would rely on someone with whom they have worked closely over the years and developed a level of trust, they’re not doing themselves (or the other side) any favors by bringing someone who’s not a deal lawyer into the transaction.
One of the most important skills your deal lawyer brings to the deal is their knowledge of “the market” and their experience with what it takes to get deals done. Deals often break down when an inexperienced lawyer is arguing for something that isn’t normal for these types of deals or doesn’t appreciate all of the inter-related aspects of the transaction that all have to be managed. Unfortunately, that dynamic can slow down the process, increase time and costs, or even jeopardize the deal entirely. I’ve seen all three.
And, believe it or not, sophisticated players in the deal world all prefer that the counterparty be represented by experienced deal counsel. While it seems counterintuitive, they know that good deal counsel will actually increase the chances of a smooth, successful closing. And isn’t that what we’re all really after?
So before hiring a lawyer, ask him or her about the types and sizes of deals he or she has done in the past. Ask about his or her experiences in dealing with similar industries and deal dynamics. The lawyer should have total comfort talking about these types of things.
And with any deal of size, a team of lawyers will be needed to get the deal done. No single lawyer can navigate all of the substantive issues that arise and execute all of the intricate steps of the deal in a timely manner on his or her own. Once the deal gets going, things happen quickly and there’s a flurry of activity leading up to closing. So, it’s important to understand what the entire team looks like and make sure that the firm you hire has the resources to get your deal done quickly, efficiently, and cleanly. Remember, you’re ultimately hiring the whole team, not just an individual lawyer.
Finally, there is still a place for your personal attorney on the deal team, even if he or she doesn’t specialize in M+A transactions. Most good deal lawyers are accustomed to working with existing counsel. In fact, it’s in everyone’s interest to leverage their knowledge and history with the company to help with things like due diligence and personal/estate planning. Believe it or not, lawyers actually can play nice together.
And keep in mind that you’ll be talking a lot to your lawyer throughout the deal. Make sure you pick someone whom you trust to sweat all of the details and to communicate clearly and effectively (in plain English) throughout every step of the way…added bonus if they have something approaching a human personality.
“99% of lawyers give
the rest a bad name.”
Now we come to everyone’s favorite topic: legal fees. [INSERT FAVORITE LAWYER JOKE ABOUT BILLABLE HOURS HERE].
In most cases, lawyers do charge by the hour for M+A transactions. There are a few reasons for this. First, the lawyers’ involvement in the deal can vary greatly from one transaction to another. Indeed, sometimes smaller deals require a heavier lift because of the unique issues involved. In addition, sometimes the lawyer’s job as counselor may actually require that your attorney advise you NOT to do a deal that’s going in a bad direction. As a result, large success-based fees usually aren’t appropriate for the lawyer and can interfere with his or her professional judgment.
However, in certain cases that are properly scoped out, alternative fee arrangements are possible, including flat fees (either for the whole deal or for individual stages of a deal) and hybrid fee arrangements. Fees can also be deferred to coincide with closing, in many cases. A good deal lawyer should be able to talk comfortably about fees and help you understand what you’re signing up for. But, at the end of the day, the reality is that deals take on a life of their own, and so fees can vary significantly from one deal to the next.
It's true that lawyers aren’t cheap. But, as stated before, the right legal team increases your chances of successfully getting the deal done and making sure that you actually get the deal you expected. Like so many things with life, if it’s worth doing the deal, it’s worth paying to do it right.
“Lawyers work hard
and, like us, they're human, many of them.”
And finally, remember that despite what you may have heard, lawyers are people, too (barely). Show your lawyer a little love once in a while because the good ones really do work very hard to help their clients achieve their goals…which is really what deal-making is all supposed to be about.
And with that, we’ve concluded our stroll through the Dealmakers Neighborhood. No, we didn’t hit on all of the specialists that might be called upon to assist in a given deal. Depending on the specifics of the deal, there are a number of other experts that might be called upon to help, including environmental specialists, insurance experts, real estate surveyors, valuation professionals, and more.
If you remember nothing else, just remember that deal-making is a team sport. Assembling the right team early on in the process will greatly increase the odds of achieving a successful deal. And make no mistake: it’s equally important that both the buyer and the seller be advised by the right professionals. When just one side to the transaction doesn’t have the right team in place, it can quickly gum up the whole process.
Hope to see you soon in the Dealmakers Neighborhood!
Next Month: Your Definitive Glossary to M+A Jargon
Read last month’s piece: The People in Your (Dealmakers) Neighborhood: Part 3 – Meet Your Financial Advisor