Dealmakers who use a transaction to reward their key players will earn strong loyalty from those members of their team. But it can be tricky to balance recognizing hard work and putting an unexpected burden on the buyer, warns deal attorney Carl Grassi.
“When you put those agreements in place, you need to have some flexibility when you're the seller so as to reward people, but not in any way limit or prevent a transaction from occurring because it might be too rich of a deal,” says Grassi, chairman of McDonald Hopkins. “From a buyer's perspective, there may also be concern that if it's too much, they may lose some employees or have employees who are not as engaged.”
Grassi has extensive experience assisting clients in areas of complex M&A activity. He learns as much as he can not only about his client’s intentions, but those of the party on the other side of the table, so he doesn't miss any critical details.
We caught up with him to talk about what are the key issues he thinks business owners need to factor into their approach to dealmaking.
You need strong counsel
I had a client I had represented for a number of years who decided to sell their business and had rainmakers who were critical to that business’s success. We put together a fairly novel deferred compensation agreement for the key rainmakers in the business. When they ultimately decided to sell, the buyer and the buyer's counsel wanted that deferred compensation arrangement to be terminated, and understandably so. They didn't want to carry that on. It didn't fit how they ran their business. But I knew enough about the business that we were selling on behalf of this client, as well as the nature of the buyer as well.
We really pressed them to understand why that arrangement with those key rainmakers would be important to the company’s future. Initially they didn't see that opportunity. It was only after the individual who was going to run that group was brought over to run it and saw what they brought to the business that they said this is something that we want to keep because it's clearly going to be a retention vehicle to keep those rainmakers. And, in fact, it did. So the message there is that you can draft the greatest agreements, but you need counsel that understands both the company they're representing, as well as the company they're not representing, someone who can anticipate some of the issues that may come up as part of the transaction.
Take a measured approach
If you're going to buy a business, you need to assess why you are buying it. What do you see that's going to be accretive to your business, that's going to make you different? We need to make this deal because we can't do this organically. That's an early assessment. That's evaluating your strategic alternatives and deciding why this makes some sense. Also as part of that process, make sure the due diligence that you do if you’ve identified a couple targets is consistent with those strategic alternatives.
When you have a business that wants to rapidly acquire a lot of different businesses, they will often do an approach where they'll identify, ‘This is the type of company we’re looking at; this is the deal that we're going to agree to sign.’ They’ll be very tailored and consistent so you get the same type of transaction, with some variation. In either case, it’s always useful to do a Monday morning quarterback on the deal. What were some of the things that went well both from a legal side and an accounting side? What were some of the things we could have done differently? It allows you to really then evolve your approach so you're always learning from the process.
Think before you decide to sell
You don't put your company on the market unless you're prepared to sell that company. It may not happen, but you want to be prepared. That means you want to have all those other issues and other considerations tied up and figured out. Because once you go through the process, to some degree, it's too late. There are a lot of buyers out there soliciting companies that may or may not be in a position to consider selling. What happens with some owners is they tend to listen to all those calls that they get. You really have to be more disciplined in your approach.
Think about that house that's always for sale across the street. At some point you start to wonder why that house isn't selling. There must be something wrong with it. The same principle applies when you're selling a business. If you're always for sale or you're always going to take that call that comes in, eventually at some point, it gets out in the community. People will see a for-sale sign on it for months and months and wonder if there's a challenge there.
That's where you see the ones who aren’t doing a deal for the first time and understand the value of having really good advisers. It’s not just a good legal adviser, but good accounting advisers and good advisers generally. You want an adviser who will reach out and make the effort to understand your business. As importantly, once you find that buyer or if you're the one making the acquisition, understand that seller. Understand as much as you can. Not just the legalese, but the business. That adviser is going to be a more effective counselor for that company they're representing and more likely to have success at the end for you, the client.