Good dealmaking is often a product of strong legal counsel on both sides of the negotiating table, says Dominic DiPuccio, a partner and M&A attorney at Taft Stettinius & Hollister LLP.
“You might say, ‘Don’t I want somebody on the other side who doesn’t know how to do a deal so you can just bowl them over in the negotiation?’” DiPuccio says. “Maybe. But more often than not, if the guy doesn’t know what he’s doing, I’m going to waste a lot of time educating him on how you do these deals and what’s normal and what isn’t. That’s an impediment to getting a deal done.”
DiPuccio counsels buyers and sellers on all aspects of M&A and capital raises, including due diligence, letters of intent, deal structures and other areas. Too often, he says, companies underestimate the complexity of completing a business transaction, no matter the type or size of the deal.
In this Dealmaker Q&A, we spoke to DiPuccio about the value a good M&A attorney can bring to a transaction.
What’s a common legal component to a deal that companies often overlook?
From a buyer's perspective, it’s making sure you are acquiring the assets you need to operate the business that you think you are buying. You might need the right to use a third party’s intellectual property, so you might need to get some licenses assigned. You may find out that some of the assets of the business are actually owned by another entity that the selling group also owns, or maybe a different version of the selling group. Sometimes you'll find out that the real estate is owned by a related party or certain services are provided by related parties. From a buyer's perspective, what you care about is making sure that you acquire all the assets that you need to operate the business.
If you buy a manufacturing business and the seller owns the tools, dies and equipment, all that can easily be sold to you. But if you think you're going to step right into their shoes with the customers, if there are customer agreements, 99 percent of the time those customer agreements require the consent of the customer before they can be assigned to you.
An unsophisticated buyer might think, ‘I'm going to buy this business and I'm going to have all these contracts.’ They don't realize that they require consent to be assigned. They may have what we call a ‘change of control provision’ that says if there's a sale of the business, that customer no longer has to honor the contract. You don't want to find that out after the fact, so somebody needs to review those customer agreements and go out and get those consents to ensure you get what you think you're getting, what you think you're paying for.
What role do actual and potential liabilities play in negotiating a transaction?
You need to have something more than just a contract. You need to have access to recourse if something happens. For example, in the course of an acquisition, the buyer might identify a particular liability and come to an agreement with the seller that it’s their liability. They have to take care of it. Some buyers may think that that's good enough. You have an agreement where the seller has agreed to take care of that liability. But if the seller takes all the money that you gave them and goes on a vacation and doesn't take care of those liabilities, it may end up being your problem anyway and you don't have any recourse.
You need to set up the transaction where you either have a hold back of some portion of the purchase price or an escrow so that if there is a claim, you have a remedy that is easy to access to be made whole if it does become your problem, notwithstanding the agreement of the parties.
What about the seller’s point of view?
From the seller’s standpoint, I want to minimize what those same things are that the seller is responsible for and minimize how long he might be exposed to those kinds of risks. I will insist on some type of standard so the buyer can’t nickel-and-dime me for every $5 claim they find. Until it's over $50,000, I don't owe the buyer anything. So from a seller's perspective, clearly you want a lawyer that knows what they're doing and that's experienced in M&A. But also you want a lawyer who appreciates the three most important parts of representing a seller: Getting the deal done, maximizing the deal for the client and minimizing post-closing exposure.
Sometimes our job is to help our sellers or our buyers keep their eyes on the prize. Prioritize what's important and what's not. What we should care about and what we can't. What points are worth fighting about and what points are worth giving up on in exchange for making a deal.