Phase One: Due Diligence
Due diligence is the first phase of any contemplated business sale or acquisition. It is the formal process by which each party examines the ability of the other party to deliver on what was promised, and to create protective firewalls to prevent surprises, to either side, once the deal is done. Like looking under the hood, reviewing the warranty, and determining the finance terms for purchase of a used car, corporate due diligence is probably the most critical phase in determining if the deal makes sense. Not surprisingly, it requires a considerable expenditure of time and analysis on the part of both parties’ legal teams, as well financial and technical personnel.
In some instances, VLF handles all of legal due diligence for one side of the transaction. In others, VLF is brought in by another law firm or the company ownership or management team, in which case our attorneys work directly with the company’s General Counsel or outside counsel to evaluate the acquisition. Although due diligence is typically an extensive process, it allows us to learn what our clients truly seek to accomplish by the deal, and to counsel our clients on potential benefits and synergies versus the potential risks and exposure of consummating the deal with the other side.
On the buy side, VLF works with our client’s management team and its senior financial and technical professionals prior to committing the client to the contemplated purchase. This includes a review of contractual, regulatory, financial, and technical obligations as well as an analysis of insured and uninsured liability of the target venture. In many cases, the seller or its management team were so closely involved in the target venture, that certain provisions become necessary to actually transfer the real value, i.e., its relationships and reputation, from one owner to the next. This means identifying post-closing transaction conditions such as non-competes, non-disclosures, and ongoing management and advisory obligations for a defined transition period, as would be necessary for the client to consummate the purchase and ensure a proper transition from one team to another.
Likewise, on the sale side, VLF’s due diligence representation lets the seller not only meet its disclosure obligations, but also determine the buyer’s willingness and ability to perform. This means not only making clear and meaningful disclosures to expedite buyer’s due diligence, but also conducting a reverse due diligence on the potential purchasers and structuring the deal accordingly. In a competitive market space, the seller needs protection against the possibility of a purchaser who is using the process merely to gain insider information about the market or even trade secrets that the seller may have developed. In this scenario, VLF would identify a need for the non-disclosure to contain appropriate remedies for misuse of shared information, and for final documents to allow for the potential re-acquisition of the business on favorable terms if the purchaser does not live up to their promises.
Sometimes deals founder during due diligence because one party does not want to share key information, or because a party discovers a nasty skeleton in the closet about which it did not previously know. Other times due diligence provides the parties with meaningful information to intelligently renegotiate the deal. Either way, proper due diligence is what lets business decision-makers reduce the chance of an unexpected lawsuit.
Phase Two: Considering Alternate Acquisition Structures
Sometimes, initial discussion, due diligence, or inadequate seller disclosures make it clear that the purchaser should not purchase equity in the target venture, i.e, while the purchaser still wants to pay for value from the target, it does not want to purchase the corporation’s shares or the LLC’s membership interests. In such an event, VLF can restructure the deal to allow for only the acquisition of assets, property, licensing rights, customer lists, intellectual property, and other tangible and intangible property of the target venture, while leaving the equity (and the liability) of the venture with its existing owners.
There is no simple formula or stack of forms that will let someone divest or acquire a new business or venture. However, VLF’s attorneys have worked closely with our clients for over 20 years, in a variety of unique and complex business purchase and sale structures, to counsel our clients to balance their risk tolerance and potential benefits of the transaction. Choosing the right path to purchase is vital, because once the deal is penned, surprises have an economic impact on the buyer, seller, and target venture itself. If this impact is significant, it will result in a drawn out and expensive courtroom battle. Although every deal carries risk with opportunity, and no business acquisition can be absolutely bulletproof, our experience in this area helps us counsel our clients how to obtain assurances, offload risk, and maximize net return in buying or selling a venture.
Phase Three: Post-Deal Covenants
Often, the sale of a larger, long-held business can add an emotional dimension that lasts long after the ink dries on the contract. This is especially true if the business was family-owned for multiple generations, or if a hands-on founder grew the business from nothing over many years. VLF’s experience in these delicate business succession scenarios gives our lawyers first-hand practical insight into the extra steps needed at the deal side to ensure the transition is a smooth one. Aside from words on the page, VLF’s corporate lawyers understand that long term management, ownership, and loyal customers of the target business must be addressed not only with analytical foresight, but also with respect and tact. When working with buyers in such cases, VLF works to secure the cooperation of management and the previous owners (the sellers) to incentivize cooperation, maintain reputation, facilitate the retention of value through the succession period, and structure remedies to quickly enforce any post-closing actions that would undermine the spirit and principle of the deal. When working with sellers, VLF’s corporate lawyers will work to make sure the departing owners and management maintain the appropriate reputation and contractual freedom to move onto the next chapter of their lives without being unduly weighed down by the sold business.
Structuring the Deal to Avoid the Courtroom Battle
VLF’s active involvement in complex commercial litigation over similar deals continues to provide its corporate team with unique insight into the consequences of deal terms. Simply put, beyond merely running checklists of deal terms, VLF knows the very real post-sale consequences of “over promising” or “false assurances,” and knows how to steer its clients clear of those issues so that VLF’s clients always leave the negotiating table with their eyes open. VLF’s more than two decades of experience in deal making and courtroom battles allow us to provide valuable corporate counsel to either party to the transaction, to serve as the coordinating team among the various professionals necessary for complex due diligence, and to advise our clients of the potential risks and advantages of the possible transaction.
We look forward to working with you when you decide to expand the footprint of your business.