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(Editor’s note: “Ask the Attorney” is a weekly VentureBeat feature allowing start-up owners to get answers to their legal questions. Submit yours in the comments below and look for answers in the coming weeks. Author Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a boutique corporate law firm specializing in the representation of entrepreneurs.)
Question: We just got an offer to buy our company for a sweet pile of cash, but we don’t know what the next step is. My father said we should hire an investment banker and let him handle the negotiations. Do you agree?
Answer: Congratulations! Without knowing more about the deal and the proposed purchase price, it’s hard to say. I practiced law for a number of years in New York City, and it was pretty rare not to have an investment banker involved in an M&A transaction. Here in California, it’s a little different since most of the deals tend to be relatively small.
A strong investment banker can add a lot of value — not only in connection with negotiating the material terms of the transaction, but also valuing the company and making sure that you’re not selling too low. A strong banker will also create a competitive environment (or the perception of one) and play bidders off of each other to make sure you get the best possible deal terms.
The problem in the lower middle-market space (e.g., $5-50 million sale price) is that it’s sometimes difficult for entrepreneurs to find a strong investment banker. A lot of the bankers I have come across in California are more like business brokers, simply trying to close two or three deals a year. This creates a certain inherent conflict of interest. They don’t get paid if the deal doesn’t close. Thus, some of them tend not to push very hard on the key issues.
Moreover, middle-market investment banks often have relationships with certain buyers (e.g., private equity firms) and bring those same buyers lots of different deals. Accordingly, they don’t necessarily want to rock the boat.
You’re better off talking first to an experienced M&A attorney. He or she can discuss whether hiring an investment banker is a good idea, given the parameters of your offer. If you do decide to retain an investment banker, ask the attorney for a few recommendations. Then meet with them and choose the best fit. Ask for references – and check them!
If you opt against an investment banker, that M&A attorney can help you negotiate the letter of intent (or term sheet). The letter of intent is very important from your perspective – and you need to ensure all of the material terms of the deal (e.g., the “cap” on liability, the size of the “basket/deductible,” the survival period of the reps and warranties, etc.) are negotiated at this stage of the transaction.
This is when you have the strongest leverage – prior to the execution of the letter of intent. This is the time frame when bidders can be played off of each other. Once the letter of intent is executed, you won’t be able to shop your company around or talk to any other potential buyers. (That’s due to the no-shop provision, which is commonplace in all letters of intent). Accordingly, if you don’t retain an investment banker, this is when you and your lawyer will need to button-down the key issues.
The buyer, meanwhile, will often try to keep the letter of intent general (other than the no-shop provision). Then, when the other interested parties (if there are any) have gone away and your leverage is weakest, they’ll negotiate the key issues in the acquisition agreement.
Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.