A few days ago we published a piece on due diligence, focusing on one of the many financial “tests” that buyers often do prior to closing a transaction in order to have some assurance that their assumptions about the financial health of the transaction are sound. We looked at the Net Working Capital test (NWC) and discovered that even though the idea of the test is straightforward, ensuring that it is done accurately is vital, hence the need for professional help.
Today I thought we would shift our focus from the financial side of the due diligence equation and provide you with insights on the legal arena. One of the complicating issues, as you can imagine, is legal M&A due diligence.
For example, the following section is actually a document from a potential buyer sent to one of our dealmakers. Have a peek at what is going to be required of the seller by this buyer:
Representations, warranties, and indemnities will be typical or “market” terms. Representations and warranties of the Sellers shall include, but not be limited to, representations and warranties regarding ownership, capitalization, transaction expenses, tax, compliance with environmental, ERISA, and other laws, financial statements, receivables, undisclosed liabilities, absence of changes, contracts and commitments, absence of litigation, licenses and permits, customers and suppliers, employee and labor relations, product liability / warranty, intellectual property rights, insurance, affiliate transactions, compliance with regulations, and prohibited payments.
Representations and warranties will survive for 18 months with the following carve outs: environmental, compliance with laws, tax, and ERISA representations and warranties, which will survive for the statute of limitations, and fundamental representations and warranties (consisting solely of ownership, capitalization, authority, and affiliate transactions), which will survive indefinitely.
As we get further into diligence we will provide more specificity to these provisions and commit to negotiate in good faith for a fair and reasonable allocation of risk. The cap on seller’s indemnification for breaches of representations and warranties will be $1.8 million, with a Purchase Price cap for breaches of environmental, compliance, tax, ERISA and fundamental representations and warranties. These items are subject to final diligence but are based on our diligence to date. Seller’s liability for indemnification obligations (and other obligations under the purchase agreement) will be on a joint and several basis. Indemnification claims will be subject to a $200,000 ‘tipping basket.’
OK, if you read that closely, you are now out of breath. And if you are a business owner and you don’t have an M&A advisory team (which at a minimum should include an experienced M&A consulting firm and an attorney) and you get this from a buyer, you should be shaking in your boots!
How do you know if any of this is comprised of standard legal M&A terms? For all you know, your buyer could be taking advantage of your lack of M&A experience and creating a transaction that is completely to their benefit, not yours.
If you have an M&A advisor, like Generational Equity, and an experienced M&A attorney working with you, they would be able to walk you through this type of request in short order and protect your interest.
I bring this topic up because it is consistent with a conversation I recently had with Brad Whitlock, an M&A attorney with Scheef & Stone LLP. We have worked with Brad on a number of transactions over the years. He has decades of experience in M&A law and was able to provide us with some fantastic input for business owners to be aware of:
Closing a deal without professional help is possible; however, closing an “optimal” (as Brad puts it) deal with a premium buyer and creating a deal structure that benefits you is clearly your goal, and doing so requires professional guidance and consultation.
One more point to be made: When you look for legal advice to close your deal, look for an attorney, like Brad, that focuses on M&A law. This is a very specialized field and even though your family attorney that set up your trust could legally review your docs, he/she will most likely be working on their first M&A transaction. Requests from buyers, like the one above, might be new to them, causing your deal to progress far more slowly than if you have an M&A attorney with 30 years of experience.
Take a look at the segment above regarding reps and warranties: If any of that confuses you, causes you to scratch your head, or even makes you grimace in pain, then you need professional guidance.
Fortunately, Generational Equity, the leading M&A advisory firm in North America, is here to help. We have closed more deals over the past few years than any other firm in our niche (the lower middle-market – deals valued below $150 million), according to Thomson Reuters. If you would like to see if our skills are a good match for your needs, call me at 972-232-1125 or send me an email at firstname.lastname@example.org. I will be glad to discuss our services with you and connect you with the appropriate member of our team for further information.
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.