By Barry Carus, Esq.

Although no two deals run precisely the same course, private company M & A deals generally follow a fairly similar paradigm, including from initial indications of mutual interest through “soft” due diligence, negotiation of the LOI, comprehensive due diligence, document preparation, satisfaction of closing conditions and closing.  In many private company M & A deals, the buyer will be hiring, and relying upon, the seller’s owners and existing management team and employee workforce to hit the ground running, which will require that the transition process be as seamless as possible.  Thus it is essential that both the seller and the buyer and their respective personnel are able to swiftly become aligned so that they develop and maintain a common understanding of the purposes, objectives and goals of the buyer’s organization.  This is critical on many fronts, such as maintaining the seller’s sales and profitability for the buyer which is counting on positive return on investment to justify the purchase, and also for the seller’s owners who, depending upon the deal structure, may be counting on maintaining sales and profitability in order to receive any deferred purchase price and/or earn-out.  Buyers need to pay careful attention to the psychological aspects facing their new employees when the deal closes and the fact that the allegiance of such employees must immediately switch from the seller to the buyer.  Buyers should realize that the process of aligning the seller’s owners, management team and employees with the buyer begins to take shape early on in the deal process, notwithstanding that certain of these parties will likely find themselves on opposite sides of the table during the various deal phases.

Although generally non-binding (with the exception of certain provisions such as confidentiality and “no-shop” provisions), the negotiation of a comprehensive LOI generally leads to a smoother transaction as the deal begins to take shape at an early stage and the parties involved can then devote their focus and attention to the due diligence and document drafting processes, with deal terms being adjusted and/or supplemented during the document drafting process to address issues which arise during due diligence.  Deal parties may be reluctant to devote too much time and expense to the LOI negotiation, but in the long run they will likely be able to better gauge the seriousness of the other party, avoid delays and save in overall deal costs by spending more time and effort on the LOI.  Although both sides (i.e. buyer and seller) are operating on an arms-length basis for the benefit of their respective constituencies, the development of a positive working relationship during the LOI and due diligence phases is instrumental to the successful alignment of the parties upon closing. 

Once the LOI is signed, buyers will expect a free flow of due diligence information concerning the business they intend to buy.  In many deals, many of the people who are responsible for providing the buyer and its professionals with much of the due diligence information, which will serve first to educate the buyer on the risks involved with the seller’s business and then to help shape the representations and warranties that the seller and/or its owners will make in the main purchase/sale deal document, are initially doing so on behalf of the seller but, if all goes as planned, they will soon be providing their services for the buyer’s benefit.  The due diligence process can be overwhelming on the people representing a selling business, as this is often their first foray into providing the massive amount of information a buyer will rightfully require before signing on the dotted line.  As such, it is imperative that the key deal-making people for each party keep personal relationships running as smoothly as possible to avoid friction that could carry over into their post-closing personal relationships thereby causing alignment challenges if the deal closes.  This element of the process requires even greater attention during the document drafting and negotiation process because friction among the parties is even a greater risk, particularly when negotiating representations, warranties and indemnities, restrictive covenants, provisions for deferred purchase price and earn-outs, and other deal documents such as employment agreements. 

Experienced and savvy buyers in M & A deals regularly keep a pulse on these matters during the deal process to ensure that any pre-closing tension and friction is eliminated or limited once the deal closes.  Once all the material deal terms have been addressed and the consummation of the deal is near, the seller and its professionals will feel more comfortable about allowing the buyer and its professionals to have more meaningful contact with seller’s managers and the people who run the various business components such as HR, IT, sales and marketing, operations, customer relations, and finance and accounting.  Among the most critical of these interactions are typically the on-boarding of seller’s employees by buyer’s HR staff (the cooperation of seller’s owners and management team will be important to this process) to ensure that the seller’s employees, who will be critical to the success of the deal, are sufficiently informed about their future compensation and benefits packages, and the introduction of the buyer’s IT staff to ensure that seller’s employees enjoy a seamless IT transition.  A deal which closes prematurely and before at least the HR on-boarding and IT transition processes have been completed can lead to post-closing confusion and a delay or even the failure to achieve the harmonious post-closing alignment among the participants in the business marriage.

Open and clear communication among the M & A parties (including the principals, management teams and professionals) on all levels throughout the deal process is paramount to successfully navigating through the various M & A deal stages mentioned at the outset.  While each stage presents its own set of challenges, experienced professionals play a pivotal role in guiding a seller through the various deal stages from getting an appropriate NDA in place, to exploratory meetings with the seller and right through the LOI, due diligence, document preparation, and closing processes.  Buyers typically have their own established M & A buy side team with personnel and professionals in place ready to execute the deal, but of course not all buyers have this experience and, if not, they would be well served to set up experienced deal and transition teams before proceeding with the deal.

As with most things in business, the devil is in the details and the successful execution of a private company M & A deal is no different.  Both parties need to begin planning for the meshing of two possibly very different business cultures early on in order to achieve as seamless a transition as possible.  In order to accomplish this, the onus is on the buyer to identify potential impediments and challenges to properly aligning all parties upon closing so that they may all push forward to execute the business plan as one team.  One line of impediments and challenges to successful post-closing alignment may become readily apparent to the buyer’s deal team by virtue of the natural deal stress and possible deal fatigue that often arises when parties are navigating through unfamiliar territory.  Other impediments and challenges are less apparent and require vigilance throughout the due diligence process to identify areas that require various degrees of attention (e.g. seller’s employees lack computer sophistication and will need training; seller uses an outdated bookkeeping and/or accounting system and bookkeeping and accounting personnel will need training; and/or seller’s benefit plans are set up differently than buyer’s (e.g. different employee contribution levels, co-pays and deductibles) and will require seller’s employees to adjust to different plans).

As the deal progresses toward closing, the parties and their professionals become increasingly focused on the likely multitude of closing items that need to be accomplished with the obvious goal being to close and fund the deal, but as they navigate through this process it is equally important that they devote the time, attention and resources to transition planning to ensure that all parties are sufficiently aligned and the post-closing transition process results in as few issues as possible.  If such issues do arise it is critical that there are designated executives and managers available from both organizations to promptly resolve any such issues.