For a middle-market business owner, the decision to sell represents the culmination of a lifetime’s work. It is an intensive process, full of complex negotiations and due diligence. A successful transaction hinges on meticulous preparation and the strategic alliance of experienced advisors. From the legal perspective, the attorney’s role is to build a rock-solid foundation, anticipate risks, and partner with the M&A firm to protect the seller’s interests.
Adam Marshall, Managing Member at Lorium Law, is a seasoned business attorney who partners with Walden M&A. He offers his perspective on the non-negotiable preparations, the role an attorney plays in minimizing seller risk, and the essential collaboration required to guide a middle-market business owner through a sale process.
The Top Three Non-Negotiable Preparations for an Exit
The best defense against a deal falling apart or being “traded down” on price is preparation. For middle-market business owners, a legal audit long before going to market is a crucial step. Marshall outlines three non-negotiable areas every seller should address.
1. Build the Legal Foundation & Conduct a Legal Audit
Building the structure from the foundation up is first and foremost. Every customer agreement and every employment agreement becomes part of the sale process. Many closely held, middle-market businesses start as collaborations between family members or lifelong friends, and in the rush of growth, formal legal agreements are often not prioritized. However, when a sophisticated buyer comes to the table, they must know precisely what they are acquiring. This means establishing the appropriate legal foundation from the ground up.
Documentation must be in place for everything from capital structure and ownership to customer and employee relationships.
- Shareholder and Operating Agreements: These are essential for ascertaining who the owners are and their rights. A lack of these agreements creates a major red flag for buyers.
- Employment and Customer Agreements: Good business practices improve how the business runs and add value during the sale.
Marshall stresses the importance of an internal legal audit before the buyer sees the documents. If the seller’s attorney has not drafted the company’s documents, they need to review them to address any problems upfront. For instance, if an old shareholder agreement exists, it is better to make the necessary changes as part of the transaction preparation than to let the buyer discover outdated documents and assume the company is poorly managed.
“We remind our seller clients if we haven’t drafted your documents, we don’t know what you have or what they look like,” says Marshall. “We like to audit them before the buyers’ counsel sees them so we can address any problems upfront.” The goal is simple: no surprises. Proactive preparation reduces the likelihood buyers will find issues which can sour the deal.
2. Plan and Manage Expectations
Selling a business is both a financial and psychological journey. Business owners often fall into one of two extremes: either overvaluing their company or underestimating its worth. Planning well in advance for an exit helps owners gain a realistic understanding of the business’s value. Bringing in outside experts to conduct a legal audit, financial review, and valuation is essential for managing expectations.
A critical sub-part of this planning involves a clear-eyed approach to unsolicited offers. Marshall uses a compelling analogy: if someone knocks on your door and offers to buy your house, you would research comps before accepting. The same common sense should apply to a business, which is often an owner’s biggest asset. Instead of accepting an unsolicited offer, use it as a catalyst to run a proper sale process with investment bankers, valuation experts, and lawyers.
“When you get an unsolicited offer, that’s when you should really rush to talk to the M&A advisors to see if you can run a proper process,” says Adam Marshall. An unsolicited offer is a sign that it is time to talk to the experts.
3. Define the Post-Deal Future
A successful exit is not just about the number on the legal documents. The owner must figure out what they need, both financially and career-wise, on the back end of the deal. “It’s really essential to remember it’s not just the dollars. It’s what you can do with it after the deal,” says Marshall.
The cash amount alone does not guarantee satisfaction. Marshall stresses the need for sellers to look beyond the “pretty number” on the legal documents and consider what they can actually do with the proceeds. This means evaluating the total structure of the deal in relation to the owner’s desired lifestyle and financial security.
If the deal requires the founder to stay on as an employee, an entrepreneur who has been the boss may struggle to be seen as just another employee in a big private equity portfolio. Many struggle with the shift in authority and role. Data shows that most business owners regret selling a year after the transaction, often because they do not take the time to plan the essential steps and prepare psychologically for life after the sale.
The Attorney’s Role in Minimizing Seller Risk
Throughout the process, the M&A attorney focuses on minimizing the seller’s risk after closing. This is paramount in a few specific areas.
A. Limiting Post-Closing Liability
Attorneys spend significant time reviewing the representations and warranties contained in the purchase agreement. These are the promises the seller makes about the business, and they typically survive closing. They are a lightning rod for disappointment and litigation. The legal team’s focus is to limit these in both impact and time.
For deals involving an earnout, where a portion of the payment is contingent on future performance, or an employment/consulting agreement, the seller’s attorney must ensure the terms are favorable to the seller.
- Earnouts: If an earnout exists, the seller needs to retain some control over the business’s operations to safeguard the funds. Without control, the buyer could bury the business or shift sales to another portfolio company, rendering the earnout illusory.
- Employment/Consulting Agreements: These agreements must manage expectations. If the buyer expects the founder to work 80-hour weeks, it needs to be said upfront. Otherwise, the buyer will be disappointed when the former owner is enjoying their post-sale life.
B. Equipping the Seller with Leverage
A seller’s leverage in any negotiation is the power to say no. The buyers largely control the M&A process—they have the money and typically draft the first agreements. The seller’s attorney must react, negotiate, and push back. A strong, unified deal team, where the M&A attorney and Walden M&A are in lockstep, gives the seller the confidence and conviction to exercise their right to walk away if the deal no longer aligns with their ultimate goals.
Strategic Collaboration: Walden M&A and Legal Counsel
A truly client-centric deal team relies on each member staying in their lane, owning their piece of the puzzle, and communicating effectively. Marshall is a strong proponent of this collaborative approach.
The Value of Financial Context
Walden M&A, as the financial and valuation experts, provides essential context during legal negotiations. Marshall stresses, “How do I negotiate on behalf of a client’s dollars when I don’t understand the context? That’s where the M&A advisors come in.”
For example, an advisor may discover a client’s burn rate is too high for a specific cash amount at closing. This financial insight requires Walden M&A to revisit the deal terms. This, in turn, requires the attorney to understand what both the M&A advisor and financial advisor are doing so the legal team can negotiate different provisions in the deal documents. The collective intelligence of the deal team—investment banker, attorney, and accountant—is necessary to get the client the best possible result.
By addressing legal and financial issues proactively and managing expectations throughout, the entire team ensures the owner enters the transaction prepared for a successful, rewarding exit on their terms.
If you are a middle-market business owner considering an exit, partnering with a cohesive deal team is critical. Contact Walden M&A today to begin planning your successful business sale.