The legal side of an elite exit

If you want to maximize the value of your business exit on your terms and without regret, don’t let legal missteps get in your way. I recently had a chance to ask one of the top lawyers in the game what to look out for.

Rob Swartwood is a good guy - he’s a seasoned deal attorney and faculty member with the Business Owner Transition Academy and we’ve done several transactions together. We also have similar backgrounds, as Rob was an Army Ranger who made the jump into business transitions. Here are some highlights from our conversation.

How did the army prepare you for business transitions?

As you know, a lot of what we do is leading folks through something challenging in order to arrive at a desired outcome. It’s a mission, no different than a mission that you might have flown in the Navy or I might have had in the Army. I made the career change 16 years ago, and it’s been great.

You’ve done deals of many sizes. How do big and small deals differ?

I’m fond of telling folks that deals are certainly financial and operational, but they are more emotional than most people believe. That's true whether it’s a billion-dollar transaction with dozens of lawyers, or a family-owned business that's being transitioned to an outside acquirer.

Larger deals are not typically short on advisors, and oftentimes there might be too many advisors. On the smaller deals, because entrepreneurs are so good at building businesses, cutting costs, and wearing a lot of different hats, you might see those parties come to the table with less counsel and less advice than you’d like - and that can actually lead to friction.

What are some of the first questions you ask a business owner looking for an exit?

You want to get to know them, their business, the rest of the advisory team, and their broader objectives. I’ll ask what you have done to prepare your company for sale, what buyers have you considered, what offers have you received.

I think you’ve probably heard me say this before but running your company and selling your company is the equivalent of two full-time jobs. Preparing your company for sale is more than most people can handle, so I’m looking for ways to minimize the number of hats a business owner has to wear during their transition.

We do a fair number of deals with folks who haven't put a lot of time and preparation into the sale. Most are wise enough to know they shouldn't be signing anything without having someone review it first.

What’s a presale due diligence offer and why is it so important?

The name of the game for buyers is to minimize risk, and the only way that they can do that is to comb through the seller’s financial information, contracts, employees, customers – pretty much turn over every stone.

After a Letter of Intent to purchase is signed, the buyer’s lawyer is going to give you a due diligence check list, and if you’re not prepared, you’re going to be shocked. It’s a voluminous document, requesting a lot of information, some of it applicable, some of it not. In my experience, most sellers experience some level of panic, particularly if they have not done a very good job of gathering their information.

I use a sell side due diligence process - we sometimes call it the defense due diligence - to try and take the stress out of that exercise. I help them locate their information, know what it says, and ensure that it’s complete. If we find there is a gap in the information or if some information is potentially unfavorable, this preparation allows us to be proactive and control the narrative.

When’s the right time to engage a deal attorney?

Most M&A advisors, one of the first questions they’re going to ask is who your attorney is. It’s quite common to say, “Tom is our attorney, he’s represented us in litigation for the last 20 years” or “Sarah is our attorney, she’s set up these wonderful trusts for our family.” But what you want is a deal attorney - somebody that does just deals all day, every day.

The M&A advisor will ask the attorney to look over the book, which is the offering document with all the information about your business. We’ll make sure that the disclosures and disclaimers are correct. We’re in a sales process here, but we’re also in a disclosure process, and there are securities laws and all kinds of different things that are being implicated.

Believe it or not, there are buyer’s attorneys that do nothing but negotiate NDAs. Particularly if it’s a private equity acquirer, they’re going to have their Wall Street lawyers look those NDAs over. They negotiate every single one of them. So you need a deal attorney to represent your interests there.

Another big negotiation is post-closing indemnity. Many sellers don’t realize that they can be financially liable years after the deal closes if things don’t go to plan. One of the phrases I hear from private equity funds is, “We do this in every deal.” But I don't care what their other deals are like. I want my client to have security when the money is deposited in their account at closing. If any of that money is subject to reclamation after closing, they know exactly how much and when those rights evaporate, so they can move on with their lives.

If you’re reading this and imagining your future exit, I’d encourage you to start thinking about building a great exit team. Having a strong deal attorney like Rob on your side from early in the process is one of the wisest decisions you can make.

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