The stakeholders in a business sale or purchase transaction have differing needs and concerns. Understanding these needs is crucial for making correct decisions. For individuals who may have never before purchased or sold a business, a fireside chat is often useful to explain how the process works. Here are some observations covered in the fireside chat.
Needs
Normally, buyers and sellers have an overriding need to achieve an outcome and prefer that this be done as safely as possible. Typically, a lawyer and accountant are employed to advise on how to make the transaction as safe as possible, to optimise the structure of the transaction for tax and other factors and to help bring about the deal.
The M&A Advisor may be expected to find the buyer or seller and to facilitate the transaction, including identifying and qualifying purchasers, coordinating discussions, managing negotiations and achieving a result. This aligns their goals with those of their client, who also has an overriding wish to achieve the outcome, provided the degree of commercial risk is acceptable. The seller and buyer usually have more to gain from the sale than all their advisors, so inevitable compromises are made to reach a workable (win-win) outcome.
Basis of Appointment of Advisors
How advisors are paid encourages them to act in an appropriate and predictable way. Lawyers and accountants normally charge for the time they spend on a project, not according to the outcome. This is logical as their assistance is needed in making the transaction as safe and well-structured as possible.
Brokers or M&A Advisors are usually appointed and incentivised by either buyer or seller to achieve a specific outcome and are paid according to the result. It is natural to expect they will be keen to succeed.
The key is to ensure working with an M&A Advisor who looks for win-win outcomes and whose business relies heavily on referrals from clients, buyers and their advisors and who takes a long-term view of all relationships. Divest Merge Acquire does, as our ‘Testimonials’ confirm.
Lawyers
Lawyers, for both buyer and seller, must protect their clients, themselves and their business.
This is best done by pointing out all the possible pitfalls in the transaction and where appropriate, advising against proceeding if this is likely to be compromised.
This is logical and reasonable in today’s litigious world, where lawyers, in particular, have become both the perpetrators of and also the victims of, this higher risk world.
They want to protect their clients so they are less likely to turn on them if something goes wrong later. Note – they do not have an overriding need to see a transaction take place, as this theoretically increases their risk. Most lawyers would prefer to act for the seller rather than the buyer, as there is inherently less risk to a seller in a business transaction.
Accountants
Accountants are in a similar position to lawyers regarding risk, although they are generally closer to their clients because of more regular consultation on ongoing accounting and related business activities. They may have known their client for many years and assisted with how the business has developed. They will naturally want to see the best possible outcome for their client.
This can manifest itself in an optimistic valuation for a selling client and a conservative valuation for a buyer. While both positions can be justified, they may result in unrealistic expectations for their clients.
Make it Clear to Advisors What is Expected of Them
There is no such thing as a perfect contract. Usually, making it perfect for one party will ruin it for the other. Communication, motivation, and common sense are required for an outcome to be possible. The best accountants and lawyers do much more than point out problems, which is a relatively easy thing to do. The most valuable advisors point out the problems and then offer solutions!
There have been stories about lawyers prolonging disputes to increase their fees and accountants obstructing transactions to retain their clients. However, there is rarely any evidence of these selfish motives. The vast majority of professional advisors act in good faith and with appropriate competence.
Focus on the Outcome
Always keep the focus on the long-term goal. All stakeholders to the transaction, for both buyer and seller, share a strong desire to be able to look back and see a good overall result for everyone – buyer, seller, employees, financiers, lawyers, accountants, M&A Advisors, etc.
Staying focused on the outcome will help keep perspective when negotiating individual aspects of the transaction and counter the tendency to be drawn into point-scoring during the negotiation, which makes one lose sight of the big picture.
Some Further Tips for Navigating Transaction Issues
Practically speaking, there is no such thing as a risk-free transaction. People buying a business are knowingly entering into the world of commercial risk. Those selling already live every day with business risk. The sale transaction is no different from all other transactions the parties deal with.
If a lawyer is asked, “should I do X?” their default response will be “NO.” The lawyer has nowhere to go here but ‘No’ unless this is a risk-free outcome. If asked, “If I do X, then what might the consequences be?” this gives the lawyer the opportunity to provide some useful commercial advice.
One could also ask what they would do if they were in the same shoes. Lawyers are commercially astute, so give them the opportunity to help without the risk of turning on them if it doesn’t work out. In many situations, lawyers may write to their client advising them not to proceed with a particular situation. They would do this to protect their clients and themselves, but may fully expect the client will proceed anyway.
The interesting thing is that both the buyer and seller are obtaining advice according to these same guidelines. It is therefore likely that, with each lawyer striving to make the transaction ‘risk-free’ to themselves and their respective clients, the default outcome is for no transaction to occur!
In the end, accountants and lawyers know that a commercial decision will be made. They expect this and would be surprised if an attractive deal is pulled back from, even if it contains commercial risk. Generally, the more experienced at business one is, the better they can discern and rationalize the advice received. Seasoned business people who know the ropes often relegate advisors to less prominent roles according to their specialised expertise. Inexperienced buyers and sellers will tend to rely entirely on their advisors. In some cases, the accountant and lawyer find themselves being relied on for commercial advice where they may not be qualified. This may increase their risk and therefore force them to be even more conservative.
