Why M&A deals don’t complete
Unusually for us, 2023 has seen two law firm M&A deals not complete. We are involved in a about a dozen deals a year and we regard ourselves as pretty competent at resolving any issues that arise and making the deals happen – but only if the deals are the right thing for our clients.
Howard Hackney and I produced a light-hearted play on the cultural issues of why law firm mergers fail, designed to show that even if the numbers look good, underlying cultural differences can scupper a deal. As the business guru Peter Drucker said, “Culture eats strategy for breakfast.”
The videos (we’re unlikely to win any Oscars, but we had fun!) can be found here.
One thing I have noted over the years of doing M&A deals, is how easy it is to get to the Heads of Terms stage is an interesting indicator of future problems. Once a deal has been agreed in outline between the parties it makes sense to document the key terms, so that there are no surprises later on. These are the price (obviously), the payment terms, any conditions, key employment or consultancy terms for the sellers moving forward, the length of restrictive covenants and any specific warranties or indemnities that are unusual. If an exclusivity period and a confidentiality clause have not been agreed previously, they will be included in the Heads of Terms.
Heads of Terms are usually agreed with a couple of iterations. When we get to version five or six (or in one case a few years ago – version seventeen!), it is apparent that the deal is going to be difficult. It shows that the parties cannot easily negotiate and, if it gets as far as a Business Purchase Agreement (in whatever form that takes) there is likely to be clause-by-clause combat on the terms.
It is especially important if the sellers are going to remain working as part of the merged business as they will have to work with the buyers. If they fall out during the early negotiations, it will make working together more difficult.
This is one reason why it is useful to have an external solicitor (or other lead advisor) dealing with the negotiations, as any difficult issues can be ‘blamed’ on them and the parties can resolve them between themselves, having taken advice.
The next stage where issues can occur is during the due diligence phase of the deal. The buyer (or their solicitors) will ask the seller a series of questions about their business and ask to see key documents about it – accounts, contracts, insurance, employee details, claims record, compliance and the like.
It is good practice for any seller to start preparing their documents ahead of a sale; it is too late when the seller asks. If any issues are found, they can be sorted out before the seller asks. We can advise on what a buyer will want to see. When I act for buyers, the quality of the responses and documents produced, along with the time taken to produce them, is a good indicator of the health of the business. If the seller can produce a file (physical or electronic) with all the required documents together and complete, that is a good sign. A while ago I advised a client who was looking to buy a firm to walk away from the transaction as the quality of the documentation produced, eventually, was shocking and much was unavailable. We were concerned about what was missing and what horrors might be lurking in the basement, as the firm did not know what it did or didn’t have.
Once the Heads of Terms have been agreed and the due diligence responded to, it’s not all plain sailing, but it should get easier. Disclosure is not often an issue, but may require some give and take to get to an agreed position.
If there is goodwill, the two firms understand each other and the Heads of Terms are agreed quickly, the deal should progress. One final area that can cause problems is delay. The parties usually want to get on with it. Contacts, especially PI insurance, may need renewing and the longer negotiations go in, the harder it is to keep the potential merger quiet. The partners may also be distracted from running the business, so speed is of the essence. If either party takes too long to produce documents or respond to the other side, mistrust can arise and the deal may falter.
We have experience of buying, selling and making deals happen. Please contact Mark Briegal on 07973 283678 or email@example.com if you want to discuss any issues raised in this article.