Agency Financial Management

M&A documents

Dealing with a complex proccess

By Paul J. Di Stefano, CPA, CPCU

With proper representation, agency principals will not become overwhelmed when confronted with the complexities of an asset or stock purchase agreement

Our experiences with how our clients approach the intricacies of the merger and acquisition process have varied considerably. Ideally, before a transaction ever gets to the document stage, the deal must be structured in great detail. Some buyers draft a brief term sheet describing the terms of a deal while others draft fairly voluminous letters of intent describing all aspects of the transaction. Harbor Capital prefers the more detailed approach because it eliminates many of the issues that are likely to be raised at the eleventh hour.

In a recent transaction, the agency principal, who had decided to sell up into a larger organization, realized that since he was looking forward to a long-term relationship, his employment agreement would be as important as the asset purchase agreement. In this transaction, we were impressed that our client was represented not only by a corporate transaction attorney, but also by an attorney specializing in employment contracts.

The deal was structured with a substantial upside to the purchase price. Accordingly, one of the areas that our client focused on was provisions in his employment agreement that dealt with termination with and without cause. Additionally, our client realized that several key producers in the agency would also be subject to similar terms in their employment agreements, and he wanted to be prepared to respond to their questions. Our client’s approach to representation during this transaction highlights the difference between his more methodical hands-on approach and that of other agency principals who are not quite as motivated to pore over documents. This client was exceptionally diligent when it came to reviewing documents. In fact, his attorneys commented that many of their clients do not thoroughly review the documents they are signing. An experienced intermediary will have great insight into what is or is not possible in structuring transactions. Harbor Capital typically works with client’s counsel to advise what modifications to the agreements will or will not be acceptable to the acquirer’s attorneys.

A complicating factor in this transaction was that in addition to the very attractive upfront consideration to be paid for the agency, Harbor Capital had to structure the terms of how the contingent purchase price incentive would be earned. This step was critical in order for our clients to fully realize the value associated with the expected rapid continuing growth, so the terms needed to be clearly defined in the documents.

The client decided to share a portion of the contingent purchase price with a number of key producers because giving incentives to these individuals would be critical to maximizing the transaction. The earn-out formula itself was complicated, and layering the producer participation on top of it would also prove to be a challenge.

Keep control

With the other aspects of the sale in order, clients need to keep control of the closing process. They can accomplish this by fully understanding the details of the process and not abdicating control to lawyers or accountants. Many clients may get caught up in the document preparation phase of a merger or acquisition because their legal counsel becomes too aggressive, pressing for changes that are unreasonable and ultimately not acceptable to the acquirer. We have seen cases where deals have died because the seller’s counsel continued to press for unreasonable concessions from the buyer.

Harbor Capital recently was called in to represent a seller after two previous transactions had cratered due to disagreements over the documents. Harbor Capital started fresh with another buyer and the client executed agreements that were not markedly different from those presented by the previous buyers. The difference was that we were able to bring some sanity to the document review process and didn’t permit deal brinksmanship to rear its ugly head. Our client actually instructed his attorney not to “over-lawyer” the deal.

With proper representation, agency principals will not become overwhelmed when confronted with the complexities of an asset or stock purchase agreement. While the language can certainly be complex, there is usually a rationale for its inclusion.

Harbor Capital recognizes that engaging in a transaction is an emotional experience for agency principals. Working with a financial consultant that has been through the process many times can make that process much less daunting. *