There are three types of people reading this post. There are the people who read the headline and thought “of course they shouldn’t”, there are the business owners who are thinking “well why not?” and then there are probably some lawyers saying “back off”. I’m here to tell you that this lawyers-selling-businesses-thing is happening in the mergers and acquisitions world and it’s not good.
You Need a Deal Team For Your Transaction
Your lawyer may be the person you first turn to when you are thinking about selling your business. They are a trusted advisor and the topic may have even come up a couple of times earlier in your relationship. Lawyers have a very important role in a sell-side transaction. They are there to make sure that a transaction doesn’t include provisions or requirements that are risky for the seller. Your investment banker will always make sure there is a good M&A attorney on the transaction. If you don’t have one, your investment banker can recommend one. This is because you need a deal team for a transaction. This team consists of three to four professionals, all playing an important role in getting the transaction done with the highest possible value, but in a way that keeps a business owner safe.
A Doctor is a Doctor, Right?
Now, what isn’t good is when an attorney thinks that they can also fill the role of an investment banker. Having them perform both roles is a little like asking the anesthesiologist during your heart surgery, to step on over and do the heart reconstruction part. These two people have very important, but different, functions during your surgery, and one of them should not do both. Let’s keep the analogy going. You want your anesthesiologist and your surgeon to communicate during your heart surgery. You want them to argue a bit if one sees something that upsets the other. This communication is critically important and it’s no different with your deal team.
Experience Selling Companies is Important
Investment bankers sell hundreds of businesses. They maintain thousands of relationships, ensuring that they are approaching the correct buyers for your business, capable of achieving your objectives. An attorney, even a very experienced deal attorney, does not keep that same sort of rolodex and cannot deliver the same level of competition for the business that an investment banker can.
Furthermore, we need the lawyer to perform his or her role as lawyer during the transaction. We need communication from them and we need some tension once in a while. If it is the investment banker’s goal to complete a transaction that delivers the highest value in a short time frame, it is the lawyer’s role to make sure that the client doesn’t fall in love with the millions of dollars in their ATM at some huge risk. The tension between these groups on your deal team is important and necessary.
When your attorney is playing both roles you can get into a situation where no one is “pricing” risk. Instead, your lawyer, if the only member of your deal team, is avoiding it at all costs. This is a situation where either no deal gets done or it happens at a tremendously low value.
The other, much more dangerous situation, is when a lawyer shifts their fees to be part of the success of the transaction. Other similarly dangerous situations include attorneys that encourage a business owner to sell to only one buyer (sometimes that buyer is someone with whom they have close relations or business dealings). In these cases, the client is left with an enormous conflict of interest and very little risk protection. Never, ever enter into this type of relationship. At best, it provides you with little protection. At worst, it is a negligent and irresponsible practice on the part of the attorney.
In either case, whatever fee the business owner was hoping to save by not engaging an investment bank is completely outweighed by a sub-standard purchase price or a far too risky transaction. Lawyers cannot simply spackle over the fact that you need both professionals on a deal team – just like you need both specialists for your surgery. A good lawyer will immediately recommend investment banking candidates when you mention you are thinking of selling your business.