Multi-Unit Franchisee Magazine Issue I, 2015 | Page 80
ExitStrategies
BY DEAN ZUCCARELLO
Thinking of Selling?
Deals require industry-specific expertise
A
fter several months of testing
after an initial diagnosis by
your family doctor, you now
must schedule surgery for a
heart condition. What do you do next?
First, you get recommendations from hospitals, other doctors, and reliable friends
for the best specialists. You meet with and
interview several of those recommended,
ultimately choosing the right person for
your specific situation. After all, entrusting your family doctor with something
clearly outside their realm of expertise
would be ludicrous, right? You want the
best specialist available.
So how could you have a different
mindset regarding a critically important
economic decision, such as the sale of
your business? We see this happen every
day. And in many cases, the seller’s folly
jeopardizes a successful outcome.
When selecting an attorney to handle
the sale of a business, many owners rely
on their longstanding relationship with
their existing attorney. Let’s call him Ted.
He’s a comfortable choice, as familiarity
and trust already exist. The seller has confidence in Ted’s competence, earned over
the years. More important, the seller feels
an intense loyalty to Ted, feeling he has
earned the right to handle such a critical
legal matter. Selecting anyone else would
be disloyal.
This is an interesting dynamic, since
Ted does not possess the experience to
best handle this situation. In the example
above, the family doctor would never offer his services or even be considered for
a procedure he has not been trained for
and performed dozens of times. However,
this distinction appears to blur when making the decision to handle a specific legal
matter, especially something that might
be considered more of a general business
practice, such as contract drafting and
negotiation. In reality, this distinction
should be very clear.
Over the years, Ted has successfully
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handled dozens of different legal matters for the business (franchise agreements, real estate purchase agreements,
bank agreements, vendor contracts, and
so on), demonstrating his effectiveness in
dealing with these aspects of the business.
However, the process of selling a business
can be very different. How hard can it
be, you ask? So what if Ted hasn’t done
many M&A transactions? He is smart and
the seller trusts him to “get through it.”
What’s critical to understand here is how
the M&A process is unique and differs
from other legal aspects of the business.
The emotional investment associated
with the possible outcome turns M&A
transactions into a whole different beast.
For many sellers, this is the culmination of
a lifetime of effort. At the very least, it is
a significant economic event. Regardless,
it has a very different overall feeling than
a “day-to-day” business transaction. This
also is true for the buyer—which cannot
be overemphasized. With nerves already
running hot, this is not the time to learn
along the way. It is imperative to avoid
the pitfalls that come from inexperience.
An experienced M&A attorney understands the issues and what is customary
for that particular business, therefore effectively communicating his expertise to
the client, along with setting realistic expectations. Any mistakes or complications
throughout this process get magnified
tenfold and jeopardize the transaction.
We have seen many transactions fall apart
from being overrun by insignificant issues
that should have been avoided.
Additional ly, the M&A process is more
than just a negotiation of the acquisition
sale agreement. Lease assignments, asset
inspection reports, franchisor transfer
documents (if the business is a franchise),
estoppels, guarantees, non-compete agreements, and other factors specific to the
industry all require definitive knowledge.
On the surface, the acquisition document
might appear similar to other types of pur-
chase agreements, but like most things,
the devil is in the details. Understanding
the subtleties of how these contracts differ substantially affects the outcome. The
addition or deletion of even one word in
the agreement can considerably affect
the meaning of a provision, resulting in
a “non-market” position. Attorneys with
industry-specific knowledge typically
don’t make these mistakes.
Finally, it is important to note that
not all M&A experience is the same. For
instance, M&A issues that are customary
in one industry might be very different in
another. We have seen experienced M&A
attorneys with familiarity in different industries incorrectly “dig in” on issues that
are not customary in franchise or restaurant industry transactions, thereby complicating matters. Additionally, there are
variances among brands, especially with
franchise companies. What is common
practice in one concept might be very
different in another.
Our advice is to follow the path of
selecting the best specialist for the job.
In many cases, a client’s current attorney has the requisite M&A experience
and is well-suited to the task. In a situation where that is not the case, consider
using your existing attorney as the point
person, but employ a specialist to work
alongside them. We have found this to be
an effective solution in many instances,
with the added efficiency typically saving
time and costing you less in the long run.
Ultimately, all you need to remember is
this: If your current counsel is not the
right person for the task, don’t compromise. Find the right surgeon.
Dean Zuccarello is
CEO and founder of The
Cypress Group, a privately
owned investment bank and
advisory services firm focused exclusively on the
multi-unit and franchise
business for 24 years. He has more than 30
years of financial and transactional experience in mergers, acquisitions, divestitures,
strategic planning, and financing in the
restaurant industry. Contact him at 303680-4141 or [email protected].
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