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The Path to Exit
40 | Choosing Software M&A Counsel: What Founders Should Know Before Their Exit
00:18:12
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- [00:02]
Podcast Host
Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.
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Mike Lyon
Hello and welcome everyone. I'm Mike Lyon, Founder and managing director at VistaPoint Advisors, and this is the Path to Exit. This show is dedicated to helping founders of software, AI and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. My guest today is Mike Greco. Greco has been on numerous previous podcasts. In this episode we'll discuss how founders should think about selecting the right M and a lawyer, common mistakes entrepreneurs make when hiring legal counsel for a transaction, and what having the right attorney in place can mean for deal terms, timing and overall outcome when preparing to sell or raise capital. This episode's based on a lot of hard fought experience working on transactions, some where we had an amazing team and some where it was less than ideal. So just trying to help you avoid some of the mistakes that we've seen made. Please enjoy my conversation with Mike. Mike, first of all, thanks for joining us again.
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Mike Greco
Absolutely. Happy to be here.
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Mike Lyon
When should a founder start thinking about hiring an M and A counsel? And how is that different from their regular corporate counsel?
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Mike Greco
I would say right after or while you're prepping with the investment bank as they're going to have some input or potentially even references from experience they've had in the past. The buy side is a well oiled machine from a transaction perspective, both from an advisor and internal, and sometimes having the investment bank help you choose the lawyer is going to create greater continuity throughout the entire process. This person, transaction lawyer, is just very specific to the deal itself. They might have some corporate background experience in the past, but really they're transaction folks. They've done deals exactly the same size, the same structure and they just know how to work at the pace of a transaction process a lot better. And what are key terms and areas that maybe a corporate lawyer might have some experience, but not to the nth degree as well as these transaction attorneys also likely have eyesight experience as well. So they give good perspective of what a buyer or an investor would just never agree to and make sure we're focused on the right things. I would say they're fairly different than the kind of corporate counsel I would say very rarely do we see the corporate counsel being the transaction. It has happened from time to time. But experience carries the day here.
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Mike Lyon
Yeah, absolutely. And one thing you mentioned up front I think is really important for a founder to realize is that on the buyer's side of the table they're going to have what I would call a pretty high performing team. So typically they work with the same lawyer or maybe same set of lawyers, but they'll have likely done 10, 15, 20, 30 transactions with this counsel before. So they're a pretty well oiled machine on their side and know that the buyer typically does not what I would call cheap out on their lawyers. They're usually hiring some national firms that are really good, really aggressive and the reason why they're willing to spend that much money is they think they get value from it. So what we're trying to do on our end is really assemble that high performing team. And as Mike said, sometimes your typical attorney has enough transaction experience and has negotiated with some of these high caliber firms and they're a good fit. Oftentimes they are not. But there's always a role for your current corporate counsel, particularly like when we're doing disclosure schedules or just things that are kind of knowledge based about the company versus what I would call more the hired gun negotiator who has a really good sense for what market is on all these deal terms and how to negotiate against a really good law firm that the buyer would have. Mike. So talk a little bit about what founders should look for when they're shopping for an M and A attorney for a software transaction.
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Mike Greco
Similar size and structure and doing software deals is absolutely paramount. What we have found when they don't have deep experience, maybe they work on a lot larger deals or they maybe work exclusively on venture deals. They're just used to specific terms for those types of transactions. And what you find yourself in is a battle with a buy side on terms that just frankly are way off market. So the perspective of what is market and what isn't really relies on the experience of the walk firm as well as the investment bank who will coach you from the sidelines. But having someone who focuses almost exclusively in software, who has deep experience with the same size business, same corporate structure, same size of transaction, same type of deal structure, as well as having the experts. So these are the folks that you'll have a lead corporate counsel or corporate transaction attorney who's going to run quarterback. But each one of the separate sections of the purchase agreement will roughly be negotiated by special attorneys who have deep experience. So tax is a big one. IP is another key one. The buy side are going to have two or three lawyers per section and partners that are going to go deep. We need a similar set of expertise, particularly on the tax side. Sometimes lawyers will pull from external sources. The challenge with that happens with timing. So they're working on other things. They're not directly tied, they're not internal resources. And so timing can be disjointed or just approaches could be disjointed. And so those are really big keys. Knowing what rep and warranty insurance is and have a lot of comfortability there. But when it comes to picking and talking to the right law firms, it really comes down to those that have done software in the right size and type of transaction and have the experts that is ultimately going to carry the day.
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Mike Lyon
I think the great point and this concept of the law firm should have partners, the specialists that can cover tax and employment, other issues. I think that's almost a non negotiable. I mean we've worked on transactions before where the corporate attorney or the lawyer kind of negotiating the transaction doesn't have those experts in house and it dramatically slows things down. And one of the things to realize is usually when you're getting the lawyers fired up and spending money that's towards the tail end of a deal where most of all the really important stuff has been negotiated, price structure. And so there should not be a trade off between quality of advice and speed. Good firms can deliver both of those at the same time. They might be a little bit more expensive, but they deliver both of those at the same time. And the problem with having one attorney who's negotiating the deal and then having a separate tax specialist and a separate employment specialist A, they've likely not worked together before. So that high performing team thing starts to degrade. And also there's no one you can complain to. Right. They're going to kind of blame each other and pass the buck. And so I would say it's almost non negotiable that they need to have all those experts in house and feel like the quarterback. The transaction attorney can get those resources. Tax is notorious for being the freewheelers. And sometimes you can't get them on the phone. You don't want to hold the deal up over tax. If you have a really competitive process and we can get this deal closed, we want to get it closed because the risk is something bad happens in the market and you have no deal. The other thing I would just mention is Mike called out. Maybe some attorneys have some buy side experience. I think that can be helpful. But one of the questions you want to ask because I've seen this happen before is you hire an attorney and then it turns out private equity firm Y is bidding, that attorney's probably going to tell you he can't work on your deal because he prefers the recurring revenue of that private equity firm. And if they say, hey, we want you working on this deal, your choices are sign a waiver where the firm represents both sides. I don't think that's a good idea for obvious reasons. Or you just lose them and have to pick another attorney. So as you're interviewing attorneys, ask them what happens if there's a conflict and one of their recurring revenue clients is a buyer. Just so you understand what that looks like and take that into account. Mike, maybe talk a little bit about some of the most common mistakes we see founders make when they're choosing legal counsel for a process.
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Mike Greco
Yeah, the biggest one is hiring what we call the local yokel. This is the person that might not have a ton of transaction experience, doesn't have all those capabilities that you just outline lined. But maybe you're really familiar with them, and maybe they do a lot of M and A or capital raising deals for real estate or some other vertical. What you find quickly is they're battling for things that just aren't prevalent. We've had a real estate attorney go to the Hill and back on real property for a software business that doesn't own any real property. And so there's just been a lot of challenges on that side. So, again, getting back to first principles, doing deals that look and feel like you have transaction experience at the right size, not having the resources internally is huge, just absolutely critical. And someone that, to your point, only represents buyers, if they're only representing buyers, you're going to get conflicted out, and that is going to just present a huge challenge. But the biggest one is selecting someone who you're just simply most comfortable with who might not be the perfect fit for the transaction. And this is in a place where we want to pinch pennies and potentially create a shortcut. We want to make sure we have the right counsel to go toe to toe with the other side, because, again, to your earliest point, they're not going to skimp out on that. And the more we can't go toe to toe, the longer the deal will take. And the longer a deal takes, the greater likelihood it doesn't close.
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Mike Lyon
And another criteria I would use is kind of measuring their responsiveness. So a common link I've seen in disastrous situations with the attorney that was hired is sometimes attorneys are under the opinion that they're like the most important person in the room in terms of their time, because they're used to working in different situations. And in An M and A context, responsiveness and getting the job done is super important. So if you kind of get that vibe from them that they're going to get back to you when they'll get back to you, that's totally unacceptable. At the pace of an M and A deal, your banker shouldn't act like that, your lawyer shouldn't act like that. No one on the deal team should act like that, like that. Because at that point in the transaction, time is just risk. That's all it is. It's the risk of something blowing up or something going bad. So if you get the feeling at all and see how they treat you during the process to set up your call, if it takes a long time to get a call with a partner to talk about working with you, I'd say that's a huge red flag. And just hammer in on the responsiveness because again, that shouldn't be a negotiable. And with the buyer's counsel, that will not be an issue. They will be hyper responsive. They may tactically or strategically do some things to try and slow things down, but in terms of their willingness and ability to get to the point they need, they'll be all over that and we want that as well.
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Mike Greco
To expand on that, Mike, interviewing some of the junior associates as well or just having conversations with them can really help understand you're going to work very closely with them, particularly on a lot of the blocking and tackling stuff. So the disclosure schedules, making sure the data room is up to date with certain things. And a lot of times if dealing with some of the junior associate level isn't as strong as maybe the partner is, it can also slow down a deal. So making sure the full deal stack is really strong and you're comfortable with them because a partner is going to come in the high leverage scenarios, but a lot of the day to day is going to be handled by the associate and middle layers.
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Mike Lyon
Great point. So we've talked about what are some of the mistakes. Let's talk about some of the opportunities by hiring the right lawyer, like how they can help impact deal structure, valuation, negotiating leverage. Mike, maybe talk about how a good attorney can add a lot of value as opposed to attract value.
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Mike Greco
Absolutely. First and foremost is focusing on the right issues and not trying to win every single battle. There are a lot of things that in a purchase agreement or all of the various documents can feel very scary to a founder who might not have ever done this before or had any experience. The things that you're having to say yes to or potentially a maybe to in a document is something that you would never agree to elsewhere. And so having an attorney that can basically get it down to business sense of what this actually means, not just legal risk, is absolutely critical in making the right decision because you could battle for an extra two weeks on a topic you'll just never win. That is really critical. Time and speed is absolutely paramount. Ability to understand rep and warranty insurance and how to push for that, as well as what areas we need to be focused around to mitigate risk long term. From a valuation and economic perspective, your investment bank should handle 99 to 100% of that. Anytime you're passing the buck on to counsels to negotiate those points, you tend to come out with a slightly worse outcome. But from a deal perspective, a good lawyer is going to focus us on the right things, make sure that we are saving time where we can and focused on the right issues and making sure you have the right coverage as opposed to getting every I and T crossed.
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Mike Lyon
The other thing I would add to that list is communication. So if we have a high performing team on our side where we're talking a lot and everyone's kind of sharing a lot of information, sometimes you see advantages like we may decide we think the corp dev person on the buy side is the weak negotiator and we should take issue X to them, or we may decide it's the attorney. But if you have a really highly communicative team, you can get some advantages and sometimes that can lead to valuation or just the better terms. The other thing I would say is the more competitive the process, the less some of this legal stuff matters. And what I mean by that is if we're in the middle of a hyper competitive process where we're sending out our draft of a really seller friendly purchase agreement and the buyers have limited ability to negotiate on that because it's really competitive, there won't be as much negotiation required. Also, if we have a deal that has rep and warranty insurance in it, there's almost no negotiation on the rep and warranties from our side because it's really the insurance company who's negotiating with the buyer and that's kind of their problem. So there are some things that can blunt some of the importance, but I think those are definitely a few things to focus on.
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Mike Greco
Mike.
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Mike Lyon
So maybe to wrap up here, talk about a few questions that founders should ask a prospective M and a lawyer when they're hiring them. What are some questions they want answers to add to their checklist first and
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Mike Greco
Foremost, what size deals do you work on, what types of transactions do you work on and your experience inside and around SaaS and AI. That is again paramount should be table stakes as we've talked about. What type of specialists do you have internally or out? What would you expect to use external resources for? To Mike's point earlier, if we're using a lot of external resources, that's just going to slow the deal down. What percentage of your deals go to leverage, RWI or REP and warranty insurance? That should be a really high percentage in today's day and age. Some of the strategics will be a little reluctant, but that percentage for a lawyer should be really high. And what is their bandwidth that is really critical in making sure that we have the right resources and deploy them at the right points in time. To your point Mike, we don't need them the entire transaction, but when we do need them in that last month and a half of the process, we need them fully invested equivalent to how we are and the client. And those are really critical. So understanding what are they focused on over the next three to four months and hiring someone too early in a process, you're really not going to get a true answer there. And so making sure you're hiring the lawyer at the right part so that answer is actually truthful versus something just force fed to you.
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Mike Lyon
And a couple of things I'd add to that is the tax person I think is really important. A good tax idea in a transaction frankly can pay for your entire legal bill. So the tax is what I would call the revenue side of the equation for the founder. Like they can help you save a lot of money in taxes with the right structure sometimes. So that's important. I would also try to get a sense for how siloed they are. So I mentioned this relationship between the banker and the lawyer. If they've worked together a lot, that's fantastic. But I think trying to get a sense for do they view it as a siloed relationship, are they going to be working together? Frankly that's true of the banker and sometimes the banker is even worse about interacting with lawyers. But I think that can go both ways. I think those are really important factors. And then the last thing I know we mentioned it earlier is just how do they deal with conflict. So if they represent PE firm X and they're in the process, what's going to happen? I think you just want to know that before you commit to them so that you can have a backup plan and just be aware that's an issue. The last thing I would just add is I would also try and get a sense for how well this council works with founders. First time or second time. Founders have a lot more questions about a transaction and so being able to take the time to explain that to you in a way that makes sense versus if they just work with a bunch of sophisticated private equity firms who know all this stuff already, it's a lot more transactional. So I think just being comfortable that you're going to get good explanations and frankly, you can trust the advice you're getting from someone's also really important in today's episode, we explored how founders should think about choosing the right M and A counsel, the most common mistakes entrepreneurs make when hiring legal counsel for a transaction, and how with the right experience, preparation and alignment, the right attorney can help protect value, manage risk, and execute a transaction really well. Mike, thanks for joining us.
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Mike Greco
Absolutely.
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Podcast Host
Disappoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Securities offered through VistaPoint Advisors member Finra SIPC this has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. US Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.