The dynamics of family-owned and entrepreneurial companies raise unique challenges for strategic acquirers. This is the second blog post in a series of 3 that offers several transaction concepts for acquiring print and graphics communications companies who have multiple partners.
The CEO of the potential acquirer is disappointed that, for whatever reason, the deal has stalled after promising early talks. It’s been weeks since he/she brought up the idea of buying all or substantially all assets of the business so that each partner gets a fair deal based on objective criteria (“Plan A”).
The lead partner of the seller “comes clean” and admits that the partners are not on the same page about whether and how to sell the business. The leader then makes an overture to the CEO of the potential acquirer by saying, “How about if you and I strike our own deal and I’ll buy out my partners separately?”
In other words, “Plan B”: the leader would buy out the partners while negotiating to sell the business to the would-be acquirer.
This is not uncommon in the world of buying and selling companies, but as an M&A advisor who is proud that not one case in over 20 years has ended up in court, I am not wildly enthused about the “Plan B” approach. Simply, we would not advise an NAPL client to go forward on this basis unless there were special circumstances.
The concern involves legal issues having to do with fiduciary duty. The leader, as a shareholder or as a corporate officer, may have legal responsibilities to the other partners. Depending on the judicial interpretation of state statutes and case law involving successor liability, the acquiring company is subject to the risk of whether the leader meets those legal requirements. Unfortunately, it’s not black and white.
In the emotional haze of the sale of a family-owned or entrepreneurial company, it would not be surprising for deeply personal considerations to affect the mind-set of the partners (or their spouses). Example: “You worked all these years at the company and put up with [INSERT NAME OF LEADER] [INSERT BAD LANGUAGE], and all you get out of this is [INSERT AMOUNT OF CASH AT CLOSING, future payments never make it into this talking point, nor does resolution of personally guaranteed debt].
In other words, the acquirer may end up being on the receiving end of legal claims that may or may not be legitimate. The extent to which this risk is worth accepting has to be viewed under the microscope of a specific case.
So when the lead partner says, “I’ll just buy out my partners and you and I can work out our own deal,” the smart acquirer knows to reach out for professional advise to navigate the landscape.