The dynamics of family-owned and entrepreneurial companies raise unique challenges for strategic acquirers. This is the third blog post in a series of 3 that offers several transaction concepts for acquiring print and graphics communications companies who have multiple partners.
“I really like this M&A opportunity,” said an NAPL client. “But one of the partners doesn’t seem interested in selling their business. It probably doesn’t matter because he’s the production guy. I’m thinking of just hiring his partner as a sales person. The production guy will end up owning a plant full of equipment with no customers, but he’s too stupid to understand that his partner controls the sales and the company is worth zero if he leaves.”
I am silent for effect. Then he asks, “What’s wrong with that?”
Assuming we get past moral and ethical issues, we then get to legal considerations. These arise because the sales person is a former owner, actually, he/she is STILL an owner at the time that the employment would begin. The strategic acquirer-turned-employer now faces the risk of the “employee’s” baggage coming to town, especially if the former owner’s suppliers and partners are left holding the proverbial bag.
The basic premise is that hiring a sales person who is the former owner of a printing business is virtually a strategic acquisition which requires assessment of “risk” and “reward” in structuring the arrangements.
This question comes up a lot and its been 3 years since I last addressed it on hydingout.org. Back then, I referred to two main legal risks and now one more is added:
- “Successor Liability” under various state laws that are mostly case by case judicial opinions;
- “Fraudulent conveyance” under Bankruptcy laws;
- “Breach of Fiduciary Duty” is a concept in law that essentially requires fairness. Partners have various legal responsibilities to each other. For one partner to “just pick up and leave” may be riskless or maybe not, depending on the gray-area facts and propensity of those who feel slighted to pursue legal hardball.
Although these risks are real, it does not mean that complex and expensive analysis is required. I received an e mail from a long-time client who planned to hire a former owner/sales person and he wanted to know what problems could be involved. We exchanged several e mails over a couple of days and the owner was able to conclude the negotiation with peace of mind knowing that he navigated the risks as best as possible. The key is that he correctly recognized that hiring a former owner as sales person is similar to a strategic acquisition and goes beyond traditional employment practices.