Yale Case. By: Raam S. Jani / A. J. Wasserstein
When embarking on a SF project, partnering with the right law firm is crucial for navigating the myriad legal challenges involved. The relationship between the entrepreneur and the legal team is vital to ensuring the project’s success, from initial acquisition to eventual exit. Here, we explore the key areas where legal expertise is indispensable and how to cultivate a productive partnership with your law firm.
1/ Dimensions to consider when selecting a lawyer for an ETA project
Choosing the right lawyer is crucial for entrepreneurs as they navigate their business journey. A good lawyer can prevent costly mistakes and provide valuable legal and strategic guidance. Entrepreneurs should seek recommendations but must conduct their own due diligence to find the right fit, considering factors like the lawyer’s expertise, reputation, style, availability, and cost. Building a respectful and productive relationship is essential, as lawyers often act as advisors and mediators. It’s important to hire a lawyer who understands small business transactions and can manage the project’s legal aspects efficiently while being mindful of the costs involved.
2/ What a lawyer will do for an ETA entrepreneur
- Legal Diligence and documentation
Once a term sheet is signed, significant legal work remains. Lawyers manage the legal diligence, ensuring the seller’s entity is compliant and the owners have the authority to sell the business. This process involves checking for tax liens and other hidden liabilities. Lawyers draft comprehensive purchase agreements, reflecting terms from the term sheet and including representations and warranties by the seller. These documents also cover equity and debt capital arrangements, necessitating various legal contracts such as subscription documentation, LLC operating agreements, and loan documents.
- Addressing labor issues
Labor issues are inevitable in search fund projects with existing employees. Legal teams draft equity option agreements for key personnel and craft employment and separation agreements. They handle sensitive matters like harassment and discrimination claims, wrongful termination, and workers’ compensation issues. Proactive measures, like robust employee manuals and training programs, are recommended to prevent legal disputes. Lawyers also ensure compliance with local, state, federal, and international labor laws, navigating complex determinations between employees and contractors.
- Orchestrating new financings
As SF companies grow, they often require additional equity and debt financing. Lawyers play a pivotal role in these processes, managing the legal aspects of extinguishing legacy debt and initiating new debt. They work closely with CEOs to ensure that loan documents accurately capture covenants, pricing information, and amortization terms. For new equity from investors, lawyers draft new operating and shareholders’ agreements and conduct thorough due diligence.
- Managing general contract issues
CEOs frequently encounter general contract issues, such as real estate leases, vendor agreements, and insurance arrangements. While lawyers typically review rather than draft these documents, their role is to ensure that the contracts reflect the intended terms and mitigate risks. Standard commercial contracts, particularly customer contracts, must be precise and well-drafted to facilitate smoother business operations and eventual exit processes.
- Overseeing the exit process
When it’s time to sell, the lawyer’s role becomes critical. The exit process resembles the initial acquisition but involves more sophisticated buyers, such as strategic acquirers or private equity investors. Lawyers manage the increased documentation demands, including stock purchase agreements, escrow agreements, and non-compete agreements. Ensuring well-organized business operations and early lawyer involvement can significantly smooth the exit process.
3/ Being an ideal client
To be the best client for a law firm, CEOs should:
- Be nice: Treat lawyers and their teams with respect and kindness.
- Make their job easy: Respond promptly and accurately to their requests.
- Be an enthusiastic advocate: Recommend and endorse your lawyers to others.
- Pay bills on time: Ensure timely payment of legal bills.
- Allow the process to happen naturally: Balance responsiveness with patience.
- Be on the same team: Collaborate effectively, accepting responsibility and seeking solutions.
4/ Additional considerations
CEOs should remember that while lawyers work for the legal entity, not personally for the CEO, maintaining clear communication and understanding the lawyer’s role is crucial. Lawyers identify and explain risks, but CEOs decide on the business terms. Avoid letting lawyers dominate the transaction and stay focused on the broader business goals.
Conclusion
Partnering with a law firm for a search fund project requires careful selection and ongoing relationship management. By understanding the various legal needs and how to work effectively with lawyers, SF entrepreneurs can navigate complex transactions successfully and achieve their business objectives.
Read the full case in: https://yale.app.box.com/s/5sbke973bhz02hn80f9r3tfd33wbmcch
