There are a myriad articles out there about choosing a sell-side M&A attorney, but very few that address the other side of the deal. Our middle-market acquisition clients and prospective clients run the gamut when it comes to M&A experience. For those that may be newer to M&A, I propose 5 tips to help you choose M&A counsel and ramp your acquisition program.
Run a Limited RFP
I had a great discussion a couple of days ago with Jason Lilly, Corporate Development Director at Neogen (NASDAQ: NEOG). Jason’s job is to get the deals done, but of course he is still responsible for keeping M&A expenditures in check. Several months ago, he decided it was time to hire new IP counsel (who provide legal due diligence support). As part of the decision making process, Jason ran a limited RFP. He started with 10 well-qualified firms and through an internal review of specific criteria, narrowed the field to 5. Fielding RFP responses from 5 firms allowed for a variety of fees, capabilities, experience levels, etc., but also limited the process enough that it didn’t become overwhelming. In the end, he didn’t choose the firm with the lowest hourly rates, but he has since experienced a decrease in outside legal fees because the firm he hired gets the job done more quickly. This shows that there are a variety of firms that may provide the service needed, but those with demonstrated experience may be more efficient and cost-effective for the client because of the knowledge base in the field.
Be Open to Long-Distance Relationships
Many middle-market companies I work with outsource their entire legal function to a local law firm, rather than hire an inside general counsel. This makes a lot of sense. An outside legal advisor becomes, in essence, a part of the management team where face to face interaction is valuable. When working with an M&A attorney, you will likely find that this face to face interaction is often unnecessary. When I worked as the Corporate Development Director at Novus International, Inc. out of St. Louis, we hired a team from the St. Louis Bryan Cave, LLC office to assist with M&A. Though we worked together for several years, I could count on one hand the number of face to face interactions we had, and they were usually a lunch or dinner meeting. All of the heavy lifting during diligence and contract negotiations was done by phone. As you consider an M&A law firm, you can use this to your advantage by going outside your local scope to bring in some excellent talent at very reasonable rates.
Push for Local, not Coastal Rates
I had lunch the other day with Laura Lo Bianco of Fennemore Craig, LLC, one of the top 3 law firms in Phoenix. I should mention here that Laura is a major contributor to this article as we discussed these points through on several calls. Laura brought this local-rather-than-coastal-rates concept to my attention. In her experience, billing rates for M&A attorneys in Phoenix are lower than billing rates for attorneys in California, all other things being equal. I suppose that shouldn’t come as a surprise to anyone who is familiar with doing business in California. But this goes back to the point above. In the realm of M&A legal services where face to face interaction is less important than other legal areas, there’s an opportunity for some billing rate arbitrage. This doesn’t mean that you shouldn’t consider coastal law firms in your search, but by running a competitive process and including offices that aren’t located on the coast, you may be able to keep rates in check.
Individual Experience Matters
When you hire a law firm, you want to be clear about who you’ll be working with and what their level of experience is. Industry expertise may be less important than the kind of M&A experience your M&A counsel has. In my prior role, we used one law firm for corporate acquisitions and another law firm for intellectual property licensing deals. We used two different firms because each team was particularly suited to the types of transactions we were doing. In some cases, you will want to seek out an attorney with a specific industry expertise. For instance, we frequently used a patent attorney that also had an educational background in chemistry and biology. She was really good at analyzing the patent landscape before we licensed or acquired IP. Such an experienced attorney may also bring industry standards to the negotiation table to craft a better deal for the buyer. As mentioned above, while an experienced attorney may have a higher billing rate, the overall cost may be less because of the time that is saved through efficiency and expertise.
Look for Bench Strength and Depth
While individual experience of your lead counsel certainly matters, the depth of capabilities within the firm is also important. If a firm is too small, it may not have expertise in some niche, but critical areas of your acquisition. For instance, an acquisition that includes intellectual property (such as patents or trademarks) may require specific counsel with respect to due diligence and transfer of the intellectual property. Another specialized area is employee benefits. Many companies provide employees with different types of benefits that are governed by the federal law known as ERISA. Failure to adequately address employee benefits in a transaction could result in penalties or damages to the buyer in the future. In evaluating legal counsel, consider whether the firm has the ability to service all of the different points of the transaction to ensure the entire business purchase is legally sound.
As a final note, we recommend that legal counsel selection be made at the same time the search for a business begins so that legal counsel will be available to assist from the letter of intent through the closing. Look for future articles that discuss the different phases of a purchase and how Third Coast Capital Advisors and legal counsel bring value to the buyer in each phase.