Getting It in Writing
Matthew described that his management team wrote specific guidelines into the sale agreement related to changes in operating process and structure. Gavin explained that he “should have given everyone a raise before closing the deal, because now all of a sudden, you’re dealing with HR and policies that have been around for a decade.” Terms related to operations would have helped both of them, but aren’t things that are typically in a contract “by default.”
In addition to the basics (the money! and the “lawyer stuff” like indemnification and representations), these are the things that are typically covered in a sale agreement:
- What is actually being purchased. In an asset sale, you are probably selling everything, but what constitutes everything? The assets, including liabilities, contracts, intellectual property, and so-on will be spelled out. Additionally, things that aren’t being purchased will be listed, too, as excluded assets.
- Terms about competition and solicitation. If you leave, are you able to work with your clients again? What about your employees—can you bring them with you to start a new company? Chances are, you’ll be tied to a material non-compete and non-solicit (perhaps as long as five years). Play this one out in your head: if the deal goes south and you leave early, as did Maria at Facebook, can you actually do what you love?
- What you can and can’t talk about. Your contract will add details about confidentiality which will likely extend a standard NDA by a lot. What happens when you want to write a book (like this!) in the future—will you be able to share your experiences with the world?
Of course, you can also negotiate for any terms you like, and if both parties are willing to accept them, they’ll become binding—and theoretically—will be followed after the transaction closes. I’ll come back to theoretically in a moment.
These are some of the things that you might want to negotiate and get in writing:
- I want the ability to sign off on my contracts. In a larger organization, you’ll likely assume their legal process, which may extend a negotiation by a large amount of time. If it’s important to you to close business quickly, control over the legal process (even using your own outside counsel instead of the corporate team) may be to your advantage.
- I want to be clear on how I “get credit” for selling work. If you have an earnout, it will probably be tied to revenue. But if a sale includes people from outside your organization, how do you claim that you were responsible for the revenue? Phil described that, at Deloitte, there was a very complicated formula for this; is that formula in writing, and do you understand it?
- I want to retain control of my brand. Is it important to you that your brand aesthetic and message continue on? More on this later.
- I want the ability to spend my budget as I see fit. Gavin mentioned discretionary spending; will you be able to send your whole team on a vacation, if you feel that they’ve earned it, without getting approval?
- I want the ability to hire, fire, and give raises without approval. Often, acquiring companies will centralize HR functions, and so you may lose control over your resourcing. Are you ready to work on a hiring schedule, and in a hiring process, which you don’t oversee? What about spot bonuses or raises—has that been a fundamental part of your culture?
- I want to keep my rate structure. The acquiring company may not agree with your bill rates, or may want to standardize. Will this disrupt the way you interact with current clients, or change your ability to attract new ones?
- I want the same terms (or better ones) if the buyer later sells their company. If you have unvested stock, does it accelerate? Do the things you’ve negotiated for transfer to the new owners, or do you have to substantiate your requests all over again?
- I want money to spend to help retain my team after the acquisition. This is sometimes called a management carveout: an amount of money is set aside from the deal that can be used to provide retention incentive to your key team members. But that money is coming from somewhere; are you okay with it coming out of your share of the sale?
- I want my money if I get fired. It doesn’t make a lot of sense for a buyer to acquire your company and then fire people, but lots of things in business don’t make sense. Have you played out the various scenarios that might lead to a termination?
The main reason to argue for these things is that, if push comes to shove, you’ll be on firm legal grounds to come back to where you started. When I first started being involved in working with contracts at frog, David Kramer, the GM, gave me some great advice. He said, “Pretend that the person you signed with isn’t there any more, and has been replaced by someone terrible.” We assume best intentions from the people we’ve established relationships with, and it can be easy to give them the benefit of the doubt: “Oh, we talked about that, I’m sure they’ll remember if it ever came to it.” But people change jobs, and their replacement won’t know about those casual conversations—and they probably won’t care about them, either.
Of course, you can always push too hard. When you demand things to be included in the contract, it starts to send a signal to the buyer—that you don’t trust them. And just because you ask for these things doesn’t mean you’ll get them. And, each item you want to put in the contract requires conversation, negotiation, and time (and, of course, lawyer fees at upwards of $600 an hour).
And back to the comment about things being binding, but only theoretically. Imagine that you’ve gotten to a place after the transaction that is so bad and so painful that you consider going back to the contract for “proof.” If you push back, legally, you’ll make the emotional environment worse. You’ll be back to the same feelings of anxiety that you likely had during the original sale. You’ll probably return to the secrecy part, so you don’t further disrupt your team; or, you’ll be out in the open about it, and your team morale will dip even lower. And, it’s likely that the buyer has bigger and better lawyers than you do. It’s incidental for them to drag out a legal process; it’s probably not for you.
So it’s in your best interest to assume the contract is a collaboratively-agreed set of terms, and in a worst case scenario, you could lean on it—but you probably won’t.