How to buy a law firm | Feature

After focusing on financial management and emergency restructuring amid the pandemic, law firms are once again looking to grow — and they are buying smaller competitors to do so.

Rachel Watson

The most common way to facilitate such an arrangement is via a stock purchase agreement (SPA) or an asset purchase agreement (APA). While on the surface, these documents may appear relatively simple to prepare, we are often asked to advise on the ramifications in which APAs have failed to seize critical assets, or in circumstances in which SPAs have subsequently turned out to be not what they were initially thought.

The ramifications of such failures are much more complex than the cause; The latter is generally the result of simple oversight or, at times, sloppy crafting. So we’ve put together our six best tips for buyers and practitioners alike, when faced with preparing a purchase agreement.

1. Due diligence

The most essential part of any asset purchase is making sure that you have carried out your due diligence properly. The skeletons lie deep in the closet and the only way to find them is to dig around. As such, before purchasing ensure that you: (a) review the company’s books and records for at least the past five years; (b) ascertain whether the company is subject to any ongoing litigation or has any judgments against it; and (c) prove that the company is either debt-free or that there are no undisclosed debts if the obligations are incurred. Needless to say, no one wants to buy a seemingly successful and profitable business only to discover that it is involved in a high-value lawsuit that could either result in a judgment against it or at least significantly damage the company’s reputation.

2. Know your business

No two jobs are alike. By understanding the mechanics of the business you intend to purchase, you can properly consider assets that you may reasonably want (or not want). For example, if less than 4% of new clients are “offline,” you might want to weigh the benefit of taking on the office rent. This type of critical analysis will allow you to provide clear instructions for the purpose of preparing your purchase agreement, but it will also give you a better indication of where the value lies in the business.

3. Protection of good intentions

When buying a company, goodwill is a critical factor. As such, well-crafted and considered restrictive covenants (including non-competition and non-dealing clauses) are essential. We emphasize the word “thoughtful” because vows that are too stressful and/or attempt to protect more than is necessary in the circumstances are very likely to remain unenforceable. Unfortunately, there are no established standards when it comes to restrictive covenants – each must be considered individually and in light of specific facts. However, a well-researched material (as applicable) should specify the period of any restriction, geographic limitations, and categories of individuals and permitted activities.

4. Ready, fixed, complete

When buying a company, condition precedents can be your best ally. The APA must clearly define all conditions requiring resolution/compliance prior to completing the purchase. These terms may include the clearing of seller’s debts and the transfer of any bank approvals. Ensuring that these terms are contained in the Agreement avoids the risk of completion prior to the fulfillment of any such conditions by Seller. It also makes sense to include a long break date in the APA at which time any condition precedents should be adhered to. This may be accompanied by a clause giving the buyer the opportunity to withdraw from the transaction if these preconditions have not been met by that date – for example, if the transaction becomes inadmissible as a result.

5. Check your schedules

If your APA refers to a table, be sure to append it to the final agreement. While this may seem an obvious point to make, there have been numerous occasions where the definition of a “customer list” is “as shown in Table 1” and upon reviewing Table 1, it is blank, which effectively means no customer list has bought. This can be a costly and very difficult mistake to correct if these customers go elsewhere.

6. Detailed is the key

The majority of previous APA procedures contain standard clauses relating to major assets that the purchaser may reasonably wish to bear. However, standard documents are never enough for the purpose; It must always be adapted to the requirements of the respective purchase. For example, while the standard APA will likely state that you’ll buy phone systems, what’s the real value if you don’t also buy the rights to the company’s related phone numbers? These types of smaller additional items are often overlooked and are not expressly stated in the purchase agreement. This can subsequently cause major problems on a broader level.

Closing comments

In practice, in addition to making sure that your purchase agreement is fit for purpose, there are also post-completion requirements to consider. These include assignments, substitution of contracts, payment of any other taxes and fees such as SDLT, and general administrative matters related to payroll, pensions, and insurance.

So purchase agreements can be a minefield to navigate. As such, it is critical to ensure that you have a legal team in place not only able to draft the APA and consider it at face value, but also to consider the intricacies of the transaction and the assets that make up it.

Elliot Nathan and Rachel Watson are attorneys on the Dispute Resolution Team at Debenhams Ottaway

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