mergers and acquisitions Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

The Impact on M&A of the New Noncompete Law

February 29, 2024 By Rick Randel

Rick Randel Mergers and Acquisitions and Succession Plans for Financial Advisers

You may have received one or more well-meaning email blasts trumpeting what sound like massive changes to California’s law on noncompetes. Some of the emails imply that now, as a result of these changes, noncompetes are unenforceable in California. In my opinion, these emails have overstated the extent of the changes. Especially in the context of mergers and acquisitions (M&A).

The basic law regarding noncompetes in California has not changed: no company can prevent a non-employee from competing, other than in connection with the sale of a business. But the seller of a business can still agree not to compete with the buyer. That hasn’t changed.

The new law basically does three things:

It clarifies that noncompetes in the employment context are unforceable regardless of where the agreement was signed or which state’s law supposedly governs the contract.
If an employer tries to make an employee sign an unenforceable noncompete, that’s a civil violation and the employer can be fined.
Employers who have made employees sign unenforceable noncompetes in the past must notify the employees that the noncompete is unenforceable.

Although the February 14 deadline for notifying employees has passed, it’s probably still a good idea to notify employees, to show a good faith effort at compliance. A late notice is better than no notice, and may prevent the company from being fined or at least reduce the amount of the fine. If you believe that your company may have made employees sign unenforceable noncompetes, you should reach out to your company’s employment law attorney about sending the required notices.

I hope this clarifies this new law regarding noncompetes. Thanks,

Rick

This post is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

Project Your Net
Personal financial due diligence in the third party sale process

September 14, 2015 By John O'Dea

An investment banker told me a story of a business owner who killed the sale of his business at the 11^th hour over FedEx charges. The termination of the deal resulted in hundreds of thousands of dollars wasted on the part of the seller along with exposing the business to real risk. Most business owners would not make that decision lightly, and certainly not over a thousand dollar FedEx issue.

I fear that the owner and his advisors allowed the following to take place. The owner finds himself sitting in the dark in his family room at 3:00AM staring at a sheet of paper. The owner is desperately trying to figure out how to avoid making the projection come true. He is about half way through a process to sell his company to his closest competitor. He is reviewing a final estimate of the following numbers reducing his total net payout:

Total taxes
Total advisor fees
Other expenses like tail liability insurance

His final “take home” number is half of what he expected. Worse still, based on updated projections and adjusting his expenses for life post transaction, this amount is starting to feel short of what he really needs to ride safely off into the sunset. The question at hand? “How expensive, damaging, and possible is it to kill the deal at this point?”

Once an owner is deep into the process to sell his business, the cost and negative impact of undoing the process can be crippling. And, most business owners would have allocated their time and resources differently had they known these numbers earlier. Clearly, they would not have started the process if the net result was less than what they needed to achieve their financial objectives. No one wants this result – not buyers, not sellers, not advisors.

Don’t let you or your clients fall into this information gap. Any business owner who is likely to exit using a third party sale process, needs to get ready. Getting ready includes two primary components:

Corporate pre-sale due diligence
Personal pre-sale due diligence

Corporate pre-sale due diligence is designed to make sure risks are identified and addressed as early as possible. Ideally, corporate pre-sale due diligence is completed with more than 3 years to go before any anticipated sale or transaction.

However, as outlined above, business owners and their advisors must include personal pre-sale due diligence alongside the corporate pre-sale due diligence. Personal pre-sale due diligence is the careful projection of the net value an owner will receive from likely deal structures after taxes, debt, advisor fees and other expenses. This number needs to be honestly compared to the net after tax number the business owner must receive to experience “Happily Ever After”.

Without this careful personal pre-sale due diligence, business owners can get far enough down the path in a sale process to be hit by the perfect negative storm – the amount won’t be sufficient and the cost to back out will be too high.

To project the net after tax result a business owner can expect, they need to be educated on valuation ranges and transaction types that will apply in their industry and specifically to their business. This information needs to be adjusted for taxation specific to their entity and common deal structures. Outstanding debt must be considered. And, the expected cost of advisors and other expenses must be included. Most business owners are not aware that even good transactions can leave them with 50 – 60% of gross proceeds after everyone else gets paid.

The next step in projecting their personal needs can include some hidden land mines. The challenge for many is getting a handle on their personal expenses post transaction.

In my practice, I call this process recasting the business owners “ME-BITDA” or from the business owner’s perspective – what’s in it for me. I coined this term to mirror an accounting calculation and key valuation metric: Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

Adjusted MEBITDA is calculated using Modified (personal) Expenses Based on Interest, Travel and Dangerous Avocations. This process makes sure to pick up personally any adjustments to EBITDA made to eliminate business owner perquisites, travel, meals and entertainment expense from the corporate Profit and Loss statement. For example, if the business is supporting $5,000 annually of travel that the buyer will not incur, EBITDA could be increased by that $5,000 expense. The result is a small increase in the potential value of the business as expressed as a multiple of EBITDA. However, the business owners MEBITDA needs to also be increased by the same $5,000. It is our experience that business owners tend to desire a similar level of travel post employment.

Thus, with some additional effort, a business owner will be able to re-cast their personal expenses to reflect their likely expense rate in retirement. As a result, they will be better positioned to estimate the net present value required to support that expense flow. From here, the owner will be better armed to compare what they need against what they are likely to obtain during the third party sale process net of taxes, fees and expenses.

As a result of these two steps – projecting actual net results from the sale and comparing this number to the net present value actually required, business owners will have a greater ability to know when deal structures, offers and concessions will jeopardize their financial health. This information will enable business owners to end unhelpful transactions earlier in the process thereby reducing the economic damage created by exiting a sale process at the 11th hour.

About John O’Dea:
John has spent over a decade working to simplify investment, insurance and succession planning concepts so that business owners and their employees can be more confident in the actions they take to improve their financial future. Operating a business requires difficult and very personal trade-offs. John specializes in helping business owners and their employees model these trade-offs to better understand the net personal impact of financial strategies – especially those present during business owner transitions. See more at: Summit Advisors John O’Dea.

Neither Summit Financial Group nor Securian Financial Services, Inc. are affiliated with Rick Randel or the Randel Law, Inc. Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SPIC. Summit Financial Group, LLC is independently owned and operated. 2000 Crow Canyon Place, Ste 450, San Ramon, 94583. TR#1290740

Seller’s Advantage: Due Diligence Preparation

September 1, 2015 By Rick Randel

Potential buyers want to know as much as possible about the target company before closing the deal. The buyer will send the seller a “due diligence request list” detailing what they want to see. Frequently a new client will send me the due diligence list with a frantic, “We’ve got to get all this stuff to the buyer by the end of the week!”

But sometimes much of that documentation doesn’t even exist. In these cases, it can take weeks – if not months – to go back and document things that took place years ago. This can jeopardize the deal because (a) the buyer gets the impression that the business is disorganized, and/or (b) the buyer finds another company to buy, while the seller is scrambling to get its house in order.

The following outline lists some of the main items the buyer will request. Although not a complete due diligence request list, if most of the information listed is assembled by the time the request is received, the seller will be ahead of the game.

Corporate Records

The company’s articles of incorporation and any amendments.

The company’s bylaws and any amendments.

The names and addresses of all shareholders and number of shares owned by each.

TIP: You should also have clear documentation of all shares issued, including board authorization, and either the original stock certificates or copies.

Minutes of all meetings of the board of directors and shareholders since inception, and any written consents in lieu of meetings.

Financials

Professional-looking financial statements for at least the last three years. Typically, this will include P&L, balance sheet, and statement of cash flows for the last 3-5 fiscal years, plus interim statements through the end of the most recent quarter.

TIP: If you don’t have well-organized financial statements, bring in an out-sourced CFO and/or CPA to help you get them in order.

TIP: Put yourself in the buyer’s shoes. Make sure you have a solid explanation for any questions the financial statements might trigger.

An accounts receivable report (including aging schedule) and list of accounts payable.

Employees

A list of all employees and independent contractors, including job titles, length of time with the company, and salaries.

Any employee-related complaints or claims filed against the company.

Insurance

A list of all employee benefit programs, including health insurance, pension or retirement plans, life insurance, disability, etc., including copies or documentation of all programs/plans.

A list of all insurance policies (e.g., E&O, EPLI, cyber, workers comp, general business, key man), including the name of the insurance company, policy number, term and extent of coverage, and annual premium.

Customers, Suppliers, Contracts

List of all customers/clients, including percentage of sales to each customer/client for the last five years.

List of major suppliers to the company for the last five years.

Copies of all major contracts and agreements, including your lease, customer agreements, distributor agreements, sales representative agreements, etc.

TIP: Review the “assignment” provisions of these contracts and create a list of contracts that require the other party’s consent to an assignment or change of control.

Tax & Compliance Issues

Copies of all business tax returns for at least the last five years.

Make sure all tax returns and other reports have been filed and that you are ready to answer any questions they may raise.

Make sure all governmental permits and licenses required to conduct your business are current.

TIP: Stay in good-standing with the Franchise Tax Board and Secretary of State. File your Statement of Information with the Secretary of State every year (biennially if an LLC). You can check your status at http://kepler.sos.ca.gov/.

Obtain a Phase 1 environmental site assessment, if there is any possibility of environmental issues. Follow up with a Phase 2, if necessary. Take steps to resolve any environmental issues now.

TIP: Be aware that copies of the assessments must be provided to a potential buyer, who will ask for evidence that any issues flagged in the assessment were resolved.

A well-prepared seller is in a much better position to negotiate the terms of the transaction. Avoid the last-minute scramble and get a head start on compiling the information about your company that a qualified buyer will want to review.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.