Sell-Side Readiness with Eric Green & Patrick Degnan

In part one of our two-part Cascade Conversations series on Sell-Side Readiness, Cascade Managing Director Eric Green sits down with Patrick Degnan, Attorney at Clark Hill PLC, to unpack what every business owner should know before selling their company.

From deciding when to start planning to understanding the key steps in the sale process, Green and Degnan explore how to position your business to maximize value. They dive into the nuances between asset and equity sales, navigating contracts and change-of-control provisions, and the timing for bringing in professional advisors.

You’ll also hear how operational improvements can influence valuation and what to look for in a purchase agreement—so you’re never caught off guard.

Whether you’re planning a sale soon or just starting to think ahead, this episode offers practical, actionable insights to help you get ready.

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Transcript

Announcer

Welcome to Cascade Conversations. Join the Cascade Partners team and our network of trusted advisors as we work to demystify the details, terminology and strategies of acquisitions, divestitures, financing, performance improvement and restructuring.

Eric Green | Managing Director at Cascade Partners:

All right, good afternoon. My name is Eric Green. I’m a managing director at Cascade Partners. I am delighted to have a guest of honor here. Pat Degnan from Clark Hill, the Arizona Phoenix office. And, we had the great pleasure of working on a deal together, most recently of the sports construction business in Phoenix. And, we became good friends.

Out of that, we had a conversation about what would sell side readiness look like in the M&A world, both in terms of what lawyers do and what investment bankers do. And out of that came this Cascade Conversation.

So, welcome, Pat. Thank you for taking the time, thank you for flying in from Phoenix. We’d love to learn a little bit more about you. Please share who Pat Degnan is.

Patrick Degnan | Attorney at Clark Hill, PLC:

Yeah. Been in the M&A practice at Clark Hill for about three years now. My prior firm merged with Clark Hill. Before that, I was actually in public accounting for four years. Before that, I was in business school. Before that, I was in law school.

Eric Green:

So, you’re well-educated.

Patrick Degnan:

So they say. (laughs)

Eric Green:

And from Toledo, Ohio, which is a sister city to Detroit, so, a lot of common threads.

We did a nice job, I thought, on that deal. We’re now on a second deal together that’s sports construction. The sell-side readiness topic not only came up with Pat, but also, out of some scar tissue that I had as a CEO of a company. I had the opportunity to to lead that company to a sale of a strategic. And, in that process, I felt that there were many mistakes that I made, particularly in preparation.

As we think about it on the law side, let’s talk about some of the things that we can get done: When should a company in general start preparing for M&A process?

Patrick Degnan:

I think it’s at the very first point you contemplate an exit. Because that’s that’s going to start this whole process. If you if you have that mindset of not necessarily just growing to continue to grow, but now you’re growing with this exit target in mind, I think your focus starts to change.

Eric Green:

Is there a rough time frame that you would suggest?

Patrick Degnan:

I don’t think you can be too prepared. But, generally, I’d say 1 to 2 years is a really good window. You have enough time there where you can start to correct things that may need to be corrected. And if you are at the point of contemplating the sale, but you don’t necessarily have to sell, that’s when you’re in a really great position.

Eric Green:

(Laughing) You want to leave Vegas when you don’t want to leave Vegas?

Patrick Degnan

(Laughs) Exactly. Get up from the table.

But, in that process, you can either set yourself up for a lot of success on the sale or set yourself up for continued and improved growth in the company, if that’s the direction you choose to go in.

Eric Green:

Yeah. And so, when we talk about being prepared on the legal side, what does that tactically mean? What are the things that we should be thinking about and preparing our clients for?

Patrick Degnan:

Yeah, many things. Obviously, I would say first and foremost, it’s probably what your current contract situation is, and that’s with customers, with vendors, with employees—pretty much any of your stakeholders with whom you have contractual relationships. That’s going to dictate so much of the legal process as it goes forward. Your organizational structure, how you’re formed, or are you a corporation, an S corporation, an LLC? You know, certain structures are easier to work with and transactions—some limit your options, some give you more. As you go down the road to sale, you can start contemplating how you may want to change that to make yourself a little bit of a better target.

Eric Green:

Got it. There’s a couple threads there that I’d like to explore, particularly on the organizational front. We went through an F reorg (Type F reorganization), which I couldn’t even spell “F reorg” prior to that transaction. Maybe you could share what some of the typical structures that you see are. What are the some of the easier structures to work with when we’re talking about a sell-side?

Patrick Degnan:

Typically, buyers are going to be very attracted to something that they can purchase as an LLC. You’re fundamentally talking about whether or not it’s an asset purchase or an equity purchase. And I’m talking about this more in the equity purchase side of things. So, an LLC is very attractive because a buyer can buy that and plug it into an existing structure fairly quickly.

It’s not as easy with a corporation. Impossible to do with an S corporation, more or less, if you’re talking about a private equity firm, strategic buyer. And so, you know, what we did on that F reorganization is taking an S corporation and turning it into an LLC that can be purchased.

Eric Green:

Got it. And mapping that out ahead of time and just having that strategy makes it a lot easier than doing it at the last minute.

Patrick Degnan:

Absolutely. And coming into a transaction and understanding you’re going to do that; saying, “Well, we’re going to assume that this is probably how you want to do it. Is that correct?” That helps.

Eric Green:

And then the other thread I wanted to go down is the contracts, whether it’s with vendors and partners, and really understanding change of control and pressure testing those contracts. If you could expand on that.

Patrick Degnan:

Change of control is very important in these transactions. We’ll get into some of the specifics on the purchase agreement later. But what you’ll see in any purchase agreement—particularly an equity purchase agreement, but it does come up in asset purchases, too—change of control means that your counterparty to the transaction has the right to terminate the agreement if there’s a change in control.

So generally, 50% of the ownership changes, they can agree to it too. Knowing those in advance—you may have been doing a lot of business on a form of a contract that has those provisions. And all of a sudden, if you get four months outside of a closing and you’ve got to go find 200 people that say, “This is okay that we transfer this business,” that’s very difficult. And those could be very important customers, vendors that could really impact the deal.

Eric Green:

Should an owner of a business or owners of a business do that on their own? When should they hire an M&A lawyer like you?

Patrick Degnan:

My genuine belief is that it is around that time you start contemplating the sale. I think of companies in three life cycles: There’s the formation, there’s the middle—that’s the operations—and then there’s the sale. If you’re thinking of sale in the middle, that’s a very good time to start thinking about it. And that’s probably the time you want to start getting a big team of advisors in place that can see you down the path for that goal.

Eric Green:

Yeah, and a little self-serving plug: You’re contemplating doing pressure testing on the legal side, then the bankers are doing it on the business, the operations, and the financial side. And they kind of come together and merge together, which we had the opportunity to serve that one client together, so, that was great.

You mentioned as we were preparing for this, it sounds like “Okay, well, maybe I’m not sure if I’m going to sell. When do I sell? When do I not?” But the result of this pressure testing could be just improvement in the business, which will ultimately lead to a better valuation. And you’ve seen that a thousand times.

Patrick Degnan:

Yes, no question.

Eric Green:

So, while it sounds like this is really sell-side preparation, you are improving your business along the way when you do these things.

Patrick Degnan:

Yeah, I think there’s a real value add there, in both senses.

Eric Green:

So, we talked about the agreements a bit and you get the purchase agreement, and our clients—generally speaking where we serve in that middle market—this is the first time they’ve done a sale. And you get a 98 page document. It’s like, “Well, what is all this?” Can you demystify the purchase agreement for the folks?

Patrick Degnan:

Yeah. I’ll walk through it kind of front to back. Basically, you start out with the economics of the deal: This is how much we’re paying for it. This is when we’re paying for it. This is what you’re getting in return—whether it’s rolled equity, cash, whether it’s seller financing; all those things are kind of covered upfront.

After that, you get to probably the most important part, which is the seller reps and warranties. As Eric said, it’s many, many, many pages of statements that the seller makes stating that this is true about the business as of this date, or that they typically have a closing date. These statements are all true. If they are not true later on, after we close, we are liable for the damages caused by those mistakes.

Eric Green:

And maybe an example. We were talking about environmental earlier?

Patrick Degnan:

Yeah. Environmental. We can talk about, Required Consents. But if you have a major customer that could terminate the contract because there’s a sale and maybe they don’t feel comfortable with the buyer—maybe they have some experience with them in the past and they don’t really want to do business with them. Possibly.

We closed. That consent hasn’t been obtained. All of a sudden, $1 million worth of business has gone. Seller has to make up for that out of the purchase price. Because, fundamentally, the value of the business may be impacted by the fact that person did not get the consent and they’re not going along with the transaction.

So, that’s kind of a relatively simple economic explanation.

Eric Green:

So the reps and warranties is the seller saying, “I swear these are drivable and etc.”

Patrick Degnan:

Yeah. And you know, they’re written and rewritten, and risk is allocated. Both sides try to find something that’s comfortable with the market. And then I’d say, the third most important part, if not maybe the most important part, is the section that’s called Indemnities. And this is what dictates what, how, and when things are repaid; if there is a problem, this is how much it costs.

If it relates to what we’ll call fundamental reps, which are the really, really important things—the things that if they weren’t true, the buyer would not do the deal. Those are very expensive if they’re wrong. Some of the other ones are somewhat limited.

So, those kind of three sections are probably the most relevant to the seller. We define as many terms as possible. There’s, definitions of things and those get heavily negotiated. Things like the concept of indebtedness, for example, like: What constitutes debt? What do you have to pay back? What takes off the purchase price?

So, yes, it’s a totally overwhelming document for anybody.

Eric Green:

So it’s: 1. What you get paid, 2. I swear, these are true, 3. And this is what happens if there’s a penalty and I misspoke.

Patrick Degnan:

Yeah. That may be the simplest way to put it.

Eric Green:

Okay. And I know that we’re talking about sell-side preparedness. However, it’s with that structure of the asset purchase agreement or equity purchase agreement, we kind of have to back up.

Patrick Degnan:

Yes. Could we say that this is true? Right now?

Eric Green:

Right.

Patrick Degnan:

Knowing what we know; if we say “No, it can’t be,” and we’re a year and a half out, what can we do to fix it?