GOING TO WORK FOR THE BUYER OF YOUR SECURITY COMPANY
Harold A. Laufer, Esq., Bradley & Gmelich, CALSAGA Network Partner
Congratulations! You have an offer to sell your security company to a much larger operation. Due to your success, they want you to come and work for them, maybe to even continue to run your business or to manage an even larger security entity. They are also talking about giving you equity in the big company with potential bonuses.
Hmmm. What should you be thinking of when evaluating how good a deal this really is, and whether you should stay on with the new company, or just take your money and head to the golf course?
For purposes of this article, we’re not going to talk about how to structure the deal – whether it should be a stock sale or an asset transaction. And we’re not going to discuss your tax issues. These are all really important, but instead we are focusing on the potential issues involved when you not only sell your business but go to work for the buyer of your security company. Ask yourself how you will answer all of the questions below.
Who’s The Boss?
Let’s start with your employment contract. You’re used to running the show. Now you have a boss. The first question is “are you OK with that”? – or even if you’re not sure – are you receiving enough money to make it alright? Who are you reporting to? What do you know about the man or woman you’ll be reporting to? Do they seem reasonable? Under what circumstances can you be terminated? Because if the job isn’t all that secure, and you’re counting on the paycheck to get the deal worth what you’d like to make, you may be better off negotiating the sale price harder now rather than hoping things will work out later.
How much control will you have? Can you run things as you see fit, or if you don’t have a completely free hand, is it clear what the limits to your authority will be? Are you OK with the answer to that question? If part of your deal involves performance bonuses or an earn-out, are the targets realistic and achievable? And even if they are, is it confirmed the buyer will provide you with a sufficient budget and with enough operating discretion to actually hit your targets, or are the bonuses really illusory? It may sound great but in the real world will it actually happen?
How Much Longer Can I Take This?
The next question is how long do you want to work as an employee, even if you’re an officer of the company making a lot of money? Does the amount of time you are required to stay on match how long you actually want to remain? Is it too long or not long enough to be worthwhile? We’ll talk more about this in a little while, but if you’re being offered equity, does your employment term align with how long it takes for your stock to fully vest? (Full vesting means you can’t forfeit or lose the stock…it’s yours.) There’s a major risk if your employment can be terminated before your stock is fully vested and earned.
Am I Getting What They Say I’m Getting?
Let’s look at the equity side. How much of the buyer’s stock is on the table? Is it enough to be meaningful? Is it fair? Is it stock in the overall company or are you getting equity in a small little segregated piece of the business? Is it being given to you as part of the sale? Or is it extra in exchange for your staying with the business? If you have to earn it, what does that mean? Is it dependent on hitting certain targets? Is it dependent on your remaining with the company for a certain period of time? If you exceed your targets, can you get more stock? (This is important because if you miss the targets you may lose stock or at least not earn some of it.) Are you getting stock options, which mean you have to buy the stock, albeit at a discount to fair market value, at the time you purchase your shares? Is your deal part of what we call a “roll-up.” This means your buyer is purchasing other companies like yours and wants to get a lot bigger. If it’s a roll-up, you should find out that your deal is equivalent to what other sellers are getting and is everyone getting a similar amount of stock? (You might be receiving 10,000 shares, but if other similar sized companies are receiving 90,000 shares, this is not equitable for you.) Is everyone receiving a similar compensation package. When a roll-up is in process it gives you an opportunity to talk to other owners and to get a better feel for what a good deal looks like.
If you earn or otherwise obtain all of your stock, who can you sell it to? What are your options for monetizing it? Unless you figure an even bigger buyer is coming along in the foreseeable future, you should consider making the buyer obligated to buy you out when you leave the company or at least at some mutually agreeable time. If the goal is to cash the stock in, you have to come up with a method of determining what the stock is worth. You should do that when you negotiate your employment deal and not leave it for later. Without a way to sell the stock, your stock certificates are just pieces of paper.
What About My Company’s Assets?
Does your security company have real estate, vehicles and/or equipment? Are they part of the sale or will you retain some or all of it? Is the buyer willing to lease these assets from you? This can be another revenue source for you and goes into figuring the total value of your deal.
Putting It All Together
When you decide to stay with the buyer of your security company there are complicated and interwoven issues about your compensation, your equity, your potential upside and possible side deals for assets that aren’t part of the overall package. Because these affect each other, making a mistake in any one of them can substantially change what your deal is worth. And most importantly, you have to think about why you want to stay on? Is it worth it financially? Is it secure? What is the realistic upside? Are you going to be happy working – and working for someone else after years of doing things your way and being you own boss? It’s different, to say the least.
Bring your attorneys into the picture at the conceptual stage, not just to look over a final contract before you sign. As you know, Bradley & Gmelich LLP works with sellers (and buyers) of security companies every day. We can help you understand the pros and cons of working for the buyer of your security company.
Harold A. Laufer is a highly experienced corporate transactional lawyer, and has been Of Counsel with Bradley & Gmelich LLP for over two years. He spent much of his career practicing corporate law as an equity partner at a major Midwest law firm, where he headed the Mergers and Acquisitions Practice Group. He has represented companies of all sizes, from start-ups to Fortune 500 companies, along with their owners and managers, as a Trusted Advisor. Mr. Laufer has handled a wide variety of transactions for corporate clients, with experience in all aspects of a business’ life cycle, starting with deal structuring and entity formation, and continuing through Founder’s documentation, initial HR, IP, rights and licensing issues, financing, growth, corporate governance and eventually ending in liquidity events and exits.
Mr. Laufer has published and lectured on mergers and acquisitions, negotiation strategies and skills, and corporate governance. He has taught graduate level business courses on family offices, contract drafting and enforcement, and entrepreneurship. He is affiliated with UCLA’s Anderson’s MBA and entrepreneurial programs. hlaufer@bglawyers.com 818-243-5200.