Dallas Corporate M&A
What structures do you see most often in independent sponsor deals, and where do sponsors typically gain or lose negotiating leverage?
QSBS has become an increasingly popular way for independent sponsors to minimize capital gain tax on an exit. Of course, QSBS requires a C corporation as the issuer of the stock, among other requirements.
Asset purchases continue to be the preferred means for independent sponsors and other buyers to effectuate acquisitions. The primary reasons are the traditional ones: a stepped-up tax basis in the assets acquired, and better insulation from pre-closing liabilities.
Independent sponsors often gain or lose negotiating leverage at the LOI stage – both with target companies and with capital partners. That is why we advise sponsors to involve counsel and other advisors at the LOI stage – as additional eyes on these critically important documents.
How do you approach aligning incentives between sponsors, capital partners, and rollover sellers in M&A transactions?
This is all about the architecture of the equity capital stack. And communication – early and often – among the constituents is critical. It’s of great importance to align parties on the importance and role of each layer of the capital stack – the equity preferences of the capital partner, the carried interest of the sponsor, and the upside of the rollover sellers.
What LOI terms tend to be the most sensitive when negotiating with founder‑owners, and how do you help sponsors manage those early‑stage dynamics?
Non-competes and other restrictive covenants are among the most sensitive deal points with founder-owners, assuming they are not retiring into the sunset. Non-cash or delayed purchase price components, such as earnouts, rollover equity and seller notes, also present negotiating sensitivities.
We counsel sponsors through these sensitive negotiations by helping them see the issues from the sellers’ perspective. We also aid sponsors here by helping them develop a sharp focus on what’s really needed, always with an eye toward a mutually agreeable solution.
How do you typically structure governance rights—board seats, vetoes, and protective provisions—when both a capital partner and a rollover seller are involved?
In deals like this, we most frequently structure board seats along the following general lines: 1 or 2 votes for the sponsor, 1 or 2 votes for the capital partner, 1 vote for the rollover seller, and 1 vote for an independent director/ manager.
We then usually structure vetoes and protective provisions in favor of both the sponsor and the capital provider. These vetoes and protective provisions cover the most material decisions, such as selling the company, issuing new equity, buying another company, etc.
What is your experience with reps and warranties insurance in sub‑$100M deals, and when do you advise sponsors to rely on traditional indemnities instead?
Rep and warranty insurance is increasingly common in sub-$100M deals, largely because premiums for those policies have come down enough to make them more affordable. We typically advise sponsors to consider this insurance when risks from pre-closing liabilities and operations are noticeably high based on due diligence – which happens more often in equity deals than in asset deals.
What misalignments between sponsors and family offices or private equity funds do you see most often, and how do you help resolve them before closing?
The most frequent misalignments we see between these parties revolve around the carried interest, management fees and removal of the sponsor. We help clients resolve these issues by addressing them early – in the LOI stage if at all possible. More particularly, we advise clients to consider mutually agreeable solutions, such as a tiered carry structure, possibly sharing management fees, and a reasonably tight definition of cause for purposes of sponsor removal.
How do you structure operating and equity agreements to anticipate future recapitalizations, secondary sales, or other exit scenarios?
We structure these agreements to include tag-along, drag-along, preemptive and other rights to address these sorts of scenarios. We also ensure the liquidation waterfall aligns with the dividend/ distribution waterfall, to ensure the integrity of intended economics upon exit.
How do you staff independent sponsor deals, and what level of partner involvement should a sponsor expect throughout the process?
We staff independent sponsor deals fairly leanly – usually one partner, one associate and one paralegal, supplemented by subject matter experts as needed. We believe sponsors should expect the lead partner on the deal to be actively involved in structuring and negotiating, and to oversee and manage the team efficiently and effectively.
How do you balance cost‑efficiency with thoroughness for lower‑middle‑market transactions where budgets and timelines are tight?
The key here is well-trained and experienced associates and staff. Under partner guidance and instruction, associates typically handle first drafts, and paralegals usually handle lien searches and corporate matters such as authorizing resolutions. We are also proud to offer substantially lower rates than most of our competitors in lower-middle-market independent sponsor and other M&A deals.