LLP Mergers – How to Avoid Disputes
In November I attended a thought provoking event hosted by the Association of Partnership Practitioners about the due diligence that should be conducted when two LLP’s decide to merge their businesses. The event was for transactional lawyers, but was insightful as it highlighted some of the key issues when merging LLP’s and the steps that can be taken to reduce the risk of disputes arising and mitigate their impact.
How to Structure the New Business
It is important to consider how the new business should be structured. Understand the liabilities of both businesses can help to minimise any ongoing risks by creating a new entity or transferring the business from one business to the other. For international mergers it is also important to consider how the new business will be taxed so there are no surprises after the merger has completed.
It is important to understand why the merger makes sense for both businesses so that all the members can buy into this new business and plan for the future. The best mergers have a positive message behind them and allow all the members to focus on the future. Issues can arise if the members are not pulling in the same direction or if parts of the business feel left out of the new businesses.
1+1 = 3?
There are considerable administration and business costs in carrying out a merger. Further, most professional services mergers will involve a number of conflicts, which may not be able to be transferred to the new business and with the increased costs it is likely that the first year will see a drop in profit unless there is an increase in revenue. There is nothing like a strain on the finances to generate disputes between business partners and the best mergers plan for any downturn in revenue and look to generate new opportunities out of the newly merged business.
It is worth remembering that LLP’s are often people businesses, with a number of key individuals (not just the members) generating a lot of the revenue, but unless the staff of both businesses fell engaged and buy into the new business this goodwill can easily be lost. Restrictive covenants can be used to ‘lock in’ key staff and help protect the goodwill of the business, but this is all they can do – ‘lock in’ staff or restrict their ability to compete, not force them to be proactively engaged or generate revenue.
The starting point for any transaction is the due diligence and legal documentation that records the terms agreed, however, this should not be the end of the matter. To minimise any ongoing issues or disputes it is important to understand the reasons why the merger makes sense for all the members and work to engage all the key members of staff with the aim of maximising the opportunities for the newly merged business.