It has been a week of hell in financial markets: S&P downgrades US Treasuries, the Dow plunges below 11,000, stock markets all over the world give up trillions of dollars in value. Riots from the UK to Israel. Safe haven investments such as the Swiss franc and gold reach new highs … Where does this leave the average SME (small or medium-sized enterprise) owner? Consider the following five likely outcomes:

1. Revenue stagnation

What has happened in the past week or two is a sea change in the outlook of financial markets. Whereas two weeks ago financial markets seemed to reflect a cautious optimism that a slow global recovery was under way, markets now reflect a scenario of stagnation, in some countries potentially even a double dip recession. So unless you are in one of those fortunate niches that can’t keep up with demand (for example the entire supply chain of Boeing and Airbus is struggling to keep up with a five year backlog on aircraft orders), your revenue outlook may be considerably less optimistic today than two weeks ago.

2. Ongoing volatility

The best prognosis is that markets will continue to lurch from crisis to crisis. There is no credible solution yet in place for the debt problems of the peripheral European economies. The US will lurch between between slamming on the fiscal brakes (the Tea Party’s desire to reduce the size of government spending) and stimulus, in the form of new forms of quantitative easing and job creation programs – each with its own set of problems. Even China teeters on the edge of a contraction, according to some market watchers.

3. Liquidity will be at a premium

Companies will likely stretch their payables even more, cash will be at even more of a premium. Liquidity may become an even more important source of competitive advantage.

4. It may become more difficult to raise financing

Banks may become even more cautious in lending. Private equity will likely become even more cautious in cherry picking quality deals at more conservative valuations. M&A markets may become even more of a buyers’ market. Yet for business owners, it may be important to seek financing to ensure liquidity, even survival, in the potentially lean months ahead.

5. A shift in asset classes?

Many market observers are saying that now is a good time to buy equities, taking advantage of current low valuations. They may be right. But one must also ask the question: Is there a long-term shift among asset classes here? Just as the decade leading up to 2008 was a decade of soaring equity values and above-historical returns, the subsequent decade may go down in financial history as a decade of equity price stagnation, horizontal movement and volatility. Since 2008, an investment in commodities (e.g. gold) would have performed better than most equity portfolios.

The two major financial markets in the world – the US and Europe – each have their own sources of instability moving forward:

• The US highlighted its own political disfunctionality in not being able to resolve an artificial, self-inflicted, problem – namely raising the debt limit – until the eleventh hour. This does not bode well for creating the political consensus to solve the real (and infinitely more difficult!) issue, diminishing the vast imbalance between projected revenues and expenditures.

• Europe continues to suffer from the lack of centralized institutions, (giving it, for example, the ability to levy taxes, drive expenditures and issue bonds at the European level), an advantage that the United States enjoys vis-à-vis Europe. While the consensus for further integration does not (at least yet) exist, the lack of such centralized institutions makes it far more difficult for Europe to respond credibly to financial crises.

Working through both of the last two issues is optimistically a decade-long agenda for both Europe and the US. In the meantime, markets may lurch from crisis to crisis, which will either help create the incentive for political consensus to resolve the above issues, failing both the US and Europe will see huge difficulties ahead. Scenarios include the European Union losing members, or the US dollar losing its status as reserve currency.

Given the developments of the past week in financial markets, the worst approach by business owners would be to take the ostrich approach: to stick one’s head in the sand and pretend that nothing has changed. These are momentous changes. How does this change your business?

 

If you are looking to undertake a transaction such as raising capital or selling your company, a lawyer will be a vital part of your team. This article will first describe the role that a lawyer will typically play in a transaction, then provide guidance on how to select a firm or individual who may best fulfill that role.

The lawyer’s role in a transaction

There are many legal dimensions to a transaction, including:

• Information disclosure to investors. The process of selling a company or raising capital involves an enormous amount of information transfer to investors – whether in the information memorandum, data room, or just questions answered informally. At a minimum, a lawyer should prepare or at least review all information disclosed to investors that is of a legal nature (e.g. information on ownership and clean title to real estate, assets, etc.; information about the regulatory environment in which your company operates; and information about litigation in which your company is involved, etc.) You may, as a matter of prudence, also wish to have your lawyer review all material information passed onto an investor.

• Deal structuring. Should the investor purchase assets or shares? Should the investment be by way of injection of fresh capital into the company? Is an “earn out” appropriate, and if so, how should it be structured? Skilled lawyers are experts on transaction structuring.

• Drafting legal agreements. There are numerous legal agreements which may be required in the course of a transaction: confidentiality agreements, term sheets, heads of agreement, employment agreements, shareholders’ agreements, non-compete agreements, and the sale and purchase agreement. Of these, the sale and purchase agreement is typically the most crucial and difficult, especially the portion pertaining to representations and warranties, and limitations to such liability, and implications of any breach. In other words, if the owner of a business sells all or a portion of the shares of a company, he or she will usually need to represent and warrant that the information provided was full, true and plain disclosure, and that there were no errors or omissions in the data room, and possibly in the information memorandum or other documents as well. The investor will typically reserve the right to claw back all or a significant portion of the purchase price in the event that there were material errors or omissions.

In other words, a significant portion of your purchase price depends on your lawyer. Select your lawyer carefully.

Selecting your lawyer

Your lawyer should be someone you know and feel that you can rely on – don’t hire a mercenary, but someone you can really trust, with sound judgment and advice. However, one of the most common mistakes a business owner may make is to select a lawyer with whom he or she may have a long-standing relationship (e.g. the company’s general commercial counsel) – who may have little or no transactional experience – to act on a transaction. This is no more appropriate than asking your commercial counsel to represent you in a divorce hearing.

The lawyer you select should have acted on at least half a dozen or a dozen transactions. Try to find out your lawyer’s track record with respect to those transactions. Did the transactions close successfully? Obtain some references.

Another important point: your transactional lawyer should be an excellent negotiator. Often the negotiation on representations and warranties is tougher and more challenging than negotiating price. All the legal knowledge in the world is of limited use unless your lawyer is a capable of projecting that knowledge and achieving positive results in negotiations.

Should you hire a sole practitioner or a law firm? Larger transactions definitely require an entire legal team, and hence require the services of a law firm. In such cases, you should select one lawyer within the firm and ensure that he or she personally has the requisite credentials, and that he or she will personally supervise all work and be present at important meetings.

It is important to find a lawyer who does not feel compelled to participate in or influence the commercial aspects of the deal – which should be left to the principals and their financial advisors – unless otherwise requested by the client. And your lawyer should not only point out the risks involved in any transaction, but be capable of offering solutions in risk management, for example through creative deal structuring.

In short, your lawyer can make a tremendous difference: between your transaction closing or not closing; between your becoming embroiled in litigation or not; and between a substantial portion of your purchase price being clawed back by the investor or not. Your choice of lawyer is one of the most important decisions you will make determining the success of your transaction.