CPA Firm Merger NDAs: Don't Sweat the Small Stuff

The issue: In a merger where each firm signs an NDA, there’s a provision that precludes the buyer from soliciting the seller’s clients, with language similar to this:

The parties agree that during discussions relative to a possible Transaction and for a period of 24 months after the conclusion thereof, neither party shall, without the prior written consent of the other, solicit any clients of the other as of the date hereof, nor solicit or encourage any such client to terminate their association with the other party to seek or accept a relationship for any such client.

I am selling a $6M firm and all 4 buyer candidates are Top 20 firms with offices in the seller’s local market. Two of them signed the NDA without raising any questions, as have hundreds of firms I’ve worked with over 20 years. But in this instance, two of the buyers balked, correctly pointing out that because of their size and thorough practice development activity, it’s possible that they may have (a) already solicited some of the seller’s clients or planned to, totally independent of any specific information they may acquire from the buyer regarding their clients and (b) because so many people are involved in practice development – both partners and staff – it’s impossible for the buyer to know if they’ve solicited the seller’s clients at any point in time.

I have suggested modifying the wording to state that the buyer will not solicit any of the seller’s clients as a direct and clear result of information the buyer obtains during the due diligence phase of the merger negotiations. Both buyers are OK with this modification, but now the seller is refusing to sign the NDA. They are sticking to their guns and saying that the buyer must refrain from soliciting their clients, even if they did so without knowing the client was one of the seller’s.

Our book, CPA Firm Mergers: Your Complete Guide, was written because every year, scores of mergers – up, down and sideways – are taking place. But relatively few buyers and sellers have much experience in negotiating what will be one of the most important transactions of their lives. Among the topics addressed are: ►Keys to successful mergers, ►21 steps in the merger process, ►Assessing cultural fit ►One times fees is a steal ►Negotiating a merger ►Letters of intent-points to address ►Due diligence

A nuance here is that perhaps, most firms simply sign the agreement, choosing to avoid arguments at the onset, and because CPA firm buyers are typically so honest and of high integrity, both parties are confident that the buyer will never raid a seller’s clients. They just don’t want to make a big deal over this. When buyers have their own NDA template, virtually all sellers sign the agreement, again choosing to avoid “discussions” over the wordsmithing.

I always counsel buyers and sellers that they should absolutely exchange NDAs with each other. But I also counsel them to avoid getting into spats over the verbiage. It’s hard for me to believe that in the history of all mergers, in cases where deals fell through, that a seller has sued a buyer over violation of the non-solicitation portion of the NDA. But obviously, the number of mergers I have worked on is a microscopic percentage of all mergers.

In all your years of doing deals, have you ever encountered this problem? Any insight you can share with me?

Another issue that arises is when “headquarters” agrees not to make the sensitive information available to the local office. I also wonder whether client names need to be shared early on.

Funny how a very minor, perfunctory point that’s been a non-issue hundreds of times suddenly becomes contentious.

Two kinds of buyers: One is a large regional firm. The other is a typical local firm, often under $10M. Regional firms are quite active in their marketing and practice development efforts. As a result, it’s nearly impossible for these regionals to restrict or prevent hundreds of its partners and staff from inadvertently soliciting the seller’s clients without having access to the seller’s client data. Consequently, it is unreasonable for regional firms to be required to sign a blanket merger NDA. Local firms, on the other hand, are not nearly as active in marketing and PD as regional firms. It is highly unlikely that a local firm will inadvertently solicit the seller’s clients.

Trust. Think about it, sellers. What do you think buyers will do if and when they receive the seller’s list of clients with names? Will they give the list to their partners with instructions to solicit the seller’s clients? Of course not. At some point, sellers must be reasonable and trust the buyer.

Here is suggested wording to give both buyers and sellers more comfort:

The parties agree that during discussions relative to a possible transaction and for a period of 24 months after the conclusion thereof, neither party shall, without the prior written consent of the other, solicit any clients of the other as of the date hereof, nor solicit or encourage any such client to terminate their association with the other party to seek or accept a relationship for any such client, with the following caveats:

The buyer will not solicit any of the seller’s clients as a direct and clear result of information the buyer obtains during the due diligence phase of the merger negotiations.
The seller understands that the buyer regularly engages in marketing and practice development activities within its geographic market. As a result of these activities, it is possible that the buyer and its personnel may directly or indirectly (advertising, promotional mailings, newsletters, blogs, etc.) solicit the seller’s clients in ways that are totally independent of acquiring information on the seller’s clients during due diligence. (Joel Sinkin contributed to this verbiage).
The buyer will not share the seller’s client list with partners in its firm outside of the due diligence team, especially to partners in the geographic office of the buyer where the seller resides. (Russell Shapiro’s suggested wording).

Firm Management