Mergers and acquisitions – Business Law Section

Crafting Non-Competition Agreements for Mergers and Acquisitions

The author acknowledges the research assistance of Vivian Hernández for this article.

In the December 2024 edition of this newsletter, Justin Monahan and I cowrote an article discussing considerations of buying and selling a business from the perspectives of the buyer and the seller. Among the considerations explored was the post-closing transition process, which Justin expanded upon in a subsequent article. Another consideration included in our first article was the importance of non-competition agreements in such merger and acquisition (M&A) transactions. This article delves into the details of crafting non-competition agreements in preparation for, or as part of, M&A transactions.

Terminology: non-competes vs. other restrictive covenants

Creating non-competition agreements (or “non-competes”) is one contractual option for preventing employees from using their employer-company’s intangible business assets (e.g., customer lists, manufacturing techniques, or knowledge about suppliers) to set up a competing business or to work for a competitor after leaving the company. Non-competes are agreements in which an employee commits not to provide services to, or own an interest in, a business that competes with the company. To be enforceable, non-competes must be limited in both market area (traditionally geographic) and duration.

Other contractual methods for protecting against competitive use of a company’s business assets are non-solicitation agreements and nondisclosure agreements. For the purposes of this article, non-solicitation agreements are those under which an employee agrees not to hire or offer to hire the company’s employees, not to offer products or services to the company’s customers, or both. Nondisclosure agreements are agreements under which an employee agrees to refrain from disclosing or using information that the company considers proprietary.

Other protective agreements that companies often find desirable are work product assignment agreements and non-disparagement agreements. These agreements, while important tools for companies, are not the topic of this article.

Employee non-competes before the M&A transaction – state law restrictions

A number of business reasons can lead companies to decide that they will require non-competes from their employees. Companies that expect to engage in an exit transaction (i.e., an M&A transaction resulting in the sale of the company’s entire business to a buyer) have an additional incentive to require employee non-competes: obtaining non-competes from key employees can enhance the value of a business in the eyes of a buyer.

Counsel to such a company (or to its owners) must consider state law restrictions on non-competes before the company requires employees to agree to them. Oregon, Washington, and California, for example, each highly regulate non-competes, and in different ways.

As established in ORS 653.295, businesses with Oregon employees can require non-competes from employees but are subject to significant procedural and substantive limitations. Non-competes can be required only from salaried Oregon employees who are involved in administrative, executive, or professional roles and who make more than the threshold amount of $116,427, as of January 1, 2025. (This threshold is imposed under ORS 653.295 (1)(e).) With some exceptions, the employee must not be a licensed medical provider. The employer must have a protectible interest. Of particular significance for M&A purposes is Oregon’s requirement that non-competes be entered into at the time of initial employment or in connection with bona fide advancement. A new employee must be told of the non-compete in the job offer for the position, at least two weeks before starting work. Oregon allows employee non-competes to last for no more than twelve months. The case of Oregon Psychiatric Partners, LLP v. Henry, 316 Or. App. 726 (2022) provides a recent example in which failure to comply with the non-compete statute voided the non-compete.

Companies with employees in Oregon have other alternatives that can be effective to provide protection in lieu of a non-compete. Oregon permits both nondisclosure agreements and non-solicitation agreements. Oregon also permits bonus-restriction agreements, as defined in ORS 653.295(5). Under these agreements, a former employee can be required to refrain from competing with the company as a condition to receiving a bonus that will be paid after employment has ended.

Washington State also allows employee non-competes in limited circumstances and of limited scope. Under RCW 49.62.020, employee non-competes are unenforceable unless the company provides advance written notice to the new employee at the time of the initial employment offer or the non-compete agreement is supported by adequate consideration if it is being required after an employee has already begun work for the company. Washington does not permit companies to require a non-compete from any employee making less than a threshold amount ($126,858.83 as of January 1, 2026). Washington law also includes a presumption that any employee non-compete longer than eighteen months is unreasonable and therefore unenforceable.

Washington law strongly discourages the use of unlawful non-competes by imposing clear statutory penalties: any person harmed by an unlawful non-competition covenant can bring an action to recover the greater of actual damages or $5,000, plus attorney fees and costs. Employees or a subsequent employer are among the parties who might be harmed and are therefore permitted to bring an action to recover these amounts.

The Washington penalties for imposing a non-compete in the wrong circumstances can affect the value of a business in an M&A transaction. Companies preparing for an exit transaction may therefore prefer to rely on other means of protecting against former employee competition, such as a nondisclosure agreement.

Companies with employees in California, in some ways, have the easiest decision to make as to whether employee non-competes are appropriate. They are not. California prohibits and will not enforce employee non-competes. Under Cal Bus. & Prof. Code § 16600, any contract that restrains an individual from engaging in a lawful profession, trade, or business is void, regardless of its scope, duration, or other factors. Businesses with employees in California must rely on other means, typically nondisclosure agreements, in order to protect the business against use of intangible proprietary business assets by former employees. Traditional intellectual property protections such as patents, copyrights, and trademarks/service mark registrations are tools that businesses with employees in Oregon, Washington, or California can use for this purpose.

Non-competes in M&A transactions

The restrictions on employee non-competes in Oregon, Washington, and California are specific to the employment arena. The restrictions do not apply to non-competes that owners (limited to owners of more than a 1 percent interest in Washington) may enter in connection with the sale of their business. (See ORS 653.295(4); RCW 49.62.010(4)(d); Cal Bus & Prof Code §§ 16601, 16602, and 16602.5.) Owner non-competes are subject only to the common law requirement that such restrictions be of reasonable scope and duration. (See e.g., Eldridge v. Johnston, 195 Or. 379, (1952); Perry v. Moran, 109 Wash. 2d 691, (1987); Samuelian v. Life Generations Healthcare, LLC, 324 Cal. Rptr. 3d 596 (2024).) In virtually all M&A transactions, the buyer will require that the seller refrain from competing with the buyer (or with the business being sold) for a specified period of time.

Key negotiating points as to M&A non-compete provisions include who will be subject to the non-compete, how competition is defined, what exclusions will be specified, and scope in terms of duration and geographical area.

In an exit transaction structured as a sale of assets, the non-compete is usually directed at the selling entity. The owners of the selling entity may also be required to enter into a non-compete. In an exit transaction structured as a stock or equity sale, at least the controlling owner will be required to agree to a non-compete. Often other substantial owners will also be required to agree to a non-compete. In both types of transactions, the buyer will sometimes also require that key employees also agree to a non-compete, especially if those employees are also owners.

Numerous approaches can be taken as to the definition of competition or what constitutes a competing business. In some agreements, there is no definition of this concept, relying on the common understanding of competition to define the scope of the provision. More often, M&A agreements define a competing business as one that sells products or services that are substitutes for those sold by the acquired business, either as of the time of the transaction or at the time of the competing act after the transaction. For early stage or rapidly developing businesses, competing businesses can be defined as including those that are contemplated by the company’s research and development activities. While such a clause is desirable from the buyer’s standpoint, sellers should be cautious about agreeing to this flexible definition since it may be difficult after the transaction to understand exactly what business activities are prohibited.

Exclusions from the definition of competing business can be critical if a seller is selling one business but retaining another business. The retained business should be excluded from the noncompetition clause. The seller should also consider whether the retained business is likely to expand into additional sectors, in which case those should also be excluded from the definition.

The geographic (or market) scope and duration of the non-compete are also items that are commonly negotiated. The appropriate market scope of the non-compete will depend on what business is being sold, where its customers and operations are, and whether it is a bricks-and-mortar or virtual business, among other things. Attorneys for a buyer need to keep in mind that courts can strike down overly broad geographic or market scopes that the courts find unreasonable.

The duration of an M&A non-compete is typically three to five years after the closing date of the transaction, as to owners. If employee non-competes are part of the acquisition agreement, the duration will usually be substantially shorter, must be tailored to comply with applicable state statutes, and runs from termination of employment rather than from the closing date of the transaction.

Common non-compete mistakes by buyers

Buyers often stumble when formulating the non-compete provisions of an M&A transaction. A common mistake that buyers make is requiring existing employees to sign non-competes at the time of the business acquisition, without any significant consideration other than continued employment. In Oregon, amending an employee’s existing agreement to include a non-compete results in an unenforceable agreement if no bona fide advancement accompanies the amendment. In other states without statutory restrictions on non-competes, such an amendment can be subject to a challenge that there was no consideration, or inadequate consideration, for the amendment.

A less frequent (in my experience) but still surprising mistake is for buyers to require non-competes from employees in California or other jurisdictions where such provisions are clearly prohibited or unenforceable. This mistake usually occurs when the buyer and their attorney are located in states where non-competes are not restricted.

In both cases, attorneys representing buyers need to familiarize themselves with the laws of the states where the acquired business and its employees are located, to make sure that non-compete requirements comply with applicable state laws.

Diligence considerations

Both buyers and sellers should include the topic of non-competes in their diligence review and preparations for a potential M&A transaction. For the seller, the diligence review should include confirming that all existing non-compete agreements with employees have been appropriately documented, and that any agreements complied with applicable state law at the time they were entered into.

For the buyer, the diligence review for non-competes should focus on which non-compete obligations have been imposed on employees, whether obligations that do exist comply with applicable law and will be enforceable by the buyer, and whether any non-compete agreements that the seller has put in place may violate applicable law and subject the buyer to claims or penalties. For example, a buyer of a business with employees in Washington could be held liable to the employee or a former employee’s new employer for non-competition agreements entered into by the seller if those agreements did not comply with Washington’s requirements for such agreements.

Federal Trade Commission

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that would have significantly restricted the ability of employers to require employees to agree to non-competes. The final rule has been stayed by the U.S. District Court for the Northern District of Texas (Civil Action No. 3:24-CV-00986-E) and remains the subject of litigation as well as uncertainty as to future action by the FTC. Unless and until the rule takes effect, restrictions under state law rather than federal law determine the limits on non-competes.

Practice tips

Attorneys representing sellers in M&A transactions, or representing companies preparing for an exit transaction, should consider the following factors when advising a client on non-compete agreements:

When advising a company on non-competes prior to an M&A transaction, confirm whether applicable state law permits the non-compete for the employees of interest. If a non-compete is permitted, explore with the client whether a non-compete may be unacceptable as a business matter and whether other restrictive covenants or traditional intellectual property protection may provide adequate protection against competition by former employees. As to any non-competes that are permitted and desired, provide the client with appropriate documentation of the non-compete and assist the client in obtaining the non-compete from employees in accordance with procedures required by applicable state laws.
When advising a seller in an M&A transaction, counsel the seller or owner who will be subject to the non-compete as to what parameters of the non-compete can be negotiated. The extent to which a non-compete requested by the buyer may be acceptable will likely depend to a large extent on the seller’s or owner’s future business plans. For example, an owner planning to retire may be unconcerned about a broad non-complete with a long duration and wide geographic scope.

Attorneys representing buyers in M&A transactions should consider the following matters when advising a client on non-compete agreements:

Confirm that any non-compete requested by the buyer has a scope that will likely be considered reasonable and will therefore be enforceable.
Confirm that any non-compete requested of the seller’s employees (or an owner in their role as an employee) complies with applicable state law. In particular, if a non-compete will be required of an existing seller employee who is not currently subject to a non-compete, confirm that the new non-compete is structured in such a way as to meet any requirements of applicable state law (if permitted at all).
Counsel the buyer that employee non-competes cannot always be relied on. For example, if an employee moves to California, courts will no longer enforce a non-compete that may have been enforceable in the state in which it was originally entered (when the employee lived in or worked from another state).

Conclusion

Non-competition agreements from sellers, owners, and key employees are an important part of most M&A transactions. Business owners preparing for an exit transaction should consider the extent to which obtaining non-competes from new and existing employees may be desirable. Attorneys advising sellers or buyers in connection with an M&A transaction need to be familiar with the statutory limitations on non-competition agreements and ensure that any such agreements are structured to be enforceable to the extent permitted by applicable law. ♦

Beginning at the End: Post-Transaction Integration Considerations

Justin Monahan, Otak

In the December 2024 edition of this newsletter, Erich Merrill and I cowrote an article discussing considerations of buying and selling a business from the perspectives of the buyer and the seller. As a follow-up, this article takes a closer look at integration activities that follow an acquisition and merger to outline practices that have proven effective and those that have not.

This article addresses integration considerations regarding strategic alignment, cultural integration, organizational structure, human resources, technology systems, operations, marketing and communication, legal and compliance matters, and financial integration. These considerations do not necessarily apply to the parties until the integration occurs, hence their being labeled as “post-transaction” activities. However, if parties only try to deliberately address these integration considerations after a deal is struck, then that is too late for any meaningful action to occur. To achieve successful integration, the parties must think about what the end state of integration will look like from the start of the transaction. This can be difficult to fully appreciate because often there are only key leaders from each of the companies involved in critical pieces of the initial negotiations or even deal-making. After a deal is struck and the parties get into the weeds of integration in earnest, there will be additional input from all different corners of each company that will need to be managed. But intentionally structuring the end state of integration into the fabric of the deal itself will help keep everyone focused on the shared vision that excited the companies’ leaders in the first place.

Strategic alignment

When negotiating a deal, through-thinking—conceiving of the deal all the way through to the resulting performing merged entity—prompts the establishment of a clear vision: Why are we joining forces? What is the strategy driving each company? Is the shared goal to achieve economies of scale, geographic expansion, vertical integration, or diversification, or is the goal to capture specific innovations or intellectual property? Further, moving beyond visionary statements to developing critical success factors and key performance indicators (KPIs) can not only help the parties quantify transactional considerations such as earnouts but also provide a bright line for the full team to clearly understand future success. Without strategic alignment to provide the bedrock for the parties to weather all the ups and downs of integration and business, the integration process risks becoming fragmented and ineffective.

Cultural integration

A challenging and often underestimated aspect of post-merger integration is cultural integration. Cultural misalignment can lead to disengagement, turnover, and reduced productivity at the employee level and failure to achieve business objectives at an organizational level. As mentioned above, one hindrance to cultural integration is that often only need-to-know key leaders are involved in deal discussions. In target entities—those being acquired—these need-to-know leaders are often founders or principals who have defined the culture for many years. These leaders have built a team around them that appreciates this culture. If the acquisition serves as a retirement path or other exit for these key founders and principals, the resulting entity and culture can quickly take on a character that differs drastically from what the team is used to.

While the confidentiality of sensitive deal discussions is often necessary, the parties need to plan for rapid and deep engagement with tier-two and tier-three leaders in the target firm. This engagement may include identifying cultural similarities and differences between the parties and defining a desired culture for the resulting entity. To support these goals, training and change-management programs should also be discussed in advance. Mergers between companies with vastly different working styles, communication norms, and management philosophies require careful cultural due diligence and proactive measures to bridge gaps.

Organizational structure

Each integration process must establish a new organizational structure that reflects the needs of the merged entity. This includes redefining leadership roles, reporting relationships, and determining who has decision-making authority. It may also mean streamlining layers of management to eliminate redundancy. Although there can be pain points in doing that, a clear organizational structure helps ensure that employees understand both their roles in the merged entity and how decisions will be made.

Human resources and talent management

Successful integrations need to resolve uncertainties about human resources and talent management. Employees are the core assets of any organization, and managing human resources during a merger is critical to maintaining morale and retention. The key founders and principals know the fate of their roles if exit schedules or retention provisions are directly negotiated into the deal, which may be critical if they are tied to earnouts structured over a certain number of years. But the tier-two and tier-three leaders discussed earlier are going to be the future of the company, and the parties should think early and often about making these leaders not just culturally comfortable but also financially comfortable. Integrating parties may consider promptly introducing a new class of bonus, buy-in, or other compensation structures to immediately capture the attention and loyalty of these emerging leaders.

Each party will need to understand the impact that the resulting benefits, performance management systems, and policy and procedure changes will have on the resulting entity’s employees. Prompt and transparent communication, coupled with a deep functional understanding of how these changes will impact staff, will help mitigate the risk of losing valuable employees during the integration.

Technology systems

Always an interesting challenge is combining two technology infrastructures. Two approaches are to leave the target firm alone or to transition them over to the acquiring firm’s systems over time. After all, the target firm built the business using their own familiar enterprise resource planning (ERP), customer relationship management (CRM), and other core platforms. It could be disruptive to the staff to change the way they do their jobs. I have seen this disruption when target firms take the immediate “phase in” approach; the process gets messy, territorial, confusing, and ultimately inefficient.

On the other hand, the parties will need to deliberately evaluate what works best given the scale of the transaction. While prompt and thorough technology transitions can be technically complex and costly, they may be ideal for ensuring business continuity and enabling long-term synergies. Another consideration is, of course, cybersecurity. A clear technology, data, and user onboarding process for the target entity could be the clearest path to ensuring there are no gaps in the resulting entity’s cybersecurity platform.

Operations

Operational integration focuses on combining the day-to-day functions of the two companies to improve efficiency and customer service. Depending on the nature of the businesses involved, this requires leaders in each firm to identify overlapping processes and design streamlined workflows; harmonize supply chains, logistics, and procurement functions; consolidate manufacturing or service delivery operations where feasible; align quality assurance and control standards; and implement joint customer service models. These analyses will be impacted by a number of external considerations as well, such as the terms of supplier contracts with ongoing engagements, the nature of their work with each firm, and the expectations of customers. This is often a longer-term project that fits in with ongoing efforts to consistently review policies, procedures, and workflows to provide the best experience for staff and clients or customers alike.

Marketing and communication

Depending on the nature of the transaction, tremendous effort may go into marketing and communication. How the merged entity presents itself to the market and communicates with stakeholders can significantly impact its reputation and market position. The market and stakeholders will wonder: Did the target entity just supply the acquiring entity with a significant new capability, services line, or market position? How are the target’s key founders or principals going to function as ambassadors of the resulting brand going forward, capitalizing on the personal brand they have built in the industry under the new flag? Similar to the IT and systems integration described above, we have seen both gradual and prompt integration strategies in this regard. Which option is best for a given transaction will depend on the depth and breadth of the target firm’s brand. It is crucial for the parties to align early and consistently on branding decisions to keep the flow of the branding tied to their strategic evolution. In addition, clear and consistent internal communication helps reduce uncertainty and foster employee engagement throughout the integration process.

Customers, suppliers, investors, and other stakeholders need assurance that the merger will bring added value rather than disruption. External branding, marketing, and communication in regard to market presence is important, but you cannot beat picking up the phone or making time to meet key clients, customers, and industry partners to describe the enhanced capabilities of the resulting firm. And every effort should be made to ensure continuity of service and fulfillment during the transition. If clients are already spooked just by the news of a transaction, the parties certainly do not want to validate their fears with a dropped delivery.

Legal and compliance matters

Legal and regulatory considerations must be carefully addressed during integration to avoid liability and ensure compliance with laws in all operating jurisdictions. A robust due diligence process can reduce the future burdens for the merged entity in administering contracts, liabilities, and obligations. If the transaction has strong intellectual property components, or is contingent on regulatory approvals, these threshold considerations must be tirelessly documented, confirmed, and indemnified in the deal process. There are always plenty of administrative details to attend to, such as updating legal entities, licenses, and registrations.

Financial integration

Combining financial operations is vital for reporting accurately, budgeting effectively, and realizing cost synergies. This may translate into integrating accounting systems and financial reporting frameworks and agreeing on the accounting treatment of each aspect of the resulting business. Financial integration becomes particularly important if key earnouts are staked to the KPIs established as part of the negotiations. It will not do the parties any service to haggle through detailed KPIs and a multi-part earnout strategy if they immediately walk into a stumbling block over a detail of revenue recognition or cost allocations among parts of the firm. Sound financial integration will provide the foundation for measuring merger success and ensuring clean deal administration.

Conclusion

Integrating two companies after a merger or acquisition is a delicate and intricate process that requires attention to strategic, operational, human, technological, legal, and financial dimensions. Each area discussed must be thoroughly addressed for the integration to succeed. Effective post-merger integration is not just about merging assets but about building a cohesive, unified organization that is greater than the sum of its parts. Companies that approach integration with a structured, strategic, and people-centric mindset are more likely to unlock the full value of the deal and position themselves for long-term success, and limit distractions, hiccups, and mishaps along the way. ♦

Buying and Selling a Business: What to Prepare For

Erich Merrill, Miller Nash LLP and Justin Monahan, Otak

The overall volume and valuations in merger and acquisition activity in the U.S. have increased in 2024 from some lower activity in 2022 and 2023. We have seen industry publications reporting that in the architecture and engineering industry, for example, target firms are achieving valuations at EBITDA multiples of 11.4x, 13.8x, and higher—well above historical medians in the 6x–7x range. Mergers and acquisitions that generate inorganic growth remain a key maneuver for firms looking to incorporate specific resources from smaller firms, augment specific capabilities, scale new growth platforms through geographic and capability expansion, and in some cases transform both firms by reshaping service offerings with transactions of scale. In this article, we are going to review several issues that have been significant deal and drafting points in recent transactions to flag approaches for buyers and sellers alike.

Considerations for potential buyers

We will begin by looking at preparations for a potential acquisition from the perspective of potential buyers.

Intellectual property

Based on transactions with which the authors have recently been involved, intellectual property of the target business continues to be of major interest to buyers. Buyers typically are looking for one of two opportunities in an acquisition: the ability to extend an already successful or potentially successful business platform into a new area or onto a larger scale, or the addition of operations that expand the sectors in which the buyer’s business operates. In each case, obtaining the ability to offer a product or service that others cannot is a key factor to a successful acquisition.

Intellectual property can provide this exclusivity. Buyers should spend significant time reviewing intellectual property assets of the seller’s operations in the due diligence phase of acquisitions. Diligence should go well beyond confirming that the seller holds patents, registered trademarks, or trade secrets that appear to offer value to the buyer. Buyers need to verify that key employees have assigned rights to the seller, that trade secrets have been protected in practice, and that third parties do not hold patents or other intellectual property rights that pose a risk of infringement claims against the seller (and, after the transaction, against the buyer). In addition, buyers need to assess the degree of competitive protection actually provided by the intellectual property held by the seller. Analysis of patent scope and possible invalidity are critical as part of the diligence process.

Non-competition agreements between parties and with employees

Much has been written about the FTC’s April 23, 2024, rule potentially affecting non-compete agreements. (See the most recent coverage from the Oregon Business Lawyer in this issue’s article, “Federal Trade Commission Non-Compete Ban: December 2024 Update.”) However, that rule is in limbo following the August 20, 2024, ruling by Judge Ada Brown of the Northern District of Texas that blocked it, pending potential appeal. At the state level, ORS 653.295 and applicable case law have set criteria for the enforceability of non-compete agreements between employers and employees. It is generally clear that non-competes are permissible in the bona fide sale of a business. These are important tools for acquiring firms: target firms may have valuable relationships with clients, customers, suppliers, and subconsultants. The economic benefit of a successful transaction generally provides reasonable consideration to make an owner’s non-competes enforceable. There are additional requirements on non-competes under state law which are worthy of addressing in a future article; anyone needing guidance on this should seek experienced transaction counsel.

In the context of professional services, protection against seller competition may also take the form of non-solicitation provisions for clients and staff. When considering mid-level management, federal and state rules are trending toward invalidating and limiting non-competes. Non-solicitation agreements may continue to be enforceable, although there are circumstances where certain clients may effectively hold a “monopoly” over a business sector, and affected employees may argue that a non-solicitation agreement is effectively a non-compete that frustrates their ability to earn a living. This may be true of, for example, certain government clients such as Departments of Transportation that simply govern an entire field of work. In these cases, counsel should pay careful attention to other restrictive details, such as the duration of the non-solicitation following an employee’s exit, to improve the likelihood that a court might enforce the agreement.

Larger deals: HSR reporting and clearance—new FTC rules

Buyers in larger transactions need to consider whether a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 will be required. When such a filing is required, both parties must spend significant time and money gathering and submitting detailed information about their operations, the proposed transaction, competitive overlap, the market in which the companies compete, and other required information. The parties submit the required information and must then wait for agency review and clearance to proceed. Not only can the process significantly delay the transaction, but the filing fees alone constitute a major expense.

The Federal Trade Commission recently adopted a final rule, which is estimated to triple the time and effort needed to complete the required filings. The good news is that filings are generally not required for transactions having a value of less than $119.5 million. If you are involved with a transaction above that amount, it is always wise to consult with experienced counsel who can help guide you through the HSR process.

Diligence process

Once some basic concepts and intents begin to be shared and agreed between the parties, due diligence can begin in earnest. The overall assessment of strengths and weaknesses of a business or business line will take many forms: financial condition, succession planning, contract rights and restrictions, and intellectual property that will be part of the deal all need to be evaluated.

A critical piece of due diligence will be the risk assessment associated with potential claims against the target that the buyer will need to evaluate. These include employment-related claims, tax underpayment/reporting, participation in multi-employer pension/welfare plans, and claims related to privacy and data security. The risk profile of each business will be different, and subject matter experts should be used within given market sectors to inform the decision making of the buyer. Although parties this far along in the process may be less and less likely to find true “no-go” risks, the sum of risks and items requiring workouts and attention may start to affect the deal valuation. If the buyer is interested in the transaction because they are picking up a piece of intellectual property or a specific customer base, the due diligence process may become particularly focused. A broad acquisition of a large performing firm, on the other hand, may span out across a broad range of potential topics and risks.

For any transaction to be successful—something the parties look back on after the dust settles to see the acquired assets performing well in the context of the buyer’s business—it is critical that risks are assessed and valued appropriately at this stage of the process. Most practitioners will maintain a detailed log and checklist of items that will be evaluated as part of their process.

Considerations for potential sellers

The process of selling a business is frequently completely new to sellers. We list below several key considerations that sellers should be aware of when preparing to sell a business.

Orderly records; due diligence production

Although orderly records by themselves may not define the success or failure of a transaction, it is wise for sellers to insulate themselves from claims by having orderly records that support the buyer’s due diligence. If there are unwelcome surprises for the buyer after due diligence, a buyer may insist that the very format of the due diligence production from the target thwarted proper due diligence and that the buyer is entitled to (a) a reduction of the purchase price prior to closing or (b) a remedy or indemnification after closing. Attractive acquisition targets can also demonstrate orderly record-keeping and the consistent use of best practices throughout their business.

Protection of intellectual property

As noted above, patents, strong trademarks, and trade secrets are usually ascribed significant value by buyers. Sellers considering a business sale should therefore spend the time and resources to ensure that any intellectual property they may have is appropriately protected and documented.

Potential sellers should expect that buyers will require extensive warranties regarding intellectual property in the acquisition agreement. These warranties virtually always place the risk of infringement claims on the seller. Potential sellers should therefore obtain freedom-to-operate opinions or other advice from intellectual property counsel to assure themselves that infringement risk is minimized or can be accurately disclosed to the extent it exists.

Sellers sometimes believe that it is helpful to obtain a valuation of their intellectual property assets. Our experience is that such valuations do not facilitate the sale of the business and are not worth obtaining. Most buyers put little stock in valuations of intellectual property. Their lack of faith in valuations appears to be well placed. With the exception of valuations of patents or other intellectual property that has a history of earning royalties, valuations of intellectual property vary widely, appear to have little correlation to business advantage, and are often highly speculative.

Transition process during and after sale

Attractive acquisition targets can demonstrate a focus on succession and transition planning within their organizations. Too often, acquiring firms find themselves disappointed when they pay significant amounts to current company leaders, only to find those leaders promptly transitioning out of the company business and handing the reins, along with all the accompanying learning curves, to emerging leaders.

Another thing an acquiring firm does not want is to be the savior to a company whose leadership is looking to exit amid a floundering, late-stage effort. Rather, attractive acquisition targets can demonstrate both immediate and durable value-add propositions for acquiring firms that mirror the motivations of the acquiring firms in the first place: adding specific capabilities while giving the target firm access to broader platforms and resources. There are many transition-planning strategies available to companies wishing to make themselves attractive targets, which we may explore further in a subsequent article.

Earnout terms

Frequently, sellers and buyers resolve disagreement over acquisition price by agreeing that part of the price will be paid after closing based on how the business performs—commonly called an “earn-out.” Sellers can find earn-outs attractive because they potentially increase the purchase price.

Sellers should know several things about earn-outs. First, the buyer, not the seller, will be in control of the business after closing, which is the period during which performance of the business will be measured for the earn-out. Second, it is critical that the earn-out criteria be carefully and completely defined in the purchase agreement. Close coordination between the seller’s financial teams and legal teams is critical in this regard to avoid disagreements over whether an earn-out has been earned and how much the seller is entitled to receive. Third, sellers need to assess whether they will continue to work for the buyer for the time that is often required in order to earn the earn-out. We often see sellers decide that they are ready to move on, leave the business before the end of the earn-out period, and negotiate a compromise amount to be paid rather than the full potential earn-out.

Rollover equity—liquidity; control over the process

Buyers will often insist that sellers take part of the purchase price in the form of stock issued by the buyer, rather than being paid the entire purchase price in cash. Sellers need to consider these facts when faced with such an offer:

Unless publicly traded, stock in the buyer is not liquid. Sellers must consider whether they are willing to hold the buyer’s stock indefinitely, without the ability to convert it to cash, or what alternative exit mechanisms may be available under the relevant stock plan.
A seller willing to take buyer’s stock as part payment of the purchase price should usually negotiate a right to require the buyer to purchase the stock from the seller on a future date. Such a right will often involve a formula price since there is no market price for the buyer’s stock. Sellers should make sure that the formula is reasonably predictable and verifiable, and that the seller retains a reasonable right to challenge a calculated price that the seller believes to be incorrect.
As with an earn-out, sellers who agree to take buyer stock as part of the purchase price should attempt to negotiate some degree of control over the buyer’s operations post-closing. For example, the buyer should not be able to sell key components of its business or incur unreasonable levels of debt without the seller’s consent.
A seller willing to take buyer’s stock as partial consideration should also insist that a tag-along clause be included in the acquisition documents. This clause gives the seller a right to sell a proportional amount of stock, if the buyer’s major shareholders in the future sell a significant portion of their stock to a third party. A buyer will likely impose a companion clause—the drag-along clause—on the seller, so that the buyer is able to require that the seller sell stock if the buyer or its major shareholders want to sell the whole company.

Areas of focus for buyers

As mentioned above in the discussion of the due diligence process, buyers are likely to spend significant time on evaluating possible employment-related claims, tax underpayment/reporting, participation in multi-employer pension/welfare plans, and claims related to privacy and data security. Sellers should keep these areas in mind well prior to a proposed sale of the business and adopt business practices meant to minimize the potential for claims or liability in these areas. In recent transactions the authors have handled, some of the most contentious negotiations of transaction terms have focused on these areas.

Involving an investment banker/broker

Sellers should give serious consideration to retaining an investment banker or business broker to assist with the sale of their business. Potential sellers are sometimes tempted to sell their businesses on their own, wanting to avoid the expense of a banker’s or broker’s commission.

Our experience is that retaining a skilled business broker or banker is worth the expense. These professionals typically bring a larger number of potential buyers to the table, resulting in a higher price for the business. In addition, we have been involved in numerous acquisitions where a skilled banker or broker is able to effectively act as a mediator when the parties seem unable to agree on a crucial transaction term. In these situations, the deal often proceeds toward closing with the help of the broker or banker’s shuttle diplomacy to keep the parties at the bargaining table and resolve the key issue.

Involving M&A counsel

As with retaining a business broker or investment banker, potential sellers sometimes question the benefit of hiring counsel experienced in merger and acquisition transactions. Just as physicians have different specialties, attorneys have varying levels of expertise in different areas of law and business. Counsel that has served well for routine contract, corporate, and litigation matters may or may not also have the experience to provide efficient representation for a sale of the client’s business. Potential sellers should consider contacting and interviewing counsel with significant merger and acquisition experience. Such counsel can work in full cooperation with existing company general counsel, if requested to do so, so that the background knowledge and experience of the company’s general counsel is available for the seller’s benefit in the sale transaction.

Conclusion

Signs suggest that mergers and acquisitions will continue at a significant pace in 2025 and beyond. As is clear from the issues raised in this article, the topic touches many different areas of the law, implicating intellectual property, employment law, corporate law, and regulatory schemes. Careful preparation before an acquisition occurs will be beneficial to both buyers and sellers in the transaction and the operation of the ongoing business. ♦

A Corporate Lawyer’s Approach to Transactions between Licensed Professionals

Noah Maurer, Elevate Law Group

One of my early legal mentors in Oregon once remarked humorously, “businesses are, in fact, businesses.” This obvious statement underscores the widespread hesitation about where legal work meets a regulated industry. For Oregon attorneys, traditional corporate work requires an evolving vantage point to account for the unique legal needs of licensed professionals.

Let’s start by defining licensed professionals. Businesses lining our corridors of commerce— such as lawyers, accountants, and dentists—provide easy examples. Specialized professionals ranging from OB/GYNs to psilocybin facilitators have varying degrees of application to our discussion. A common characteristic of all these businesses is the requirement for a license and increased scrutiny under state and federal regulations.

There is no one-size-fits-all approach to working with licensed professionals. Each regulated industry features unique statutes, albeit with common themes. For example, licensed professionals must abide by strict regulations governing ownership, referrals, and confidentiality. Rule 5.4 of Oregon’s Rules of Professional Conduct may initially come to mind, which establishes these requirements for entities practicing law. It should be of no surprise that other licensed professionals are bound by analogous requirements. For instance, ORS 679.020 and ORS 673.160(5)(a)(A) state that dentists and accountants must own their respective practice entities.

Despite the differences among these industries, a common challenge for licensed professionals is the restriction on their ability to transfer and encumber their assets. But these businesses (say it with me) are, in fact, businesses. Often, they are local, family-owned enterprises in our backyard. The Oregonians at the core of these entities should be supported in exploring collaborative opportunities. By tackling their corporate work from an informed perspective, legal specialization can support greater business opportunities for our neighbors.

Private equity is increasingly focusing on the fragmentation within professional services and licensed industries, aiming to consolidate these sectors. Veterinary hospitals, for instance, have been early adopters of this trend. Over the past thirty years, the national marketplace has seen major widescale consolidation of veterinary hospitals, with notable examples like Veterinary Centers of America (VCA) and National Veterinary Associates (NVA) acquiring hundreds of veterinary hospitals across the country. The same consolidation is occurring in other industries with more scrutinous licensure compliance. In 2022, 13 percent of all U.S. dentists were affiliated with a dental service organization. With greater profit comes more complex structures and increased pressure on specialized corporate attorneys.

Simple business transactions become exponentially more difficult through the lens of state and federal regulations. Legal work for licensed professionals demands tailored contract drafting to achieve a client’s goal. From the letter of intent all the way to post-closing, licensed professionals have mandatory considerations that a skilled attorney must carefully consider.

Maintaining licensure and compliant ownership

The key aspect to a licensed professional transaction is ensuring ongoing legal compliance and continuity of license. Any corporate action involving equity or asset ownership by an unlicensed party, or an entity controlled by one, raises significant compliance concerns. In the event that two licensed parties are doing a simple ownership transfer (i.e., dentist to dentist), the risk is mitigated. When corporate entities get involved with unlicensed out-of-state ownership, compliance becomes more complex.

Maintaining continued ownership of regulated property should be easily traceable throughout a corporate event. Licensed professionals may see their businesses split down the middle. On one side sits the unregulated assets, such as real property, certain equipment and inventory, management services, and employment of support staff. On the other side, there are licensed services, regulated assets (such as patient records), and inventory requiring licensure (such as prescribed medication). Differentiating these two categories may allow licensed and unlicensed entities to effectively collaborate, without sacrificing continuity of license, under a “service organization” structure.

New entities may be required to allocate assets, licenses, and services away from the prior practice structure. For sellers contemplating joining a service organization structure, the post-transaction day-to-day operation can be daunting. A transaction of this nature can quickly spill across dozens of specialized documents allocating assets, equity, services, options, employment, and real estate. For purchasers, the question of compliance and continuity can be equally challenging.

At the forefront of this discussion is how these structures may differ across organizations, industries, and even states. The acceleration of consolidation in licensed industries demonstrates that private equity is willing to take on this legal burden. Oregon attorneys need to be prepared to scrutinize these arrangements to confirm that they comply with our unique state ownership requirements and provide appropriate protection for all parties involved.

Transfer mechanics and payment terms

A simple representation and warranty surrounding the maintenance of professional licensure may not be enough to guarantee the viable operation of a licensed professional’s business post-closing. Transactions in certain highly regulated industries frequently run into a “black box” conundrum. In this scenario, the purchaser cannot own the assets or equity in question until given approval by the government on an indeterminate timeline. In other words, the parties have no choice but to rely on a third party to conclude their transaction. This necessarily interjects an unknown variable into the heart of closing. To provide guidance in these scenarios, attorneys need to effectively consider whether parties are properly motivated to cooperate in light of this unavoidable ambiguity.

For licensed professionals selling their practice and joining a new structure, payment may not simply be cash in hand at closing. Payment may take the form of equity ownership in newly formed entities and performance-based earnout payments. As a result, parties must be able to clearly move between various roles—employee, employer, shareholder, lender, debtor, and owner—often within a single transaction. Understanding how each of these roles affects the other is necessary for drafting a workable mechanism and proper economic consideration.

As an important reminder, structural arrangements of this nature lean heavily on a well-drafted letter of intent. Without a usable letter of intent, delineating this arrangement becomes much more burdensome. This is where an experienced attorney and broker in licensed professional transactions can work together to establish workable expectations from the initial stages of communication.

Concerns post-closing

Parties to licensed professional transactions are unlikely to simply call it quits and walk away from one another. Regulations govern a host of ongoing conduct, such as the continued use of the seller’s name and likeness, thereby increasing the need for contractual discussion on the transition of the business post-closing. Combined with the need for client continuity, parties frequently negotiate detailed transition assistance plans, short-term employment or contractor arrangements with the seller individually, and mutually assembled client letters.

Beyond a cooperative transition, the seller may consider compelling the purchaser’s cooperation in evidencing the seller’s past legal compliance. When retention of confidential information is held exclusively by the purchaser, the seller may require the ability to access historical records to answers before their licensing authority.

For medical industries, Anti-Kickback and Stark Law compliance looms over shared practice management decisions between newly affiliated parties. Private equity consolidation frequently comes along with linked networks of practices, creating unique ethical questions over how an individual licensed professional fits into a broader network of shared interests. These considerations are particularly open to change at a federal level.

A combination of legal documents is the unavoidable answer to effectively structure the continuing obligations of the parties. Because of the complexity of the considerations listed above, specialized corporate attorneys have become an important fixture for licensed professionals in all their legal work.

Key takeaways

Representing licensed professionals must be approached from a fundamentally distinct perspective than other business in Oregon. Whether at the beginning, middle, or end of a business’ life cycle, unique questions of compliance must be tactfully assessed. For business transactions involving licensed professionals, confident, tailored language must alleviate the regulatory burden faced by clients. As state and federal governments adjust their approaches to the commentary raised in this article, specialized corporate attorneys must be ready to adapt accordingly. ♦