Getting your governance fundamentals in order does not commit you to a sale, writes Louann Bronstein, chair of the corporate practice at HunterMaclean. But it does mean that when someone approaches you with an offer, which is increasingly likely in today’s market, your company will be positioned to withstand the scrutiny rather than scrambling to preserve deal value.
When a private equity firm approaches a company, the transaction process that follows will stress-test every governance structure the organization has. Corporate records, contract compliance, ownership documentation, regulatory licensing and workforce classification all come under intense scrutiny, often for the first time. For the compliance professionals and board members responsible for that infrastructure, the question is not whether the company will ever face a transaction. It is whether the house is in order when it does.
These approaches are no longer unusual. Private equity investors have moved aggressively into the industries that keep everything else running, including contracting, commercial services, logistics, healthcare and distribution. A significant share of these companies are owned by founders approaching a transition they have not yet formalized.
The deal determines the scope of exposure
Not every approach is the same, and the governance implications vary significantly depending on what a buyer actually intends.
In a platform acquisition, the buyer plans to make your business the base of something bigger, then buys other companies to add onto it. This triggers intense scrutiny. Buyers will conduct a quality-of-earnings analysis, examine the reliability of financial reporting and assess whether the company can operate without its founder. For compliance professionals, this means the integrity of financial controls, the accuracy of reporting and the depth of the management structure all need to withstand outside verification.
In an add-on acquisition, the company is folded into a platform the buyer already owns. The diligence emphasis shifts. Internal systems matter less because the platform’s will replace them, but your customer contracts, your service agreements, your licenses and your skilled people matter much more. Are assignment and change-of-control provisions identified? Can required consents be obtained without disruption? Those are important questions to answer.
In a roll-up, a buyer is acquiring many companies in one industry. What matters is where you fall in that sequence. Being the first company acquired is very different from being the ninth. For governance teams, questions may emerge about records and compliance infrastructure.
In a majority investment, the buyer takes a controlling stake while the existing management continues operating day to day. These agreements typically introduce approval requirements for major decisions, control what happens in a future sale and can include provisions that force existing shareholders to sell when the investor does. Board members and compliance officers should understand that this type of transaction fundamentally alters the governance framework even when daily operations appear unchanged.
In a minority investment, the buyer takes a smaller stake and the owner retains control on paper. This is often structured more like a loan than a true equity position, and it is the least common scenario for a small to midsize company. Even so, the protective provisions, information rights and transfer restrictions that accompany it deserve careful governance review.
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Read moreDetailsWhere governance gaps become expensive
The things that erode deal value are almost never dramatic. They are the accumulation of years of ordinary administrative gaps that didn’t matter before someone came looking.
- Ownership and corporate records. Incomplete or inaccurate capitalization tables, unsigned stock or membership interest documents, approvals that were agreed to but never memorialized and informal promises of equity made to long-serving employees all create questions of authority and title that must be resolved before any transaction can close. For compliance teams, maintaining a clean cap table, ensuring that all equity actions are properly documented and confirming that governance approvals are recorded should be ongoing disciplines, not diligence-preparation exercises.
- Contracts and third-party obligations. Customer agreements, leases and equipment financing arrangements frequently contain assignment or change-of-control provisions requiring consent from the counterparty. Each unidentified consent requirement becomes a source of delay, cost or leverage for the other side at the worst possible moment. Licenses and permits held in an individual’s name rather than the entity’s create similar exposure, particularly in regulated and trade-dependent industries. A compliance function that maintains a current inventory of material contracts and their key provisions, including change-of-control triggers, eliminates a common source of transaction friction.
- Workforce and intellectual property. Buyer diligence routinely examines whether workers are properly classified as employees or independent contractors, whether restrictive covenants are enforceable under state law and whether intellectual property created by employees or contractors has been properly assigned to the company. Personal expenses running through the business will also surface.
Even when a company ultimately decides not to engage, two documents that appear early in these conversations warrant governance awareness.
The confidentiality agreement a buyer presents is not a formality. It should protect the company’s proprietary information and prevent the premature disclosure of a transaction to employees, customers and other stakeholders. It may also contain standstill provisions and restrictions on employee solicitation that have implications well beyond the immediate conversation.
Separately, an exclusivity or no-shop provision, which may be embedded in the confidentiality agreement or appear later in a letter of intent, grants the buyer the sole right to pursue the company for a defined period. Once in place, it eliminates competitive pressure from the process. Both provisions deserve careful review by counsel before execution.
Treating readiness as a governance function
The most productive response to an approaching transaction, wanted or not, is to have already addressed what the process would reveal. Governance professionals and board members who treat corporate recordkeeping, contract compliance, workforce classification and IP assignment as ongoing responsibilities rather than pre-sale checklists protect enterprise value whether or not the transaction ever materializes.
Louann Bronstein chairs the corporate practice at HunterMaclean, a business law firm based in Savannah, Ga. She has guided owners and buyers through more than a hundred mergers and acquisitions. 
