By: Nicole Carter
Private equity attracts entrepreneurs and investors with the promise of growth, scale, and returns that exceed traditional business ventures. The process of buying and transforming a business has been romanticized as a numbers-driven exercise: find the right EBITDA multiple, optimize debt financing, and sell at a higher valuation. But Jeremy Tomes underscores a vital truth: those financial models only work if they rest on a strong legal foundation. Without legal clarity, private equity deals are little more than speculation dressed up as strategy.
Tomes has worked with countless buyers who approached acquisitions with optimism, only to realize that their carefully built spreadsheets had little protection against poorly drafted contracts, ambiguous liabilities, or unenforceable terms. His philosophy is simple: numbers may inspire confidence, but legal clarity delivers certainty.
The Fragility of Numbers Without Law
One of Tomes’ recurring themes is that numbers are projections, not assurances. Forecasts rely on assumptions: that vendor relationships will hold, that customer contracts will remain enforceable, that intellectual property rights will not be challenged, and that employees will stay. Each of these assumptions depends not on financial metrics but on legal enforceability.
Take, for example, a company whose profitability depends on a few key customer contracts. A financial model might assume those contracts remain in place after the sale. But if the contracts have “change of control” clauses that allow termination upon transfer of ownership, the assumption collapses. Without legal review, the buyer may acquire a business whose revenue disappears overnight.
Similarly, an entrepreneur might buy a software company believing its intellectual property is secure, only to discover post-closing that code rights were never properly assigned from contractors. In these cases, the numbers looked solid, but the legal clarity was missing. Tomes reminds his clients that private equity is not a game of chance; it’s a system of enforceable rights and obligations.
How Attorneys Create Legal Clarity
Legal clarity comes from carefully structured agreements and thorough due diligence. Jeremy Tomes highlights several key areas where attorneys provide indispensable clarity:
1. Ownership and Authority
Before a business can be sold, it must be confirmed who has the legal right to sell it. Attorneys verify corporate governance, shareholder agreements, and authority documents to ensure that ownership transfers cleanly. Without this clarity, buyers risk disputes from disgruntled partners or creditors who were not consulted.
2. Asset and Liability Allocation
Clarity requires knowing exactly what is being purchased and what obligations come with it. Attorneys define whether the deal is an asset purchase or an equity purchase, negotiate which debts remain with the seller, and document how contingent liabilities (like lawsuits) will be handled. Vague language creates openings for disputes; precise drafting closes them.
3. Intellectual Property Protection
Businesses increasingly rely on intellectual property as their core asset. Attorneys ensure that trademarks, patents, and copyrights are properly owned, registered, and transferable. They also negotiate covenants preventing sellers or employees from misusing or disclosing intellectual property after the sale. Legal clarity in this area secures a competitive advantage.
4. Employment Agreements
Clarity extends to employees, the lifeblood of any business. Attorneys review employment contracts, union agreements, and benefit plans, ensuring compliance and preventing future disputes. They also negotiate non-competes and non-solicitation clauses, giving buyers confidence that key employees will remain and that sellers will not undermine the workforce.
5. Dispute Resolution
Finally, attorneys build clarity into how conflicts will be resolved. Instead of leaving disputes to chance, attorneys negotiate arbitration or mediation clauses, specify jurisdictions, and define remedies. This foresight prevents costly litigation and ensures conflicts are addressed efficiently.
The Role of Due Diligence
Legal clarity begins with due diligence. Tomes argues that without proper diligence, buyers cannot know what they are actually purchasing. Attorneys comb through corporate records, contracts, licenses, litigation histories, and compliance reports. They identify risks, assess their significance, and recommend ways to address them through negotiation, purchase price adjustments, or deal termination.
Tom’s views due diligence as the map that guides negotiation. Discovering an unresolved lawsuit, for instance, does not always mean walking away. It may mean negotiating indemnification clauses that make the seller responsible for any damages. Discovering a problematic vendor contract may mean requiring the seller to secure consent before closing. Each finding feeds into stronger legal clarity, giving the buyer a realistic picture of the business’s future.
Why Clarity Protects Both Sides
While legal clarity is often discussed from the buyer’s perspective, Tomes points out that it benefits sellers as well. Sellers who enter negotiations with vague obligations risk disputes long after they thought they walked away. Strong legal drafting gives them finality, ensuring they are not dragged into endless post-closing litigation. It also enhances their credibility. Buyers are more willing to pay higher valuations when they see that a business has clean, well-structured contracts and compliance records.
Case Study Examples
Tomes often shares cautionary tales to drive the point home. One buyer purchased a distribution business believing it had exclusive rights to sell certain products. Post-closing, they discovered the exclusivity had expired, and competitors flooded the market. The financials had looked great, but the contracts told a different story.
Another investor bought a profitable restaurant group only to learn that its liquor licenses were non-transferable. By the time new licenses were secured, revenues had dropped dramatically. Again, the numbers were promising, but the legal foundation was missing.
These stories illustrate that private equity success depends on what is written in contracts, not just what is written in spreadsheets.
The Long-Term Value of Legal Clarity
Legal clarity does more than protect against immediate risks; it creates stability for future growth. Buyers with strong contracts can expand confidently, secure financing more easily, and even sell at higher valuations because future buyers see reduced risk. Sellers with strong legal clarity can walk away with peace of mind, knowing their obligations are defined and limited.
Tomes emphasizes that private equity is not just about buying low and selling high. It is about creating enduring value. That value only exists if rights are enforceable, obligations are defined, and risks are allocated. In other words, value exists only when there is legal clarity.
Conclusion
Jeremy Tomes continues to remind private equity investors and entrepreneurs that financial models are important, but they are not enough. Numbers project potential, but legal clarity secures it. Attorneys provide that clarity by structuring deals, conducting due diligence, negotiating protections, and anticipating disputes. Without them, buyers risk losing not only money but entire businesses.
For investors serious about private equity, the message is clear: focus on numbers, but never trust them without legal grounding. Legal clarity is not a barrier to deals; it is the very thing that makes deals possible.
Learn more about Jeremy Tomes and his perspective on the role of legal clarity in private equity at biglawcapitalist.com.
Disclaimer: The content provided in this article is for informational purposes only and should not be considered as legal or financial advice. Success in private equity transactions may vary depending on individual circumstances. Readers are encouraged to seek personalized guidance from qualified professionals for specific concerns related to business acquisitions and negotiations.
