Six-year employment agreements that Focus Financial Partners entered into with principals at the 40 or so advisory firms it invested in are emerging as a potential snag as Focus's primary shareholder, Summit Partners, negotiates with potential acquirers for its majority stake in Focus. Several months ago, Summit retained Goldman Sachs to search for acquirers to purchase its interest in Focus and Goldman is believed to now be in serious talks with two or three private equity firms.

Since Focus was formed in 2006 and some of those contracts will start to expire soon, potential acquirers are realizing they will have to renegotiate deals with principals at many firms in the next few years or find new professionals to run the businesses.

The fact that Focus used a single national non-compete contract for all its transactions rather than individual contracts taking various state laws into account also weakens the negotiating position of any potential acquirer, sources said. Furthermore, if one state court were to invalidate a single contract, it could conceivably render all Focus' non-compete contracts irrelevant, making the firm much less attractive to potential buyers.

Focus was formed six years ago by Summit and former McKinsey & Co. partner Rudy Adolf with the idea of aggregating advisory firms in much the same fashion that the Apollo Group and Jessica Bibliowicz consolidated estate planning firms, benefits providers and other advisor businesses to create National Financial Partners (NFP). Like NFP, Focus hoped to do an initial public offering (IPO), but the financial crisis soured IPO investors on financial companies while the recession threw at least a temporary wrench into Focus's growth strategy.

Despite these problems, Focus still holds some appeal to private equity firms for several reasons. The firm has about $40 million in earnings before interest and taxes plus depreciation and amortization (EBITDA), although that figure drops to about $22 million after deducting for the minority interests of the various firms. Combined with about $210 million in debt, Focus has an existing capital structure in place.

While private equity firms are awash in equity capital commitments, finding the available debt to put their capital to work is proving to be a huge challenge in today's loan-averse environment. Banks that once competed fiercely for the high fees and interest rates associated with highly leveraged loans are taking a far more skeptical view of companies with 5-to-1 or 10-to-1 debt to equity ratios.

Any acquirer could avoid extensive negotiations with wary banks for debt. However, it would need eventually to begin the arduous task of negotiating with principals at about 40 separate advisory firms. Sources added that time was beginning to become urgent for Summit because in late 2009 it entered an agreement with Polaris Venture Partners to recapitalize Focus. At that time, Summit injected $15 million in capital while Polaris invested $35 million.

Polaris is believed to have obtained a superior position with certain cramdown rights in Focus's capital structure that could allow them to significantly dilute Summit, Focus management and other equity shareholders. If Summit can't find a buyer, it is believed that Polaris would become the controlling shareholder at some point in the next year or so.

It is by no means clear that Polaris, which invests primarily in technology and life sciences, is interested in becoming a long-term owner of Focus. If Summit can't find a buyer within the next year, one source suggested Polaris might retain an investment bank to sell the individual firms back to their principals after diluting their minority equity interests along with the equity of Summit and Focus management. Another option could be simply doing nothing, waiting for financial markets to appreciate and hoping a buyer eventually emerges. What exactly would happen to the holders of $210 million in debt isn't precisely clear.