Nat Burgess
- Don’t let the issues die with the lawyers.
Lawyers have a tremendous role in these deals, they have to figure out thousands of legal points and technical points and basically make the deal work. Often, lawyers will be negotiating with each other and they’ll reach an impasse. They’ll reach business issues that they’re not authorized to compromise on or to make material changes on the deal at all. When that happens, they can sit there negotiating for weeks, or if they’re experienced and you’re managing the process correctly, they will identify those issues as business issues, put together a list, escalate them to the business people, and help structure a negotiation where those can get solved.
- Avoid duplication of work during due diligence.
Questions on the due diligence list will require a response. Many of those same questions will pop up again as reps and warranties in the contract, again requiring at least study. Then they will pop up a third time because those are going to disclosure schedules. In other words, as you go through this initial diligence response, don’t just dump data on the buyer and consider it done. What you’re doing instead is building an organized archive, and later on when you’re reviewing the accuracy of the reps and warranties of the contracts, both creating the disclosure schedules that go with the contracts, you’ll be able to zero in on precisely the documents that you need in order to create an accurate response without duplicating work.
- Leave contingencies to closing.
Here I’ll echo what Ward said and Jim said and basically what our recurring theme of urgency here is. When the purchase agreement, the contract is signed, the deal isn’t done, it isn’t done until it closes. Signing and closing are two distinct events. Usually there are contingencies that have to be satisfied at the signing, but before closing. It is possible as Jim pointed out to have a simultaneous signing and closing, and that is ideal, but in the rush to lock down an acquisition target, the buyer will push hard to get the deal signed, even though there are lose ends that still have to be satisfied before closing. As the seller, your goal is to have no contingencies. As a fallback, you might accept a few contingencies, like a simple assignment of the lease, or getting an employment agreement signed. If the contingencies are more complex and unpredictable, you should consider delaying the signing. For example, what if you have a dozen contracts that have to be assigned by customers to the buyer? In the heat of the moment and under pressure from the buyer, you might sign the contracts and then get stuck for months trying to get the assignments done. This is hard on companies and hard on people, and deals come unraveled. You’re better off either negotiating away the contingencies or delaying the signing. This, frankly, is harder than it sounds. Buyers want to lock you up, they’ll complain that you aren’t committed, that you aren’t being fair. Hold the line; you don’t want to get stuck in limbo.
That concludes our contract section.
Q&A
We have several questions that have come up. I’m just going to take one because we are just about out of time. The question is, “Isn’t this the job of the lawyers?” Interesting.
As the CEO, you need to manage the lawyers, they work for your. Their job is to inform you of risk so that you can make informed decisions. But you still have to make business decisions, and you still, as CEO, have to take risks. That means understanding the critical issues, understanding the traps, and really working with the lawyer to work with you to make the deal you want happen.