Buying and Selling a Business. Garrett Sutton

discussing how to assemble your team of experts, it is important to understand why so many professionals (especially attorneys) are considered deal killers when it comes to the sale of a business.

      Case No. 4 – Kent and Hank

      Kent and Hank had been friends since high school. They both went away to college and grad school and moved back to town to start their careers.

      Kent had obtained an electrical engineering degree and then an MBA, and inherited his father’s electronics repair business. He quickly expanded the business into electronic component manufacturing, both in the United States and abroad. Under Kent’s more aggressive leadership, the company really started to take off.

      Hank had obtained his law degree and had gone to work for a large law firm in town. Kent’s company was the first new client he brought into the firm. In four years, instead of the normal seven year associate track, Hank had become a partner due solely to the fact that Kent’s company provided so much work for the firm.

      Kent was becoming known in the region as a leading entrepreneur. He had been selected Businessman of the Year by his state’s Industrial and Economic Authority. He had been written up as a genius in Forbes, Business Week and the Wall Street Journal. Unfortunately, he started believing his own press.

      Kent and Hank spent a great deal of time together. Kent was expanding into new markets, thinking about going public, and all the while getting Hank’s sound legal advice for his next move. Kent was demanding of Hank’s time. He needed him 24/7. And Hank gave his time to Kent out of loyalty and friendship, which was more important to him than billable hours.

      Kent started thinking about acquiring an established company in a somewhat unrelated field. Time and time again Kent had to spend big dollars to get injection molds prepared for his electronic components. It was so expensive and frustrating for him that he decided to acquire his own injection molding company. Hank had urged caution, but Kent wanted to move forward.

      Kent located a target company in southern Illinois. It had an excellent business track record and a good reputation in the industry. Importantly for Kent, his company could get its injection molds for 60% less than they had previously been paying.

      Hank was assigned to do the due diligence investigation. All the documents, financials and procedures were in order. Everything appeared to be on the up-and-up. Still, Hank’s intuition told him something wasn’t right. He discussed his vague concerns with Kent over dinner. Kent dismissed his feelings as the inbred deal-killer instincts of a lawyer. Kent assured him that everything was fine.

      The transaction closed. And within four months, Kent was furious at Hank for ever letting him do the deal. A number of Taiwanese injection molding companies had suddenly sprung up. They were undercutting U.S. prices by up to thirty percent. No one had seen it coming. The former owner said he knew nothing about it, and there was no evidence to prove otherwise. (Had there been, Kent would have sued in an instant).

      The injection molding fiasco was a major financial and business embarrassment for Kent’s company. It indefinitely put off its plans to go public. It challenged Kent’s status and position as a genius entrepreneur. Kent couldn’t live with this. His press clippings had said otherwise. It wasn’t, it couldn’t be his fault.

      Who was responsible for doing the due diligence investigation? As part of that process, as part of knowing of competitive threats to the industry, who should have known that the Taiwanese were mounting an imminent and major attack on the injection molding market? There was one answer – Hank. Kent had his company’s PR flacks and spin-meisters put out the word that the whole disaster was Hank’s fault. Kent was led astray by Hank’s advice. Kent was still the genius. Hank was now forevermore the goat.

      Hank was bitterly offended by the actions of his former friend. The competitive analysis was supposed to have been done by the company’s people. While it wasn’t in writing, Hank had even warned Kent against the deal. And now, to be turned on like this, was something beyond belief.

      It got worse. His large firm couldn’t have the taint of the injection molding fiasco on their doorstep. Despite the fact that Hank’s work had lined all of their pockets with tens of thousands of dollars every year for the last eight years, Hank was told to leave the firm. For his former partners, appearance was more important than reality, rejection easier than loyalty.

      The lesson of this case – and be assured it has happened thousands of times around the world – is that attorneys are deal killers because of the position that they are in. For Hank, there was no upside on the deal. He would collect his fees, sure, but he would be entitled to them anyway. But if the deal was a huge success, Hank would not get the credit or a bonus, or any other benefit. Success was expected.

      At the same time, Hank had all of the downside risk. If critical information wasn’t ferreted out in time, if the deal didn’t work for a myriad of technical reasons, the lawyer was to blame. Hank’s position in the whole transaction was that of scapegoat-in-waiting.

      And so, for many attorneys, it is easier to kill a deal than make one, for in killing it, no mistakes are made. There are no future problems or issues, for which scapegoats are needed.

      While it is justifiable to criticize a small and select number of attorneys for their officiousness, incivility and questionable ethics, it is important to know that the syndrome of the deal-killing attorney most frequently arises outside the context of the attorney’s own personality. Instead, it should be recognized that almost every attorney you will ever deal with will have had a person like Kent in his past – a client and a friend, who the attorney went all out for, only to have that person turn on them when it became convenient to do so. With most attorneys having one or more such experiences, it is no wonder that they are skeptical, resistant and on their guard in the sale of a business. Their clients, the public at large, have put them in that position.

      The point of this discussion is not to create sympathy for the legal profession. Shakespeare, Twain, Hemingway, the world’s most talented writers, could not do that. Rather, the point here is to help you win when you buy and sell a business. To do so, you need to know why attorneys are deal-killers. And, armed with this understanding, you can overcome the resistance of the deal-killers to your ultimate advantage.

      Entering into a business purchase transaction, assume that every attorney involved in the deal is a deal-killer. They don’t want to make a mistake for which they will be blamed – or sued for malpractice – at a later date. How can you win with such people at the table?

       1. Be forthright. Don’t hide anything. Attorneys have trained antennae that sense out when even the smallest of details don’t add up. If you are evasive or furtive or, on the other hand, too slick or glib, the attorney will be processing those impressions and recording them as a strike against you. Be honest, open and direct. It’s not hard to do.

       2. Focus on win/win. As we’ve discussed, the only good deal is one that works for both parties. Appreciate what the other side needs to get out of the deal, and openly discuss your understanding of their position. This may seem counter-intuitive to certain hard charging executives who are determined not to leave one scrap on the table for anyone else. But again, you are in a room full of deal-killers. And honey gets you more than vinegar. By tenaciously and unreasonably fighting for every last dollar, you are geometrically increasing your chances that one of the attorneys will decide that you are a future problem waiting to happen. And we know how attorneys deal with the specter of future problems. Avoidance. No deal.

       3. Immaculate documents. You should see the look on some attorneys’ faces when a perfectly assembled due diligence package arrives for review. You would think they’d want to start dancing. If your corporate documents – your articles, bylaws, minutes, major contracts, policy manuals, procedure manuals and the like – are in perfect order when they are shipped off to the other side’s attorneys for review, you will have taken a huge step in overcoming resistance.

       Immaculate documents and documentation of corporate operations and affairs creates an extremely favorable impression. And remember that we are dealing in a certain measure