Armando (0:00 – 1:19)
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You have nothing to lose. Enjoy this episode of the Founders Guidepost. Hi, Armando Roman with the Founders Guidepost here with Wesley Robinson.
Wesley Robinson is a partner with the law firm Ballard Spar. Wesley, how are you?
Wesley (1:19 – 1:21)
I’m doing great today. How are you doing?
Armando (1:21 – 2:02)
Good, good, doing great. Hey, I’m anxious to have this conversation because there’s so many great companies here in Arizona and founders who have just built really fantastic companies. And then it comes time for them to sell, transition out, get the company to the next generation or the employees or private equity, and they just don’t know what the heck to do.
And that’s, of course, Wesley, when your role becomes so critical. So if we can talk about what you do as a merger and acquisition attorney, what that really means and how you help that founder, that would be just fantastic.
Wesley (2:03 – 3:24)
Yeah, definitely. And you’re right. I mean, usually in the legal market, a lot of times I’ll mention I do M&A work or kind of stick more to that item.
But a lot of times when you talk and just outside, you mentioned that and someone doesn’t really know what that means. You know, you say you’re an attorney and they think, oh, you’re in the courtroom, you know, in front of judges and then what’s M&A? So, you know, a lot of times I just I boil it down to really what I am as a corporate transactional attorney.
And I work with companies from various sizes to startup companies all the way to public companies that are looking to buy and sell, you know, different assets or businesses, or they’re just trying to do something transactional. And my job is to work with them in drafting a contract, really papering what the business deal is. And so, as you mentioned, one of the main things I do is what’s called mergers and acquisitions, where there’s a buying and selling of companies.
And I represent both buyers and sellers in a variety of those transactions to assist them, you know, assess the risk and just work with them through the process from, you know, signing that initial engagement to say, I want to buy or sell your business, all the way to what we call the closing, which is when the transaction is consummated and the actual equity or the purchase price is exchanging.
Armando (3:24 – 4:20)
Yeah, fantastic. That’s such a critical role because legalists, as everyone knows, you know, I think everyone who has a business and runs a business understands that lawyers are important to get things done and get things done right and protect themselves. But really, in the whole, you know, business sale, business acquisition space, it’s a whole specialty that you’re in.
And that often I’d say for probably the average small business owner is maybe a once in a lifetime thing. They’ve never had a conversation with somebody like you. They don’t really understand what they’re getting into.
They don’t know the details and how you really protect them. So maybe what you could do, Wesley, if you can just walk through, let’s say you’re having that first conversation with that founder, he or she wants to, they realize they’ve got to step out of their business somehow, some way. They don’t even know where to begin.
What are some of those first conversation points that you have with them in those initial conversations?
Wesley (4:21 – 6:33)
Yep. Yeah. And that’s right, Armando.
And it really, you know, and this is a lawyer answer you’ll hear a lot of times is it depends, but it does really depend on where they are at at that time. You know, there are times when we are approached and they have a signed letter of intent from a buyer that says, you know, we are buying your business for X amount here, the key terms. In that situation, there’s some things we can work with, we can assess, you know, and we can talk about the transaction as a whole.
But at that point, if there’s binding terms, we already have some parameters we have to work with. Nothing wrong with that. We get people that approach us all the time like that.
And there’s still a lot of value add as you know, you know, if you have good advisors like you and a good attorney, we can still find ways to try to be efficient on taxes, save the person money, find creative solutions to really put them in the best situation. You know, the reason I mentioned it depends is there’s, it’s never, in my opinion, too early to reach out to advisors to really surround yourself with a team. And I would say even if it’s three or five years pre-transaction, the earlier the better.
And, you know, there’s a lot of times where we’ll get, you know, a company and, you know, one of the things we’ll say is I wish we would have been talking years ago because we kind of got you set up with someone like you who could have maybe put funds in a trust or in a situation where we could save taxes or we could have you become, you know, convert to a different form of entity and whatnot. So again, it really depends on where they’re at and how eminent a transaction is. But our goal upfront is really to assess those high level risks because at the end of the day, that’s what we are.
We’re an advisor for you. And we’re, we’re trying to understand the risks and, and put them in a way that you understand, because as you mentioned, these are all very smart and successful business owners that are great in aircraft. But, you know, I don’t know a thing about foot surgery or, or, or buying and selling of houses and whatnot.
And so when I run into situations like that, you need to find someone that’s specialized and knows how to do that so that they, they, they can provide you with the right information.
Armando (6:33 – 7:21)
Right, exactly. And you mentioned coming to you, you know, say three to five years ahead of time, you know, ideally the sooner, the better I would guess, because then as you, you touched on several things with what you just said. So I want to make sure the really heard what you just said.
You mentioned that if it’s early enough, you might think about a different entity, business entity for them for, because it might make sense. Maybe it’s a tax reason or they have all their assets in one entity versus several entities, but coming to you sooner than later is better for them. You also touched on a moment ago about the letter of intent.
Maybe sometimes it’s already signed. They come to see you, but on the front end, if you can see them ideally as early as, as possible when they’re going through a transaction, Wesley, when, when would that be a three years, five years, 10 years? What does that look like?
Wesley (7:21 – 9:00)
Yeah. Again, I, I always say the magic is, is about five years for one of the reasons, and I don’t want to get too much in the details because this may get more complicated. But for example a lot of times accountants will advise on, on a structure as like an S corporation.
And, and a lot of times if you haven’t made what’s called an S election, which in short, it’s, it’s, it allows you if you’re a corporation and in some instances an LLC, it allows you to be taxed not as a corporation, which has two levels of tax, but as a passer entity. But the problem is, is when certain buyers buy a company, if, if the elections aren’t made soon enough, or if they’re not done properly, you can, what’s called, it blows the S election and you have a bad tax event. So I always say about five years because a lot of buyers like to see a couple of years, at least have good financials.
So you want to make sure you have, you know, an accountant that’s putting together solid financials. You want, and again, an advisor that can make sure that funds, if you have like family trusts or, or maybe you have charitable trust, get things set up so you’re not rushed. And then the same thing here for taxes and the variety of different things that you probably run into as a company on a day-to-day basis.
Are you doing your I-9 process properly? Are you signing NDAs? If you’re a software company, is everyone signing kind of the assignment of inventions and things like that?
If you can handle those ahead of time and have a process when the transaction happens, you don’t have to worry about that. You can worry about running your business and selling your business, not also kind of doing these backend things that, that, that could have been handled ahead of time.
Armando (9:00 – 9:20)
Right. And when you mentioned those backend things, those often seem to come to light during due diligence, right? When the buyer is now kicking the tires and digging in deep, that’s called the due diligence period.
And some of those things that could have been headed off well in advance, if they weren’t, they can certainly delay a deal and maybe diminish the value of the deal or maybe even kill a deal. Yeah.
Wesley (9:21 – 10:35)
Yeah. And I really sympathize for sellers in this instance, because again, you know, most of, most sellers that we’ll handle on a sale like this, they’re running their business and that’s a, that’s not, that’s not a nine to five job. That’s a 60, that’s sometimes a more than nine to five job.
In addition, you pile on the fact that they have to, again, read, you know, hundreds of pages of purchase documents and whatnot. And then the third phase is the diligence phase where they have to pull up old documents and make sure all their records are in place. So in my mind, we obviously can help on the second and third phase, but the more diligence and things you have organized ahead of time, the easier that third prong is going to be.
And it’s going to make your life just a little bit easier. And as you mentioned, one of the adages in M&A is, is, you know, time kills all deals. And so, you know, everyone wants a deal to close promptly because one, it keeps legal fees low, which is good.
It keeps the longer things go on, things can be discovered and people can change their minds and whatnot. So as you mentioned, that diligence phase is, can be painful, but it can be made easier with preparation if the time is afforded.
Armando (10:35 – 11:21)
Right. Exactly. Exactly.
So in, in that due diligence phase, when, when, when things surface, you as, as the, as the attorney to helping them go through this exit, you also do more of the, the, the non-exit functions as well. So what I’m thinking of specifically is if they need corporate minutes updated or need their entity reviewed, need all these normal legal things that are kind of day-to-day legal things, if you have kept up with those with the client and they’ve engaged you early enough, and you, you are keeping up with that with them, making sure they’re up to date, then the due diligence can be easier and less, just, just less of a burden during that time. Right. Correct.
Wesley (11:21 – 12:08)
Yep. And that’s exactly right. I mean, we’ve had some clients where they’ll say, I want to sell next year.
And again, that’s not the five years, but that’s okay. And what we’ll even do sometimes is, is put together, like, this is a due diligence request list. And what that basically means is these are the things that a buyer is likely going to ask.
And, you know, in some of those clients, we’ll set up a data room where everything is posted so that when, when, when, you know, that actually happens, we can then, we have the documents, we can upload them quickly and, and efficiently and everything is organized already. So there’s a lot of things that we can do. And, and, and maybe it’s a little bit more upfront work, but the efficiencies that it creates, I mean, nine times out of 10, it makes things more smooth that actually reduce cost.
And it makes the process just much more smoothly.
Armando (12:09 – 12:19)
Yeah. That, that makes perfect sense. And Wesley, you mentioned data room.
What, what, from, from the, the, the owner of the business when hears a data room, what, what does that, what does that really mean to them?
Wesley (12:20 – 13:13)
Yeah, it, it, it is basically, if, if you store your photos in like a drop box, that at the simplest form, it’s, it’s an online website where you can securely upload documents. Again, I mean, some of them, like, I don’t recommend using just a drop box because that is not the most secure, but there’s a lot of companies that you can host a third party room where you can monitor who can access the documents, who can download them. But in short, it allows you to, to upload all your documents.
Again, a long, long time ago, you would basically have your, your data room would be your documents and your folders in your office. And then, you know, the, the buyer’s council would come and review the documents or look at the photocopies. Now everything’s of course done virtually.
And so it creates efficiencies, but it allows, right, a seller to upload documents and then the buyer can review them in a secure environment. Okay.
Armando (13:13 – 13:48)
The data room basically is that old black file cabinet with the keys in the back storage room. But now it’s a, now it’s a more efficient process. Okay.
And help, help the, help the founder understand how you’re protecting them when they go, when they retain you as their M&A attorney, they’ve never gone through this before. They don’t know what they don’t know. They don’t know how to, they don’t even know how to be protected.
And obviously that’s how you help them. But can you talk about some of those protections that you help them or help put in place for them so that they are better off when it’s all done?
Wesley (13:49 – 17:36)
Yep. That’s, yeah, that’s, I think that’s probably one of the most important jobs of, of an M&A attorney. Because again, when you think about it, really the actual, what I would call the purchase agreement, which that defines the business terms of the, of the deal.
It really is a risk allocation document, right? There are certain things that happen. And, and as, as an attorney, if something doesn’t go as expected, who is bearing the risk on this?
So on its face, you know, a purchase agreement has a couple of key components. One is what I call the business terms. What is the buyer buying?
How much does it cost? And what are the terms of it? Is it all being paid up front?
Is it being paid over a period of time? You know, the kind of what I would call the core business terms. And then the next piece goes into what, what are called the representations and warranties.
And so as a seller, what you do in this section is you make representations about your business and about the people that, if it’s an equity deal, would own the business. And, and the purpose of this is that the buyer, of course, they can do all the diligence in the world, but there’s some things, right? They’re just not going to know and they’re not going to understand.
So really what attorneys have, what is now expected is you’re going to make representations. For example, you know, there’s no litigation in your business and here’s a list of all your key customers and you’re in compliance with law and different items like that. And you own all the equity or you own all that you actually have title to the assets.
And so one of the things as going back to your question, how do we kind of manage the risk is, is, you know, sometimes a buyer will serve up a very fair agreement and sometimes they’ve, they serve up a very aggressive agreement that maybe has more representations than are reasonable or aren’t qualified. For example, like sometimes some of these reps can be qualified by a seller’s knowledge, right? They just may not know.
They don’t know that a third party is infringing on their, on their IP, right? They, you know, to their knowledge, it’s not. So what we do is we kind of go through the reps with the seller and we review them and we make sure, is this correct?
You know, can you make this rep? If not, how do we quantify this? Okay.
Well, we have two pieces of litigation. Okay. Let’s put them on what are called schedules where we schedule it out.
So we go through this whole process of helping you with the diligence and understanding your business so that we can really disclose everything so that after the fact, you know, they can’t say, Hey, that’s incorrect. There’s something wrong. So I know that’s a lot and, and it is overwhelming.
And that’s part of our process is, is we need to read, we review it with the, you know, the seller, we talk through it, we answer questions because for me, I review reps and warranties every day, all the time for, for sellers, they haven’t seen this. So sometimes there’s legal words and terms. And so what we try to do is really distill it down to something they understand.
And then the last point is then what happens if one of those reps or a certain liability that’s been discussed, what happens if something bad happened? And that’s called, you know, typically the indemnification provisions. And what we do is, is we kind of can help work and negotiate what we would consider fair terms or find ways to work around that.
So in short, you know, since this is something I do all the time, we try to find ways where maybe the buyer’s reaching and are trying to go too favorable against buyer. And, and we use our kind of our expertise and what’s important to the seller to really find, you know, strike what’s a balance, something that the buyer can be comfortable with, but the seller is and try to minimize the risk as much as possible.
Armando (17:36 – 18:23)
Yeah. So let me just make a, make a, let me just talk to the, to the listener for just a second. So what, what Wesley just talked about a lot of details that, that, that he just talked about and why they matter.
And it’s so important to get this specialist attorney on that sale. This is not your normal business attorney you’ve had maybe the last 20 years. If he or she does not do this, this, this exit process, this merger and acquisition activity, then he or she will not know just what Wesley talked about.
So Wesley, thank you so much for saying what you, what you did because so much is so specific, but it gets to the point that without your expertise on that team for that seller, he or she could easily just not know what’s there and get caught later in a really bad situation.
Wesley (18:25 – 19:13)
That’s right. And, and again, we could probably talk, you know, you know, on and on and on about different things. You know, there’s also covenants.
A lot of times when you sell a business, you know, the buyer doesn’t want you on day one to start competing, right? You don’t want to, you know, you sold your business and then a month later you’re, you’re competing. So there’s provisions in place there.
And, and what we can do is tell you, here’s the risk, right? This is what this means for three years. You can’t compete in the 30 mile radius of Phoenix, right?
In this business. And you may say, Hey, that’s totally fine. I never want to do this again, or, Hey, I have this side business that’s already doing this.
And so a lot of it is again, just talking about the risks and letting you know, because you may have looked at it on your own and had no idea, like that was really what, what the implication was.
Armando (19:13 – 19:34)
No, fantastic. And what if there is a possible litigation that really nothing is really there yet, but the seller thinks there may be, are they better off to tell you about it, have that conversation, disclose it or not? Because sometimes people want to say what they don’t want the, maybe the buyer to know.
Wesley (19:34 – 21:12)
Yeah. It’s my rule of thumb always is, is to always over disclose. It’s, it’s, you know, we, you know, as we talked about the data room, a lot of times we’ll be a buffer on the diligence upfront because we want to be careful on how we deliver the information, right?
So we don’t want to just say, Oh, there’s this, you know, all these bad things, because maybe we actually look into it and, and maybe there’s a piece of litigation, but it’s covered by insurance and, and it’s almost settled. So a lot of it is the packaging and messaging, but, but typically, as we talked about before with those reps and schedules, normally when you disclose that, that allows the representation to be correct. Going back to the, there’s, you know, no litigation, what we would say in that instance is except as set forth on this schedule, there’s no litigation, then we would list the litigation.
And then in the future, right, they could never say, Hey, you never told us about it, right? Your representation is still correct. So, you know, I, I think I’m going to almost every situation where you’ve talked about, if it truly is something that would make one of your, your representations you’re making incorrect, you want to disclose that.
And it may end up being, again, I don’t want to get too nuanced in the situations, but it may cause the buyer to seek some sort of special escrow or hold back, because let’s say it’s a really big piece of litigation. They’re going to want to say, well, I didn’t, when I valid your business, I didn’t know this was here. So I need to do something to protect me.
But at the end of the day, I think that the disclosure is important and it’s, and it shows a good faith between the parties too, which is important.
Armando (21:12 – 21:45)
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Fantastic. You mentioned Wesley, the word hold back just now, as you were talking, what is a, what is a hold back? And do you have a, maybe a simple example of what that, what might create a situation where there is a hold back?
Wesley (21:46 – 23:44)
Yeah. Yeah. And in the easiest sense, a hold back is, is, is, is literally a buyer is holding back part of the purchase price for a period of time.
And it’s either done in, in what would be called a traditional hold back where the buyer just retains the funds. Sometimes it’ll be held by a third party called an escrow agent. So you’ll sometimes hear the term an escrow or, or a hold back, but in short it’s typically held back for, I would say three things.
One, we talked about these reps and the indemnities it’s typical for, for, you know, an amount, I would say, you know, ranging from maybe 5% to 20%, give or take of the size for indemnity claims, because it’s inevitable every business there’s things that happened. And so a lot of times there’s just a help, a hold back for maybe 12 months or six months where funds are held back so that if the buyer has a claim, then they can just go to those instead of clawing back from your pocket. So that’s one of the items.
The second area is, is a lot of times when you’re buying or selling a business again, you have working capital in your business. And again, we can, we can start going down a lot of complexities, but there’s certain things such as accounts receivables and inventory and normalized amounts in your business. And a lot of times, you know, there’s an estimate of that done at closing.
And then it’s what’s called it’s trued up or justified after the closing. So a lot of times there’ll be a small escrow or hold back that’s released, you know, 30 days to 90 days after the closing. The final pieces you mentioned is, is what I would call these special holdbacks or indemnities for something, you know, maybe there’s transaction bonuses or there’s an indemnity or something kind of out of the ordinary.
And then, you know, you know, there’s a risk that’s been identified as, as, you know, a good chance of happening. And then funds are held back in that instance.
Armando (23:45 – 23:46)
Wow. Yeah, there’s a lot there.
Wesley (23:47 – 24:16)
It is. And that’s why I want to be careful. Like you said, this is at a high level and this isn’t meant to overwhelm, but it’s also just to show that there is an importance in having specialists do this because some of these things are, they come up every day for us.
But I know for, for someone who’s never done this before it can be very overwhelming. You know, there’s all these different terms and things coming out. So it’s always important that you have someone that, that is skilled in this and does this all the time so that they can really give you good advice.
Armando (24:16 – 24:39)
That’s right. So start to finish. Let’s say somebody is talking with a, with a prospective buyer.
Now they think they, they want to go ahead and start doing something with this, with this buyer. And they come to talk with you for the first conversation and they’ve not signed anything yet. From that point to when it’s a done deal, what is a, what is a normal timeframe look like for this?
Wesley (24:41 – 25:34)
Without a signed LOI, I would say, I mean, typically, I mean, you, there’s always outliers. I would, I would say it’s, you know, two to six months, I would say is the range. You know, I’ve had some deals, you know, like I said, that I’ve had a signed LOI and we’ve closed in a month.
That’s very, very fast. And, and maybe if the deal is a smaller deal or a subset and then there’s deals that I’ve had some deals that have gone on for years. It’s, it’s quite amazing, but I would say typically most of them are in that two to six range.
You don’t want to go much longer than three to four months because you’ll have what’s called deal fatigue. As I mentioned, these sellers are running a business. They have to keep their numbers up.
Right. So they continue to show good projections and then they’re diligencing and reviewing this. So you want to be careful.
We want to try to keep things moving quickly so that no one burns out right before we get to the finish line.
Armando (25:35 – 25:48)
Yeah. Fantastic. We’ve talked about LOI a few times in this conversation.
Can you talk about what is, what, what is in that LOI? Is it a binding agreement? Is that part of the contract?
What is the LOI in this whole, in this whole thing?
Wesley (25:49 – 27:15)
Yep. Yeah. LOI means letter of intent.
Sometimes they’re called memorandums of understanding. They have a couple of different terms, but I would, I would, I would say it’s similar to like you give the engagement ring almost to, to your spouse. It’s, it’s, you know, there may be a couple of provisions that are binding that relate to maybe confidentiality, right?
If, if, if you’re selling your business, it’s very important, right? That if they start diligencing and looking at your documents, we don’t want them to sever the relationship and then steal your customer list. Right.
So there are some things that are binding like confidentiality in terms like that, but a lot of times it’s really it’s non-binding, but it’s, you try to stick to it as much as possible. It has the key terms like purchase price. Here are some of the key assumptions with, you know, the pieces of the deal.
And it’s the framework. It really helps kind of guide you to the next step, which would be the draft and the purchase agreement and the closing. So again, you know, each person’s different, but you try to stick to the terms, but maybe something’s discovered, right.
And maybe, or maybe after you sign the LOI, you have two or three of the best months ever. Right. And then maybe at that time, if you’re brave enough, you can ask for a little bit of bump in purchase price, you know, and so there’s goods and bads with it, but it’s, so it’s definitely not binding in whole, but it does help frame the process.
Armando (27:16 – 27:26)
And that LOI, is that coming from the buyer, from the seller? And at what point should, should that seller involve you in that process?
Wesley (27:26 – 28:07)
I would say it typically comes from the buyer. I would say nine times out of 10, every once in a while you get a seller in. And I highly recommend that you have someone, you know, that does M&A work review and LOI.
Again, just because, although it’s not binding, it’s hard to back out of some of those terms. If you’ve agreed to, let’s say you agreed, we were talking about estros or holdbacks and you agree to one or certain terms, it’s going to be hard if you go to the M&A attorney and say, oh no, that’s way too high, you should have gone lower. You know, you’re, you have an uphill battle.
So we definitely recommend bringing in somebody to review that reviews those on a normal course.
Armando (28:07 – 28:36)
Yeah. And let me just repeat that Wesley, for the listener, that, that what you decide is that the LOI before the seller signs it, have the attorney review it. And the attorney who understands the buying and selling of companies, the merger and acquisition attorney, which may be different from the business as normal attorney, but it’s really, sounds like it’s really important to make sure that someone with your expertise looks at it on behalf of the seller, gives guidance on it before they sign anything.
Wesley (28:36 – 28:59)
Yes. Yep. Definitely.
Cause we can give a market check. I mean, like when I say a market check is just make sure things are right in the right ballpark. Right.
And, and we understand that that’s truly what you mean, because at the end of the day, we’re trying to document the business deal. And so if we start talking to you and this is not what you expected, we want to make sure we correct that, you know, right up front.
Armando (28:59 – 29:13)
Yeah. Fantastic. And then Wesley, when, when people are going through a sale for the first time, you know, everybody wants cash upfront, what is a normal deal or a range of deals look like when it, when it comes to how the seller gets paid?
Wesley (29:15 – 32:06)
Yeah. It’s, I mean, it’s all over the place. I guess it’s all over the place.
I mean, you know, there are a fair amount of deals that I work with where, where a high portion of the cash is paid at closing. And maybe that’s a virtue of some of the, you know, just some of the clients and deals I’ve worked with, but it is very typical for a number of reasons. And sometimes it’s beneficial for the seller to, to have some of the purchase price deferred.
And, and again, it, so I would say on average, maybe again, two thirds to 80%, I would see, I would expect the purchase price to be paid at the closing. And then there’s some sort of component, whether it’s the hold back, as I mentioned, typically you’ll see around 20% of funds being held back. A lot of times you’ll do what it’s called a roll.
You, you do what rolling your equity and that can be done in assets and equity. But, but in short a lot of this is communication with the seller and what they want to do going forward. But a lot of times what’s, what’s the key of a business.
It’s a lot of times those hardworking individuals, like the sellers that have made this business successful. So, you know, even if it’s for a shorter period of time, a lot of times buyers want that person to continue as an employer or consultant. And, and a lot of times or sit on the board and they may offer the ability to roll some of your equity.
So maybe you’re buying, you know, they’re buying your company, but you roll 20% or 30% of the purchase price into equity in the buying entity or a parent entity. And then you get a second bite at the apple in the future, because a lot of times if it’s a private equity buyer or someone else, they may sell the company in the future. So there’s, again, kind of going into this, we can get very complicated and it can make your head spin.
But the nice thing is, is, is that there’s a lot of different options out there. And, and, you know, these aren’t out in the ordinary things. And a lot of times we can tailor things based on what’s important to the seller.
We have some sellers that are like, I want to be done. I don’t want to work anymore. I want to ride into the sunset and I want all my money up front.
You know, that may affect the valuation, but there’s ways to work around that. And there’s other people that maybe want to be part of the business. They want a board seat or they want, they believe in the company and they think it’s going to grow because they have these great executives that are going to run the business.
So it’s a wide variety. And a lot of times that is the important phase of finding a good buyer and seller to make sure that everything’s aligned here. Because if the buyer expects you to continue to work for five years and you don’t want to, there’s probably a culture issue that we want to get in front of sooner than later.
Armando (32:07 – 32:12)
Yeah. And Wesley, what it sounds like is you’re, you’re, you’re in a way saying that just about everything is negotiable.
Wesley (32:13 – 32:49)
Yes. Yeah. That’s, I would say, yeah.
I mean, and there’s creative ways that have come up in, in a variety of deals you do. And it really, a lot of times depends on the interests of the seller. And that’s why a lot of times my, you know, most important job, and I think is you as well as is really understanding the client and what’s important to them, because, you know, it may be market to have X, Y, Z, but if that doesn’t work for the seller, then, then we got to find a way to get the seller comfortable.
Otherwise, it’s not going to be comfortable for them. And it’s going to put everyone in a tough spot.
Armando (32:49 – 33:04)
Right. And given that, that there’s so much negotiation and there isn’t really a lot of hard and fast rules on some of these things, it again, gets the important of having the, the right experts that are helping that seller go through this once in a lifetime events.
Wesley (33:04 – 33:05)
Yeah, that’s right.
Armando (33:06 – 33:45)
Okay. Are there some, are there, are there some common surprises that the sellers for the first time when they’re talking with you or going through this, some of the, what are some of those common surprises to the seller as they’re, as they’re going down this path for the very first time? Um, I, I thinking about that, it.
I mean, we have one right now and the due diligence phase is so heavy and so time consuming. I’d say that was probably a really big surprise for them. Just how much time they’re spending on due diligence.
Wesley (33:46 – 35:49)
Yeah. And, and I, and again, it depends on the buyers and sometimes the law firms as well. You know, there’s, you know, some of these private equity back, we’ll have very large firms and you start to, you start to know ahead of time, you know, that firm is representing the buyer.
This is going to be a tough diligence process, but I would say typically the diligence is the thing that wears it out because, um, a lot of times in these deals too, um, the buyer needs to get comfortable. But, um, depending on the price range, there’s this, it’s, it’s an insurance product. It’s called rep and warranty insurance.
And so a lot of times the buyer can buy insurance so that if there is a breach, as we talked about, again, the breach of these reps, they can go to a policy just like you have an auto policy, right? You can make a claim and there’s, there’s, you know, a deductible and there’s a retention. And then if it’s covered, you can get, you know, you can get coverage as a buyer.
That’s kind of a win-win in some circumstances, because as we mentioned, one of the risks to the seller is if there’s something that’s incorrect, well, if there’s a policy in place that helps, um, and for the buyer too, instead of having to go after a seller that may be working for you, right. You know, as we mentioned, if they continue to work or there’s, you know, rollover equity, they can go to the policy. But as you mentioned that the insurance people aren’t going to just carte blanche, give, give out an insurance policy.
They have to diligence too. So as you mentioned, sometimes you get diligence requests from the buyer and then you get them from the provider and then you get, you know, follow-ups and follow-ups. And, and so that can be definitely a stressful time.
So I think that would be the common theme. And then just how much paper there is, you know, depending on the size of the deal. Sometimes a purchase agreement can easily be, you know, 80, 90 pages.
And then if there’s a rollover agreement, there’s an operating agreement and a lease, a lease back and non-compete agreements. So it can easily be 300 pages of paper that you’ve never seen before or anything like it. So that can be a little bit daunting.
Armando (35:50 – 36:51)
Wesley, I’ve, I’ve spoke with some sellers who I’m thinking of one specifically who went through a sale. They, they were getting phone calls. The company was doing really well.
And when companies doing really well, the phone starts to ring people say, hey, I want to buy your business. So the phone rang and rang and rang and they said, yes. Next thing they knew, they had a dozen people lined up as potential buyers.
And before 60 days, they were under contract to sell. And when I spoke with the owners, they were a little bit kind of still head spinning a little bit how fast it was moving. And I asked them, is this really what you want to do?
Because it seemed it was happening so quickly. I don’t know if they really had time enough to process where they were. And when you think about a normal deal and a normal speed and cadence of that, when things going super fast, is that normal?
Is it more, you need to be more cautious when things going that quickly? What does that say to you as the, as the M&A attorney?
Wesley (36:54 – 39:21)
It’s, it’s, again, it’s not uncommon at all for a deal to start going that fast. And that’s, you know, that’s where I really try, you know, and you can tell, right? Part of this is really understanding the client and making sure they’re around good support.
Because again, if it’s maybe a closely held business, again, there’s maybe one or two or three people that are doing all the work on the seller side. But part of it is really communication and understanding, right, what they want out of this. And, you know, a lot of times, you know, even me as an attorney, I try to figure out, especially when I’m hitting mid-November, is we have deals going on and there’s this whole thing like we need to close at the end of the year.
And I’m very upfront and I, you know, if my client really needs or wants to close at the end of the year, maybe they have a family vacation or they want to get it done for taxes, we’re happy to drive that. But I always try to understand some of the, you know, the method behind the madness. And, you know, there’s some times where, you know, again, earlier this year, I had a client, the other side wanted to close by the 4th of July.
And I talked with my client. I said, is this what you really want? And they said, you know, I’d love to be closed, but we don’t need to close by the 4th of July.
You know, if we could close by mid-July, that’d be great. And so we had to have the conversation with the buyer. They understood it.
We slowed things down a little bit, but it allowed everyone to get more comfortable because, again, my client felt, you know, they were getting pushed and they felt the buyer was kind of trying to cram things down. And so, again, part of that is that’s my job a little bit to understand, you know, does it make sense? Or maybe we’re just so close, let’s, you know, let’s get it out for another week and then we can be done and then you can be exiting there.
But a lot of that is, you know, I say an M&A attorney as much as we need to know our legal expertise, and most of them do. You have to be, you know, a psychiatrist too. You really have to.
This is a tough situation, right? It’s a lot of times it’s a business that a seller has built through years. It’s their identity.
They put so much work into it. And then, like you said, the next thing you know, next year, I am not going to have a job, right? Or I’m going to have to move on to something else.
And then that reality hits. And so part of our job is to talk through and really, you know, let them, you know, process that, but also understand what they’re true, what they want to get out of it and what’s important to them. Yeah.
Armando (39:22 – 39:52)
And then that gets back to what you said a moment ago, but really understanding what are they trying to get to? What do they want? And to help being that guide for them along the way and knowing when to ask the questions, maybe when to hit the pause button for just a moment to let them catch their breath.
But it’s just so important that so many people go through and spend their lives building one company and they go through one sale. And there’s no second chance, no do-over. It’s got to be the right decision at the right time for the right reasons.
Wesley (39:53 – 41:01)
Yep, exactly. And that’s why it’s important too that, you know, I think it’s important that anyone that’s selling a business talk to multiple attorneys. You know, it shouldn’t be just talk to one person that does M&A because, you know, a lot of it is this is a very emotional and it’s stressful and it’s a time crunch time.
And you really need to have someone that really aligns with you, you know, even just, you know, your views on things too. And so, again, there’s been times where I’ve made pitches with, you know, a seller and after the call, I think it was pretty clear, like, it just wasn’t a good fit. Like, we could have helped them and done a good job, but just, you know, the personalities didn’t align.
And there’s other times where we’ll meet and talk and we’re like, this is just a perfect fit. Their values align with us, our way of really just being, you know, we like to run a deal really transparent, upright and not try to be the like always the crazy approach, you know, to kind of negotiate. We want to really be pragmatic about it because that saves time and energy.
So I think that that comes to the top pretty quickly when you talk with people and what’s important to them.
Armando (41:01 – 41:34)
Yeah. And I’d say also, you know, in your role as the attorney who’s leading this or maybe the lead on this for that seller, you’ve also got within a larger firm, of course, you’ve got lots of partners, lots of expertise. So if you need to tap into somebody about a trademark or intellectual property or licensing or royalties, the benefit of working with you in a larger firm setting as you are, you have that expertise available to you.
How does that come into play when you’re helping serve your clients?
Wesley (41:35 – 42:59)
Yeah, no, that’s a great point. And as you mentioned up front, I work at Ballard Spar and they’re what I’d call full corporate service firms. So, again, very similar.
Like I said, I wouldn’t go to my general practitioner for foot surgery. If someone reached out to me and said, you know, negotiate a lease or file a patent, you know, I can’t personally do that. But thankfully, you know, I have a great group of firm, you know, different colleagues that labor employment attorneys, tax attorneys all over the board.
So a lot of times in a deal like this, depending on the type of business, we’ll make sure we invoke the right people. You know, data and privacy has become a very, you know, hot area in legal. So we have data and privacy people that can review and assess if it’s a software company.
We have trademark and patent. And with a lot of things, it’s gotten so specialized, even in IP. Like I said, if it depends on what type of IP it is, there’s different attorneys.
So the nice thing about that is, is that I’ve worked with a lot of companies. So a lot of times it’s me issue spotting. I obviously draft the transaction documents and I work through the whole process.
But when I have to bring in a specialist, I know who I can bring in and we can connect them so that we make sure that the seller is getting the right advice and understanding the risks with, you know, what the issue or potential issue could be.
Armando (42:59 – 43:24)
Yeah. Fantastic. Fantastic.
So what, what have we not talked about up to this point in this conversation? I know we’ve touched on a lot, but what have we not touched on that founder who’s thinking about selling and hearing this conversation, what have we not touched on that they really need to have in mind as they think more about this process and going through it?
Wesley (43:25 – 43:43)
I think, and I know we, we talked about it a tiny bit, but I really think that getting a good team around you. 43:40 – 49:45 Right. Exactly.
Yeah. It’s, again, there’s a number of things depending on your circumstances. Again, it really comes down to what your short and long-term goals are.
But I think that’s always something.
Armando (43:44 – 43:45)
There’s a sudden death in the family.
Wesley (43:45 – 44:42)
Yeah. And that’s completely right. And, and, and like I had mentioned upfront, I do a lot of M&A work and kind of what I would say my, my, the side is when I’m not doing M&A work.
I do what’s called outside general counsel and it’s, and it’s really depends on each client too, but some clients reach out, you know, you know, daily and, you know, I need, you know, I need an employment agreement or an independent contractor drafted, or, you know, I have this issue, I have an HR issue and some of them reach out, you know, once a year, but it’s good to have people even like that. You know, if, if that’s something where your company’s growing really fast and you need some of those services, it’s good to engage with the people because it, again, it doesn’t just mean right away, oh, you’re going to have a bunch of legal fees, but you know, it really is, is, is you need to gather the information so that you can make a decision that’s a value add.
It’s really, that’s how I look at it is, is by doing those things like that, you’re adding value to your company and putting it in a better position to succeed in the future.
Armando (44:43 – 46:01)
Right. Exactly. So I’ve touched a couple of points you’ve made along the way here.
You’ve said this several times in this conversation, really understanding what that client is trying to get to, what’s important to them, and then you can give them guidance along the way and help steer them in the right direction and draft, of course, and get that in their favor. You talked about the purchase agreement and three areas about that. You touched on the reps and warranties insurance as a possibility as well, which made me think of the detail insurance that I got on my CPA from when I sold that 20 or so years ago, same idea.
You talked about holdbacks, letter of, a letter of intent, LOI, sometimes called the MOU. But before that, before that seller signs that, get it to you, ask you to take a look at it so that you can help modify that agreement. And you mentioned a few times as well that, that so many parts of this, if not all of them are negotiable, and even though that, that, that seller might get an LOI that looks like it’s perfect, they’ve done this a thousand times, I should just accept it and sign it.
They should not do that. They should instead engage you, talk with you and have you make adjustments to that in their favor. Right?
Wesley (46:02 – 46:18)
Yep. Yeah. You never know if you don’t ask.
And I mean, a lot of times, you know, people want something and I’ll say, well, that’s maybe not market or usual, but you’d be surprised at, at sometimes when someone asks and, and what they’re willing to get. So that’s, it’s, it’s, it amazes me still.
Armando (46:18 – 46:25)
That’s right. If you don’t ask, you will not get it for sure. But if you ask, it just might come through.
Wesley (46:26 – 46:28)
Yes. Yes. Don’t tell that to my kids though.
Armando (46:30 – 46:40)
That’s right. That’s right. Well, kids are always pretty good at that.
They’re, they’re kind of, when they’re growing up, they understand they can always ask and it’s okay to hear no.
Wesley (46:40 – 46:41)
Exactly.
Armando (46:41 – 48:42)
And we teach them otherwise. Yeah, indeed. Good.
Well, Wesley, this has been a great conversation. I’m so thankful that you touched on so many areas and you touched on just a ton of areas that matter in this once in a lifetime sale. And if, let me just look at my notes real quick, see if I have any other questions I want to touch on before we, before we finish this up.
You also said to engage you early in the process, you know, five years ahead of time is not too early. Maybe that’s even ideal. And we talked about the, the getting the right team members on board, the right exit team on board, which of course is the merchant acquisition attorney, which is what you do.
It might be in the investment banker, if that’s the route they’re going, which I would suggest that most people of course have, have that person on board as well. Having the right CPA who understands exit and understands maybe the working capital, the quality of earnings, audit and review financials, because not all CPAs are in that space, but some are very, very well ingrained in that space. And they understand what needs to happen when a business goes through a sale.
Having, as you, as you suggested, the right wealth manager on board who can help the family plan and navigate this ahead of time during and after as well for the, for the best opportunity for that, for that client. And then that also gets to making sure the right estate planning is in place as they’re going through this as well, because it’s, it’s funny when people are, maybe the company’s worth $40 million when, before it becomes liquid cash, they know what’s worth a lot of money, but they’re not really stressed until it becomes cash. It was the same value before and after, but now it’s cash and now the stress levels can be really high, but that gets to the right estate planning, the right protection, the right titling of assets.
And then of course, when you do your job for them and making sure that after the sale is all done, that they are in the best situation possible. So that if anything happens, they can handle it.
Wesley (48:43 – 49:11)
Yep. Yeah. And that’s, and that’s, it’s that easy, right?
Yeah. And it is a lot, but again, that’s why the team is in part in whether, whenever you’re in, you would know as business owners, right? Like it’s, you have, you need good people, even in your company, right?
That’s how your job gets easier. And so it’s the same thing here is having those, those people you can rely on to kind of get you through, you know, a challenge or a new thing that comes up.
Armando (49:11 – 49:20)
Yeah. Wesley, fantastic. Thanks so much for the conversation.
If somebody heard the conversation and wants to get in touch with you, what is the best way for someone to reach out to, to, to talk with you?
Wesley (49:21 – 50:18)
As an MNA attorney, I am always available for better or for worse. But you know, I do have my, my direct line. Is that right?
If I just say my direct line in my email, but you know, my direct line is 602-798-5489. Okay. And my email address is, is RobinsonW at BallardSpar.com.
And that’s R-O-B-I-N-S-O-N-W at B-A-L-L-A-R-D-S-P-A-H-R.com. And, and as I had mentioned before, I’m always happy to give away a free advice or pointers on, on anything. And we have a bunch of materials too.
Part of it is educating and, and really getting you equipped with the information you need. So always happy to have a conversation about any questions or concerns people are having related to their business.
Armando (50:18 – 50:25)
And then Wesley. We of course are here in Arizona. Are your clients all Arizona, all over the country? Where, where are they?
Wesley (50:25 – 50:56)
They’re, they’re everywhere. Of course, a lot of my sell side work is, is, is local just because again, I, you know, that, that makes the most sense, but I do do a variety of buy and sell side and I’ve, I’ve done probably a good 30, 40 states now in different states. And so I’m in the kind of private equity strategic all over the place.
So it, it, it’s really all, all over the place. So there’s no limitation if you have a business that’s in another state or you have a buyer that’s in a different state.
Armando (50:57 – 51:08)
Fantastic. And that again, is the benefit of having, being part of BallardSpar where you’ve got so many attorneys across so many states, it gives you much better coverage across probably all the states.
Wesley (51:09 – 51:27)
Yeah. And it does help, especially in employment laws, when you need people to start researching employment laws are very different in the state of Washington than they are in Texas. So it’s, it’s good to understand what restrictions and things are in place and how to, to cover that.
Just things like that. It’s just, it’s nice to have people that understand that and know that.
Armando (51:28 – 51:44)
Oh, fantastic. Good. Wesley, thanks so much for the conversation.
Really appreciate it. Yeah. And just again, thank you for the work you do.
Thank you for offering that, that free conversation with people just to reach out, get to know you a little bit and, and you can help give that guidance when, you know, when it’s appropriate.
Wesley (51:45 – 51:49)
Yep. And thanks so much for having me. I really enjoyed this.
This is a lot of fun.
Armando (51:49 – 51:50)
Same here. Thank you.
Wesley (51:50 – 51:51)
All right. Take care.
Armando (51:52 – 52:36)
Hope you enjoyed this episode of the Founder’s Guidepost. When you think about exiting your business, that’s often a once in a lifetime event. With no do-overs and the stakes can be very high for your family.
Before making that leap, ask for your free copy of our Scottsdale Founders Forum white paper packed full with information that first-time sellers should know before exit. And schedule your 30-minute Founders Strategy Call at axiomcorp.com. Your exit can be amazing.
Everything you dreamed of. When you plan ahead and take all the appropriate and necessary steps. That’s what’s possible.
Until next time, I’m your host, Armando Román.
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