Shownotes
It is incredibly important to get the right counsel involved in your transactions at the right time so that you don’t end up in a dispute later on. Jessen Gregory, attorney with Ruddy Gregory, PLLC talks about preventative medicine in terms of business transactions. Jessen says the majority of their transactions are mergers and acquisition transactions where someone is trying to sell or purchase a business or an asset within that business or get financing thereof. RG is a member of an international alliance of business attorneys that they can reach out to if a client has a transaction going on in any other country across the world. Jessen talks about what they do in their firm and shares some useful information about pothole avoidance, de-risking your business, transitioning your business, and everything else you need to know in between transactions.
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Mergers, Acquisitions, And Other Business Transactions with Jessen Gregory
Better, sooner than later. A little prevention.
Preventative medicine in terms of a transaction.
We have Jessen Gregory. She’s an attorney with Ruddy Gregory. Jessen, you and I met at a large conference, which prompted this meeting. Welcome to the show.
Thank you, Bob. I’m very happy to be here.
I appreciate your time. If you would tell us a little bit about your business and who you serve.
I’ve been practicing for 13 years and I am licensed in California, Colorado and Texas. I’m part of a boutique firm. We have two offices, one here in Cherry Creek, Colorado and one in Washington, DC. There are six lawyers total. We provide high-quality services at an affordable rate. We have the same experience that large firms do. We are a smaller scale version of the same thing.
We have a collection of attorneys. What is the specialty that you guys focus on?
In the Denver Office, we have a general business practice. The majority of our transactions are mergers and acquisition transactions where someone is trying to sell or purchase a business or an asset within that business or get financing for some avenue thereof. In a transaction like that, you always see a piece of commercial real estate, whether it’s the sale of commercial real estate or a lease transaction or transferring that lease, so our business is heavily involved in commercial real estate as well. Our group in DC represents the alternative investment community, so hedge funds, registered investment advisers, private equity funds and the like. We’re also a part of the Alliance of International Business Attorneys. That means that we have a group that we can reach out to if you have a transaction going on in any other country across the world.
For the business owner that’s going like, “That’s not ringing a bell for me,” I’m a typical business owner and I go, “I’ve got a warehouse that’s no longer a key to my operation and I want to liquidate or I’ve got a warehouse and I want to move. I want to sell one and move to another.” What are the typical things that a business owner misses that they should be thinking about if they’re going to go down that road?
I’d like to separate the two into the asset itself versus the real estate because those are two separate questions. I’m thinking about concerns related to both of those.
Not affording yourself that ability to have somebody who thinks outside of the box is a detriment to your business and future transition.
Before we go any further so everybody knows, this is not to be construed as legal advice. If you have questions, what’s all the disclaimer stuff you’re supposed to say?
Unfortunately, I can’t provide the world with legal advice. You have to be under engagement of my services. In a typical transaction where you’re selling something of value or purchasing something of value, you have to understand (1) whether or not it’s heavily encumbered (2) whether or not there are alternative issues related to that asset, (3) how the business itself is being run and (4) how a sale might impact the assets within the business. If you’re talking about a warehousing business, I assume that there are contracts with respected goods coming in and out. You have to understand what happens to those contracts If you’re going to sell. Is the buyer going to be liable to take those over? If you’re the seller, you want to make sure that you are limiting your liabilities and maximizing the price that you’re getting for the asset itself.
For the business owner, we’re looking at pothole avoidance for lack of a better term. The thing is, what do you typically get asked? You said, “Maybe a better way of doing that is talking about some of the common pitfalls that business owners run across.” Let’s say that I’m a Baby Boomer and I have a business and I thought I would live forever. I have decided all of a sudden, based on the doctor’s advice that maybe I’m not going to live forever and I need to sell my business. When you guys get engaged to help a business owner, what are some of the things that you try to encourage them to consider to avoid the pothole down the road?
If I can insert myself anywhere in this transaction, I would try to be involved before the thought of I want to sell my business even comes about. If you have partners, we would suggest something called a buy-sell agreement, which helps a business prepare sufficiently for a transaction either a death, a disability, a divorce or someone voluntarily wanting to leave. I have a multitude of examples of situations where someone would need a buy-sell situation. I can give you one. There was a franchise company based in Colorado here and the majority owner was the younger of the two partners. Business was going great. They had over a hundred operating franchise stores nationwide. Tragically and untimely, the younger of the two partners passed away and there was no buy-sell in place.
The company itself is faced with trying to purchase the estate interest for the younger partner. That still leaves the minority partner in the minority. It’s not a great scenario for him to have had to go into this arena. Essentially, a buy-sell that had been funded by insurance would have been perfectly appropriate in this situation. If I could insert myself before the question comes up, if we’re already talking about someone’s approached me with this price and these terms, what am I looking at? That’s the most important time to contact an attorney. You have a term sheet in front of you. A term sheet in most instances is non-binding except for confidentiality and some other of the provisions usually therein. You have to think about the issues that you’re going to face in the documents, in the term sheet. If you have already signed the LOI without having counsel give their input, then it’s very difficult to peel back some of those layers when you’re trying to negotiate the document. I like to tell my clients and my colleagues that if you can get me involved, if you can get me in front of the other party at the term sheet stage, I can save you headaches and issues that come out and down the road.
I think about the old adage if you think the quality adviser is expensive, try either no advice or poor advice. Your discussions with a general statement, if there some of the readers that are in the boat of either contemplating ownership issues, buy-sell issues or what happens if somebody shows up at my doorstep, the biggest mistake they can make is not calling you. How do people find you?
Business Transactions: A buy-sell agreement helps a business prepare sufficiently for a transaction – either a death, a disability, a divorce, or someone voluntarily wanting to leave.
Professionally our website is www.RuddyLaw.com. We have a presence on LinkedIn and also on Twitter. My name is Jessen Gregory. My father, Jim Gregory is my business partner here in Denver.
I think about a typical business owner commentary. My adviser and this tax guy or somebody else has told me what my business is worth, that we could do this ourselves. What would your response be to that?
My response is if you go in against a potential buyer or seller on the other side, they’re going to have a litany of advisers on their side. They’re going to have a CPA. They’re going to have an attorney. They’re probably going to have several attorneys possibly including a tax attorney. They’re going to have people who are advising them all along the way and if you come to bat without the proper equipment, you’re behind the ball. The more you restrict yourself and having the proper advisers on your team, the further your pit becomes. The further you dig yourself into that hole. Once you realize there is a problem, it’s very difficult to come out. One of the things you’d asked me, what are some of the questions that don’t get asked? For me, it’s about the questions that don’t get asked at the onset, In a transaction you’re in a situation where you have to look into the future and think about what issues you’re going to face.
For instance, we were involved in a transaction where a company was a purchasing a service company. We, as counsel, said over and over again, “Where’s the pipeline? Where are the contracts in the future? Where’s the future work coming from? How are you developing your pipeline? How are you getting your customers?” I see work for you for eight months. If we’re going to purchase your company and give you a salary, we need to see more than eight months’ worth of services that you’re going to be providing. Despite our best efforts, that has become a problem post-transaction. That’s one example. There was another example. We do a lot of commercial real estate. Not getting an attorney involved when you’re purchasing a commercial real estate asset if there’s an issue, it becomes your issue to solve when you go to sell it.
If you’re the buyer and you see an easement that’s running through the center of this commercial property, you say, “I’m not going to purchase that property until you have that easement removed.” That’s the obvious solution, but if you buy it without contacting an attorney and understanding what an easement is, then that becomes your responsibility to fix in the next iteration of the transaction. It’s much cheaper to be the buyer and say, “You fix that problem, seller. I’ll buy your property when that’s cleaned up” than to be the seller trying to get your contract finalized and get to the closing table with a clean piece of property when you’re the one who has to fix the problem. Particularly if you’re talking about an easement through the center of your property.
Once you understand how someone else is communicating, it's much easier to understand how to react to them.
I was thinking back to your comment on the contract length on the service company. Had you been involved with the service company pre-sale, one of the comments that can typically be made is can you extend the length of your contracts with your customers. You have visibility of cashflow for some period of time since it will change the value of your company. You think about it, “Why do they know that?” From the seller side, if you don’t know that and from the buyer side, you don’t have visibility of cashflow.
Not only extension rights but also assignability. That becomes a total transaction killer. Again, this is not legal advice. If your contract says something like, “This contract is not assignable by other parties without the prior written consent of the other party,” why don’t you add some additional language that says something like, “Except for upon the sale of all of the assets of the company.” Then you avoid that problem because that contract is basically assignable by its terms. You don’t even have to invite the comments of the third parties and you can transfer that contract smoothly to the purchaser.
Over your career, you’ve got years in your career. You’ve done over 100 transactions. I’m sure there are none of the same. You think about the litany of, of challenges and problems. The pushback that I hear from many business owners is, “I know what my business is worth.” They discount the value brought to the table by perspective and assembling the proper team. There’s going to be an enormous transfer of businesses as the Baby Boomer generation ages. They’re either going to transfer because they want to or because they die off. It’s going to occur. In thinking about if you’re working with a company, pre-sale, you’re brought in with this that we’re getting ready. Ultimately, how early do you want to be brought into the transaction or pre-transaction?
It depends whether a broker is involved. There’s a challenge between brokers and attorneys because one is overly concerned with a successful outcome and the other is supposed to be concerned with the best interests of their client. I would say before a term sheet is signed, let a lawyer take a look at it. If you’re talking about a company that is service driven, and enters into a lot of contracts for its services, have a lawyer take a look at your service contract. See where it can be buttoned up. Think about the transition. Who is my target? Who is an excellent candidate to purchase my company? Do you have a relationship with that group? Is it synergistic? Is it your family member? Are they ready? Do they have the skill set? Do they have the emotional intelligence to run a business? Do they have the desire? If they don’t, you need to think about the next steps because there are so many Baby Boomers that are going to come across the time to sell their businesses in the upcoming years. It’s a much better solution to find somebody who wants to purchase your business than to be in a position of a fire sale where someone has passed away, unfortunately, or someone is sick and is getting ready to transition their business. Any business is worth much more before those events occur.
I think about the broad category of a lot of the stuff that you were talking about. It sounds like de-risking a business. You go through into your first order of business, what your biggest risk to your business. Your previous example of the majority owner is a younger person. The minority owner is older. You’ve got a demographics that would tell you the older guy is going to pass first or gal didn’t happen in this case. They go, “It wasn’t in my thought process.” You think about how simple that would have been or if they’ve been instructions in the de-risking phase. When you talk to a business owner, they’re typically pretty busy. When you talk to them about that, how do you get them to step out of the running of the business to step into thinking about on the business instead of in it?
I hate to be the doom and gloom party, but I always say, “Think about what you would you do tomorrow if this happened?” Wouldn’t it be so great to have fail-safes in place so that you could go forward and transact your business as it is maintaining its value to the best of your ability . The things you can control are protections. The more protection that you have going into a situation like that, the better. Also, knowledge. An attorney is a wealth of knowledge of different transactions. Thinking outside the box and finding tools that maybe worked for one transaction but don’t work for the other. Let’s find a different avenue. Not affording yourself with that ability to have somebody who thinks outside of the box is a real detriment to your business and to future transition.
Business Transactions: It’s much better to find somebody who wants to purchase your business than to do a fire sale where someone has passed away or is sick and is getting ready to transition their business.
I think about the emotional investment of the business owner when thinking about transitioning the business. It’s already bad enough that you think about your mortal, which is a tough topic. You think about, “I spent my life building this business, which is who I am?” You think about, “What do you mean it’s risky? I’ve run it for years. How do you think it anyway, you’re going down that particular road?” When you go through looking at folks and assisting them, what are the top one or two reasons in your history that transactions failed to transact?
It’s a couple of things. The one I’m thinking about the most is a failure of a business owner to understand the liabilities that are going to transfer to the transitions company, to the buyer or your partner if you’re transitioning out. What liabilities are going to transfer? What you’re going to be left with and face, “Did I properly negotiate the purchase price to understand the liabilities that I still have once the documents are signed?”
Are you walking away or do you still have some stuff in the car?
Many times, it’s not a great scenario for a business owner to walk away. We definitely recommend that that owner stays on as an employee or a transition services consultant to be part of the company going forward. Obviously, that person has to be compensated for their time, etc. It’s an important transition point because you have employees, you have customers, you have vendors that are all used to dealing with the same person and to walk away creates a lot of commotion. Another one is a blending of the cultures. Very often you see two like service companies merged because they have synergies, but their cultures are totally different. Particularly looking at the younger generation coming into the workforce, you have to understand the culture of one group may not mesh with the culture of the other end. You have to set forth the parameters from the beginning, so everybody understands what’s going to happen as of the transaction.
I don’t know if you can make this broad statement but when you look at businesses unbalanced, those...
