We just learned that lesson in spades.  Over the years I have often taken client engagements without an upfront retainer.  The logic was simply we are walk the talk kind of guys.  We do what we say and we deliver on our promises.  Not taking a retainer was symbolic of our belief in what we do and proof we were made of the right kind of clothe.

Unfortunately I have learned that is an idealistic and unrealistic way to view a client advisor relationship.   Time and experience has taught me clients will listen better, return your calls in a timely fashion, value your recommendations and take the process more serious if they are writing a monthly check.  Frankly, if a client isn’t willing to pay for the service and value that legitimate advisors are providing they’re not worth having as a client. 

Looking back on the last several years in our business I have noticed that engagements that include a retainer work out better for the client and for us.  Is this because we care more when we are getting a retainer?  Hardly, we are about getting deals done.  The better outcome comes from two parties collectively working on a common goal and respecting each others value.
 
Consider it a lesson learned. 

 

http://www.raintoday.com/pages/2432_michael_w_mclaughlin_contributing_editor.cfm

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For one, you can count on a lot of emotion. In its simplest form, an industry consolidation implies large buyers have decided it is time to acquire numerous smaller players within the targeted industry.

So how does the emotion come to play? Think about it. If an industry is worth consolidating you have to believe the overriding business fundamentals are strong and the industry participants are likely having success. When business is good the last thing you want is a well funded, larger competitor entering your market. On the flip side, even if the business owner decides to participate in the roll up and sell their business, the process of selling your business is highly emotional. All in all, the developing consolidation is a recipe for an intense, emotional environment.

There are also more tangible aspects of consolidation that appear to exist regardless of the industry. Namely, it is well documented that industry consolidations proceed through stages. I have seen numerous descriptions of the different stages of consolidation. I like to think about a consolidation as encompassing four distinct stages; opening, scale, focus and balance & alliance. Each of these stages has very defined characteristics that can help a businessperson understand what is happening on a broad sense and what it might mean to their respective operation.

To that point, I have been actively involved in the consolidation of the document destruction business for more than seven years. During that time I have been reasonably accurate in predicting what would happen to various industry participants based on the evolution of the consolidation through these various stages.

In the coming days, I will discuss the four stages and the impact a consolidation can have on a business. Industry consolidations are here to stay and frankly a part of the normal business cycle. Given that, business owners need to be prepared to respond proactively to a market which is actively consolidating. It’s a topic worthy of further consideration and I look forward to the discussion.

With that background as a foundation, my amazement and concern has grown with each article that Norm has written. Now don’t get me wrong, I have nothing personal against Norm or his business. I have talked with Norm at the industry conference and found him to be a pleasant enough guy. But his behavior over the last seven months is very troubling.

First, confidentiality should be respected. Unfortunately, he has gone too far in this regard twice. Using a national magazine to drop names and reference past interactions with publicly traded companies is inappropriate and at best stretches the confidentiality agreement he signed with those firms. One could argue that if Norm had pushed it too far he would have certainly heard from the three multi-billion dollar companies. I disagree, having spoken with numerous individuals at these companies; I can assure you they are appalled at Norm’s lack of confidentiality. At that same time, what do they have to gain by going after him? Nothing. In spite of his declarations, Norm is not a driving force in the industry. Getting into a contest with him would be a waste of time.

As if the initial breaches of confidentiality were not enough, he walked all over the buyer he calls Greg and Greg’s firm for months, disclosing conversations and replaying interactions as though they were part of some dime store novel. In fact, in his most recent article in Inc. dated May, 07 he outlines specific deal terms that have been discussed and agreed to. I am certain that the confidentiality agreement he signed with the prospective buyer precludes either party from sharing deal terms, but he doesn’t seem to care. In one of Norm’s articles he points out that maybe he was subconsciously trying to kill the deal. Maybe, or maybe he was just unable to control himself and just wanted to talk about it and himself. Regardless, the real lesson for owners trying to sell their business is that confidentiality is important and hubris is dangerous.

Unfortunately, the problems don’t end with loose lips. Much of the anecdotal advice that is espoused in this series is flat wrong. To be fair, some sound advice is provided, but unfortunately it is clouded by the overwhelming amount of bad counsel suggested in the series. First, Norm claims to have dictated the EBITDA multiple to the buyer. A few months later, he points out that there is some disagreement over the trailing EBITDA number to be used. Imagine that. As is obvious, the purchase price valuation is derived by multiplying EBITDA times a multiple. I have seen countless times were a buyer has “agreed” to a multiple and then secured their target valuation by negotiating the EBITDA amount that will be used in the calculation. This probably seems almost silly to mention, but Norm didn’t explain what happened. He continued to give off the impression that, he and he alone, was in control. The reality is that rarely do buyers come to a transaction without having a valuation in mind and even more rarely will they significantly exceed that number.

I am also bothered to read numerous examples given by Norm as to why he should sell his three businesses. The delivery business’ margins are thin, the storage building is almost full and it is going to cost him a fortune to open a new building, the best time to sell is right before you have to invest in the business to keep it moving forward, the future plans the city has with the space, etc, etc. After hearing all of that, would you want to buy his business? The problem with these comments is that he fails to fill in the gap and acknowledge that the buyers aren’t stupid. They understand these concerns and at least from the public companies’ perspective, they represented enough of a problem that they never gave Norm a deal he would agree to.

Finally, he goes to great lengths to brag about his relationship with his employees and to chronicle their inclusion in the process. I found it amusing that it was his fourth installment before he decided to clue more of his people in on what was happening. Did he think they couldn’t read? He was chronicling the deal in Inc. Magazine. But I digress. Telling your employees is a bad idea. It is rare when something positive comes from telling your employees you are thinking of selling. I know, I know. The buyer says at one point that he was impressed that Norm had such a great, open relationship with his employees. Give me a break. The buyer loves it when employees are accessible. It gives the buyer a better chance to continue due diligence and look for any hidden problems. Norm’s description of how open he was to his employees is a huge disservice to sellers who are going through the selling process for the first time.

So what conclusion can be drawn from watching this play out in Inc.? I guess the best judge of that is whether or not the deal closed. Well it didn’t. Sources close to the process say that the deal is off. Not a surprise here. I predicted in January that unless Norm stopped what he was doing, his “offer of a lifetime” would be gone. There are many rumors as to what happened, and I won’t spread those tidbits. I will say, however, that selling your company is hard. It’s not a game. It’s not a chance to promote yourself. It should be enough that someone wants to buy the company you built.

I wait with baited breath to see how the next installment describes why the deal fell apart. I am sure we will endure the long story of how they wouldn’t do what he asked of them and how he thought about it and his people and just couldn’t pull the trigger. As we say down here in Tennessee, hogwash. This deal was doomed from the beginning. Norm was playing the readers and the buyer, and in the end, the buyer simply had had enough. If you were the buyer wouldn’t you have reached your limit? My advice: do yourself a favor - if you desire to sell your business, consider this series for what it is. Well-crafted fiction.

Legal documents can be very technical and to the uninitiated a bit overwhelming.  Given that, I understand why a person would want to work with someone that they know and trust.  But, unless your lawyer is a transaction attorney, they lack the experience to protect you in a transaction.  Deals are about the allocation of risk, and if your counsel has not worked on transactions, they can leave you exposed unnecessarily. 

It is funny to see this in practice.  Recently, I worked on two unrelated transactions as a buyer.  We used the same basic initial draft of an Asset Purchase Agreement with both sellers.  What was interesting was one seller used an experienced transactional attorney to comment on the document and the other used an attorney who didn’t specialize in transactional law.  Wow, what a difference.  Believe it or not, the two black lined documents did not contain any duplicate comments.  Not a one.   The transactional lawyer focused on the things you would expect and the comments were thoughtful.  The other attorney argued points that were almost never argued and failed to push back on the important items to protect his client.

I know that having someone you trust is important.  But would you want your proctologist doing your knee surgery just because you trusted him?

 

 

I grant you that I have seen situations where making aggressive to even crazy requests have created the desired outcome.  Every once in a while, the other side of the table will concede on a point that seems to our side a big ask.  In time, I have learned that the big ask from us was something that the other side didn’t care about and almost as an afterthought they agreed.  However, more often than not, I see aggressive requests leading to bad outcomes. 

Suppose you were leading a transaction for your company to buy a target company and all systems were go.  Then the seller lets you know that unless you concede to their newest request the deal is off.  Your first response would be to assess whether or not their request makes sense and can be agreed to by your company.  You probably wouldn’t really appreciate the take or leave threat, but assuming it wasn’t a problem you would in most cases get over the threat and move ahead.  You would however take note of the tone and be very cautious in future conversation.  Subtleties matter to you and this tone has you on alert.  Now pretend that the same thing happened, but the request is way out in left field and you know that there is no way you can agree to their demands.  If you are like most deal people, you are now discouraged.  The other side has drawn a line in the sand over something stupid, changed the tone of the negotiations and created a showdown over something that is probably just their attempt to move the needle a little bit.  Your response of course is going to be no, but assuming you are still committed to the deal, you have to be careful how you say no as emotions can get out of control and something silly can create a crisis.  An experienced transaction person thinks about these developments and just shakes her head.    

Notice in the previous example I mentioned that the acquiring company may not want to go ahead.  It may sound odd that an experienced deal person would fold up and move on to something else over something as silly as this.  If you think that, you’re wrong.  Transactional people are busy and even though their job is to close great deals, they are also watching the other side’s principals to see how they conduct themselves.  When the other side asks for something stupid, it makes the buyer wonder about their abilities.  It plants a seed of doubt about the transaction and the experienced person on the buy side starts to wonder if they are wasting their time.  I have seen countless deals fall in the ditch because they lose momentum over something the seller asked for even though they knew that it was a stretch at best.  Asking for stupid things makes you look stupid.  Ok, you say what defines a stupid request?  I used to have trouble answering this.  What I have learned over the last few years is that most people know when they ask for something if it is reasonable or not.  Said differently ask them to put the shoe on the other foot and remove the emotion.  Ask them if they would do what they are asking the buyer to do.  What you will find is that, if you ask them to be honest, they eventually will respond with “hey is doesn’t hurt to ask.”

But it does.  I will give you an example.  Several years ago I was working with a client who was selling his business.  We conducted an auction and received three bids.  All were great bids but one was a tad better then the other two.  I shared with my client the fact that the highest offer was well beyond what multiples had been and that he was knocking it out of the park.  He said he thought it was great but he wanted more.  After much arguing, he instructed me to go back to the bidder and tell him that unless he got 2 million more he was going to pass.  I challenged him and asked him if he was prepared to walk and he assured me that he was.  Dutifully I went to the bidder with the counter proposal.  Almost instantly they wished me luck in selling and thanked me for calling.  Not surprised by the outcome, I called my client to tell him that they had passed and to wish him luck with the future. 

After telling him what they said he said “ok, what’s next?”  Dumfounded I said “what do you mean?” 

He repeated his comment of what was next. 

I told him that there was nothing left to do.  They had passed. 

He fell apart.  Seems he was happy with their first offer and just wanted to get a little more. 

Could I call them back he asked?  Let’s take the offer, he suggested.  He was a new man. 

Well you guessed it, I called the buyer back and they were delighted to buy the company.  However they revised their bid and lowered it by $250,000.  Seems they made a mistake in their original math. 

You see it does hurt to ask.  I see it over and over and people are too stubborn to listen.  They think the way to get a better deal is to shoot for the moon.  I could have gotten him a little more by just artful negotiation.  Not lead foot tactics.

Still don’t believe it doesn’t hurt to ask?  Try this.  Go home and tell your spouse that you love her/him and want to continue your happy marriage, but you also would like to date outside the marriage and you were wondering if she/he would have any problem with that.  When you’re digging yourself out of that hole, I bet you will wish you had never asked.

 

 

I spend most of my time working with sellers, and as such, I am used to going to battle with buyers. But when it comes to the seller non-compete, I must admit I am sympathetic to the buyers concern. If you are willing to take a fair purchase price for your business, you should be willing to not compete with the buyer after the transaction.

I am amazed how many times a seller will close a deal and then work every angle possible to get around the non-compete they sign. People have their own sense of what is right, and I understand that. However, a seller should be prepared to deal with the repercussions if they choose to get cute. Buyers usually have a zero tolerance attitude.

I am reminded of a transaction last year that was scheduled to close the following day. The day before closing, the buyer sent a flattering email to the seller talking about the future and how proud he was to work with the existing management team. The seller forwarded this email to her team with her editorial comment that even though she didn’t trust the buyer and frankly didn’t like him, she felt they had no choice given her personal financial concerns. As you would expect there were several responses back to her and a rather lengthy email train developed. If it had stopped there then all would have been well. But unfortunately with the frantic pace of the day before closing, one of the managers hit reply to all and, you guessed it, the buyer was copied on the long lists of emails that questioned the deal, the company and the character of the buyer.

The result was predictable. The buyer walked from the deal angered that the sellers thought so little of him. The company missed a $15 million dollar transaction and six months later filed for bankruptcy protection.

Email can be a wonderful thing. And accomplishing multiple tasks at once can be useful. It can also be expensive.

My hope is that I can provide brief observations taken from the last several years of closing transactions. Every time I close a deal, I realize that there was something that happened in the deal that was new or unexpected. I have also concluded that it is virtually impossible to prepare for every contingency. You can however make sure you don’t repeat the same mistakes over an over. That’s where I hope to play a small part. I have made enough mistakes myself and watched my share of people screwup for a lifetime of deals. Sharing those experiences might just save you the pain of enduring it yourself.

Whether you are a dealmaker or an executive about to embark on a project for your company, I hope you will enjoy what I have to say and will gain some value out of my shared experiences. I also hope you will feel free to contribute as well. I am always interested in hearing a deal guy start a conversation by saying “you won’t believe what just happened….”