The Art of the Deal

Pen to paper

Drivers of the increase include baby boomers preparing to retire, entrepreneurs looking for deals and companies who have survived the downturn seeking to grow or add service offerings.

But while these signs are positive, Horenstein said that divestitures and acquisitions have experienced a “culture shift that will be with us a while.”

For example, he said, “however many billable hours it takes” is a thing of the past, and his firm provides a scope of work and budget for drafting necessary documents. Other examples of how the culture has shifted include sellers doing a lot more work up front before they approach an attorney and buyers working on the financing prior to beginning negotiation.

“You used to do the money after getting into the deal,” said Horenstein, “now it’s money first.”

Banks are much more careful with loan to value requirements, the need for appraisals, and strict underwriting. Specialty funding, such as real estate investment trusts and industry-specific venture capitalists, are common.

“We see as much non-traditional as traditional lending,” Horenstein said.
Brad Eriksen, shareholder at local law firm Jordan Ramis, agreed, stating that the recession forced sellers and buyers to be “more creative” with the structure of the financing. For example, mergers might involve stock transactions that can be liquidated over time when it is most advantageous.

Team Approach

According to Eriksen, the regulatory environment plays a much more significant role in transactions than it used to. For example, Jordan Ramis represents a lot of companies in the aggregate industry (concrete/gravel), which are subject to mining and environmental regulations.

“Assessing and allocating potential liability between buying and selling parties is critical when we’re doing transactions,” said Eriksen.

A single attorney cannot hope to navigate all the environmental and human resource regulations, as well as other areas such as qualified benefits plans, Eriksen said. A successful deal requires an entire team of accountants, specialty attorneys, insurance brokers, benefits analysis experts and real property brokers.

“It’s a larger endeavor than many years ago,” said Eriksen. “It often falls to the attorney to be the leader of the team – martialing it and making sure everyone is pulling in the same direction.”

Sampath added that the attorney doesn’t just deal with the legal terms of the agreement, but also is involved in the valuation, purchase price negotiation and business terms as well as circulating the terms and converting the terms sheet into the actual agreement.
The team approach can help surmount some of the challenges Horenstein cited, such as dealing with buying or selling a franchise, securities issues that arise while raising money from investors, and required licenses in regulated industries such as senior housing.
Another issue is the transfer of intellectual property.

“Because of the mushrooming of technology,” said Horenstein, “businesses have more to protect.”

Technology has also increased the pace of transactions, said Eriksen. Documents flow by email consistently now, and clients expect responses in 24 to 48 hours.

Unlike 20 years ago, “you don’t have time to analyze while you’re waiting for the next letter to arrive,” Eriksen said.

Sampath added to the list of challenges, including structuring deals that involve SBA loans (which can telescope timelines to 60 to 120 days) and settling differences of opinion about what the company is worth.

“Transactional lawyers need to keep up on how fast the market is changing,” said David Bristol, shareholder at Vancouver-based law firm Schwabe Williamson & Wyatt. That includes market terms and conditions for a particular industry as well as what the current market price should be. But if data is sparse for a particular type of transaction, he said, it can be hard to figure out how much to pay.

Due Diligence

Eriksen said that attorneys can help businesses looking to buy or sell. For sellers, he said there were three sources of buyers: family members, key employees or a 3rd party. A transactional attorney can help a business investigate each of these potential markets, and pursue the one that makes the most sense.

For buyers, Eriksen said, the attorney and the rest of the professional team can help identify tangential issues that could affect the deal.

“Kick all four tires, not just the driver’s side,” said Eriksen, “especially if it’s a new area of business or two states away.”

Bristol added that while he understood clients being cost conscious, in his experience many people can’t reliably identify legal problems when they arise during a transaction. He used the analogy of only calling a doctor after you’ve self-diagnosed yourself.
“I am often surprised how unsophisticated smart people are about when they need a lawyer,” said Bristol.

Watch the Deal Pendulum

“It’s either a buyer’s market or seller’s market,” said David Bristol, shareholder at Vancouver-based law firm Schwabe Williamson & Wyatt. For example, from 2002 to 2006, he said commercial real estate was “as hot as could be” and sellers provided buyers with no warranties and only 15 days to commit to the deal. But, he said, when the market tanked, things “changed completely.”

In 2008 and 2009, the market was paralyzed because of fear – Lehman Brothers, which had been in business for 150 years, went out of business. In this time frame, he said if any deals were being done, they were on a distressed sale basis, and buyers could dictate practically any price and conditions they wanted. And, he added, despite the federal government lowering interest rates, companies were reluctant to take on more risk or debt.

However, those same low interest rates, said Bristol, are now making retirees consider investing in businesses.

“We have an aging population that wants to retire but can’t do it on 1% on savings,” said Bristol. “People need to make a better return on their investment.”

He said that trillions of dollars are sitting on the sideline waiting to invest.

“As fear turns to greed,” said Bristol, “that’s when you see markets going back up.”

The fear, he said has changed from “what if the market gets worse” to “we need to buy now to get a good deal; if we don’t do it now, it will be higher.”

Businesses that survived the Great Recession, said Bristol, are seeing profits increase and a dearth of competition — such businesses can attract a lot of buyers.

But, he cautioned, if the economy continues to improve, “I think you’ll see increased competition in some industries, higher interest rates, and better investment alternatives for potential buyers. Sellers who are entertaining good offers now should consider whether they have a window of opportunity that may start closing with time.”

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