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The Value of Time With Your Advisors
Business owners seeking to sell may think they have a final deal, and just want the lawyers to "write it
up." Sometimes in an effort to avoid involving lawyers, they will go it alone and bring in the
lawyers at the last possible moment — a critical mistake, in my view. Here's why. They think they have negotiated
a complete deal but invariably, after the lawyers discuss the deal with their client and understand the underlying
business objectives they raise issues no one considered, and ask relevant questions no one else bothered asking.
The sellers realize that some of these issues may be important and now must re-negotiate with the buyer.
The prospective buyer might get annoyed; the client may become frustrated; and everyone blames it on the lawyers.
Lawyers are trained to help clients plan for the "What ifs" of commercial life, avoiding risk and taking advantage of opportunity. My mantra has always been to provide my client with the benefit of my judgement, based on my training and experience, but NOT to substitute my judgement for that of my client. I think that's how business lawyers add value.
Case Study: Bridging the gap between seller and buyer Our firm represented a company in the sale of its business. The company was engaged in application of hard surface coatings for industrial applications. It had three locations. Its midwest and southern plants were new more modern facilities; its Connecticut headquarters was the oldest and had significant environmental/health and safety issues.
The owners were all in their 70s and beyond. One was active in the business and owned 50 percent of the shares. The other two, long retired, owned the rest of the company between them.
Initially, when the owners decided to sell, a Fortune 100 competitor became interested and made a higher than expected offer. The shareholders were elated. But as due diligence progressed, the suitor became very concerned about the potential environmental and other liability at the Connecticut plant, and insisted that the shareholders indemnify the buyer for all claims that may arise and the cost of remediation.
The client understandably balked at the prospect of unlimited liability and the deal cratered.
Business went on as usual for a couple of years, but the owners still wanted to sell. Any new buyer would have the
same concerns as the Fortune100 suitor, since the liability profile had not improved. Things seemed to be at a standstill.
Finally, at a meeting of the three shareholders, I tried to really get at what they wanted in order of priority.
After much discussion, the following emerged: First and foremost, they wanted no post-closing responsibility or
liability for anything. The buyer could overturn every stone in due diligence but once the deal closed, the buyer
owned everything — the good, bad and ugly.
Second, they wanted a fair price, but did not need to squeeze every penny out of the deal. They wanted most
if not all their money at closing. However, they were willing to take back some paper but with a greater potential
return.
Third, they wanted the buyer to provide opportunity for their employees.
Fourth, they wanted to reward the President/CEO for his many years of service and for his skill in turning
their modest investment to many millions of dollars.
The clients were no longer floundering. We retained an investment banker to identify potential acquirors.
We teamed up with a Chicago based holding company (backed by private equity from outside investors),
which was in the process of rolling up several companies engaged in similar coating technology. Here's how the
final deal looked.
The owners discounted the final purchase price by approximately 8 percent in exchange for release from
postclosing liability. That discount was in line with the estimates we had received for the cost of environmental
remediation. The buyer assumed control of all remediation and decided how and when it would spend the
money. Some of the expenditures would be tax deductible and some could qualify for government
"brownfield" money.
The sellers took 90 percent of their money at closing, and could sleep at night. The remainder of the purchase
price was in 3-year convertible notes, which carried a healthy rate of interest, paid quarterly. The sellers could
decide to be repaid principal in cash or convert it to the buyer's stock.
The buyers agreed to take on most of the employees and all three locations. In addition, they agreed to continue certain benefit plans for the CEO, along with a generous consulting arrangement for him.
In retrospect, it took nearly four years from the time the three shareholders decided to sell to actually closing
the deal. It is essential that clients are honest with themselves and their advisors to determine what they really want and what's really important to them. Armed with that intelligence, a lawyer can become creative and add
value by proposing a win-win solution to business problems.
In my view, good business lawyers first figure out the client's business, why they're in business; how they make
money; what drives the business — essentially, what's really important or ought to be important to the client.
Armed with that information, the attorney can determine which issues are most important and which less relevant.
The lawyer's obligation is to educate the client on the legal risks and possible solutions to limiting or at
least quantifying that risk so that the business person can make an informed decision.
C. Robert Zelinger, Esq. is a partner and chair of the business and finance department at Levy & Droney,
P.C. in Farmington, Connecticut. He can be reached directly at 860-676-3036, or via e-mail at
crzeling@ldlaw.com It is essential that clients are honest
with themselves and their advisors to determine what
they really want and what's really important to them.
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