After plenty of ups and downs, our buyer has finally closed on the purchase of their business. While we’re marking this down in the ‘wins’ column, it never hurts to review the game tape.
In this final episode, our hosts, Matt Staub and Nasir Pasha, return to the deal almost a year later to reflect on each step of the process. What if you’re not in the market for an urgent care in California? How does this purchase process relate to other business deals Matt and Nasir have seen? Will the lessons we learned here carry-forward in a post-Covid world? Tune in to this final episode for answers to these questions and more.
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business. This is our last episode of Behind the Buy where we cover a business transaction from start to finish, and now we’re beyond the finish line in our last episode where we’re going to reflect and really give some insight on this entire transaction. My name is Nasir Pasha.
NASIR: And I’m Matt Staub.
NASIR: This episode, I’ve actually been looking forward to for a while. We’ve been releasing our series for months now, and we’re actually recording this — I think it’s almost been a year since we actually recorded originally this series. Right, Matt?
NASIR: Yeah, I think a little under I guess, but by the time this episode comes out, it’ll probably be just under a year.
NASIR: Yeah, just under a year and of course, 2020, for those of you that are listening from the future hopefully, we’re still around. It’s been a crazy year but buying a business in — I think we’re going to talk about this, but pre-Covid and post-Covid is a completely different story, but I think what’s nice about this, we can kind of look at that in this lens. It’s like how this may have been different after Covid, right?
NASIR: Yeah, undoubtedly, obviously, it would be a much different transaction if it would have been after or even during, but we’ll touch on that. It’s just one of the things that can arise in the transaction of buying a business.
NASIR: In our series obviously, you guys listen to it or maybe you’re catching up still, but our client buyer was buying a business out in California, an urgent care business. And of course, not everyone’s buying urgent care in California, that’s a pretty specific transaction, but what was really neat about this transaction, not only the fact that you were able to kind of go through from the beginning to end — because let’s face it, not all transactions go through. This one did and I think we would consider this a success, and it did close, but there were so many different aspects at every episode at every step of the transaction that you can kind of grab from and relate to in other transactions. Matt and I often talked about how when we’re even listening to the episodes ourselves, I know Matt obsesses over the podcast, listens to it every night. I’m not wanting to do that, but when we did talk about it, we did reflect upon how this related to other clients and other transactions that we’ve been in and we thought that this would be a good opportunity to kind of share those stories as well.
NASIR: Sure. It’s like you said, this is an example of a transaction that obviously, there were bumps along the road, but it ended up with the right result for the client, but there’s plenty of instances where there are these different hiccups and bumps and that isn’t the case and the deal blows up. We’re just going to go through the life cycle of this transaction and touch on some examples where it hasn’t been successful.
NASIR: And that first step is that letter of intent. When you’re acquiring a business, I wouldn’t say this is the case in all cases, but for those that have gone through many series of acquisitions and so forth, everyone understands that you get a lot of prospects, but very rarely, maybe 1 out of 10 or 1 out of 20 deals actually goes, the first step of actually signing something and getting an offer, and that’s just the nature of making sure you’re finding the right deal. And if you get lucky and nd get that letter of intent right away, you have to be careful because you got to make sure you look at different prospects to make sure you know what you’re looking for, you can’t just jump on the first one.
NASIR: Right, and like you said, there’s plenty of instances where there’s a prospect and there are even discussions, and nothing ends up happening from there. If you can clear that first hurdle and get a letter of intent in place or a similar document, it can still even terminate after that. The fact that in this example, there was an actual letter of intent signed was a huge first step, but there’s definitely been instances where we’ve had clients with letters of intent signed and the other side starts doing their due diligence, or even our client does their own due diligence or I should say we do it for them sometimes, but one of the sides wants to back out as a result and so that’s why it’s so critical to have the right terms in those documents like a letter of intent.
NASIR: But sometimes, you have deals that are too good to be true, right?
NASIR: Right, and a lot of times, there will be discussions prior to anything being signed or even presented in writing and like you said, it is a situation wherein terms are too good to be true, and then we’ll find out after the fact once things get written down that that’s not the case. I think at the beginning, anytime there’s a prospect of buying a business, the discussion always needs to be centered around some of the material terms, because for example, we’ve had clients before that have come to us and they give us a call and say look I have this potential business that I’m going to buy, it’s for x price and it can close within y number of days, and it just doesn’t even seem realistic. It’s not to say that it can’t happen but I think there’s always a lot of excitement at the beginning, and then once you actually get into the details and the realities of everything, you can see that it was actually too good to be true.
NASIR: I’m glad you mentioned excitement because I think when we have a clientele that bring us this opportunity to work with this transaction, we’re excited as well. This is a new acquisition, new transaction, and at the beginning, everyone’s kind of very optimistic, and I think it’s very easy for us as attorneys to get caught up in it too. It’s not that we’re here to kind of be doom and gloom because as we know, there’s always kind of hurdles and obstacles and so forth, but we do have to be responsible to our role with the client to make sure that we create proper expectations and make sure that even though everyone’s anxious to move forward that we slow down when we need to. It’s not to say that a lot of times these transactions need to move fast and so we typically like to keep up the pace, but also where it makes sense to make sure that our clients are protected. I don’t know how many times again, like, we want to get in this letter of intent and get the terms down, and a lot of people want to kind of punt on talking about some of these important terms. Hey, let’s just get the basic terms out there, we’ll deal with this issue later. Sometimes, that’s strategic, but sometimes, it’s like look we don’t want to waste time. If we’re so fundamentally different, then let’s not bother with this. And how many times, Matt, where it’s like sometimes the other side will kind of trick you into — I don’t know, trick is probably too strong of a word, but maybe not be up front on a certain issue that they know that we’re not going to like or vice versa, and we don’t find out later that hey this is a deal term that is essential, and if you don’t like it then you have to walk away, and of course by that time, you’ve already spent all this time and money vetting this deal whether in due diligence or legal fees or what have you.
NASIR: Yeah, I think maybe pressuring might be the right word. It reminded me without disclosing some of the more pertinent details or the identity of a client, it reminded me of a situation where we had a client who was looking to buy this business actually for a long time, for many years and basically came to me and said, opportunity has finally risen. The seller just wants me to pay x amount right now, and then the rest — and I was like. First of all, we’re not going to pay anything until we get anything in writing, but it ended up being a deal that was too good to be true at least from the beginning because there’s all these little pieces that got thrown in as we got more into the actual transaction. Ultimately the deal closed, and it did work out for the client, but it was a situation where they just had a dollar amount up front, but there were all these little issues along the road or things that our client maybe didn’t contemplate or wasn’t expecting. That’s why we paper this up from the beginning and then have the right contingencies in place, and see if we can ultimately get the transaction closed, if the deal is, I don’t want to say too good to be true, but good enough in that instance to be true.
NASIR: Right, and I think you’re going to find a lot of that especially now in post-Covid because you have a lot of sellers that are in bad situations, and they need to sell for example, and they may have not buyer’s remorse, but seller’s remorse because you’ll sign a letter of intent and I think we’ve already seen it personally. It’s like you have the seller’s regret where they’ll want to renegotiate terms post letter of intent which is not impossible, but of course, all of a sudden you’re going on a path of a certain expectation and the seller is like this is not as lucrative of a deal that I thought it was, and they’ll start making such comments and so forth, but that could happen any time post or pre-Covid.
NASIR: I don’t think it’s incredibly realistic to expect that all the exact terms of anything that’s on a letter of intent are ultimately going to be the terms at the end of the deal. Both sides can kind of divert off the path, but it’s more the material issues or things that weren’t disclosed and probably should have been upfront that can really blow up a deal. You’re mentioning the Covid pieces, things that can possibly blow up a deal when it otherwise seems too good to be true or just not disclosing the full facts or not even when one side questions the other, I guess more importantly when the potential buyer is asking questions of the seller, maybe on specifics or financials, and the seller’s not willing to divulge that or says they can’t, to me, that’s a huge red flag from the beginning and you should really put up your guard at that point from day one and move forward with that in mind.
NASIR: Right, trust but verify and that’s the whole point of the letter of intent process is okay I’m going to buy your business out of these terms assuming everything goes well in due diligence, and you kind of put that in there, the expectations are out there and you go through that. You ask all those questions, and especially now. It’s kind of hard to not keep relating this to Covid because as we’re recording this, we’re in the middle and thick of it, but some of those questions are what was your revenue pre-Covid because if you’re in the hospitality or some other business or even any business frankly, you need to have an understanding of what your revenue is prior to the pandemic and post, and getting those questions and going through that due diligence because really that’s the next step after the letter of intent.
NASIR: Exactly, I think the good analogy here would be if you’re looking to buy a house and I think most people’s process is they see a house online, they go look at it. You obviously can see any material defects on the outside or struck something and then once you get into the inspection process, it really digs into the bones. That’s why you might uncover things and that’ll shift the potential price or negotiation or things a party’s wanting to give up, but that’s kind of how I view this in terms of buying a business is you’re not going to know everything upfront, and so maybe it’s like the house that is too good to be true. They exist, but it’s just probably not likely.
NASIR: Right and in this transaction in our series, that’s how we set it up. We even had a no shop provision in there, that’s pretty common in letter of intents, and that actually came up because they — Again, I don’t think it was seller regret in this case, but there were some talk with that broker friend of the seller where they were kind of hinting like hey we could go to other buyers and so forth, but the whole point of entering into that exclusivity period was that no you can’t go to other buyers right now because right now you’re dealing with us. And we’re right now doing our due diligence and going through that. And of course, what happens is we go through this due diligence and we start uncovering some interesting facts in the transaction if you guys recall. This is kind of going all across the series, but they had trademark issues, they had employment issues, there was concerns about the licensing and making sure how we can structure that and that’s all part of it. You have to be able to really dive deep and fast too. These sellers, they start to get anxious and when you’re doing to due diligence, something to think about is that there’s a lot of deal fatigue that occurs on the seller’s behalf because all they’re doing is providing all these documents, answering questions and so forth. We even had an incident where the seller just seemed like fed up and they told their staff that they were selling the business. That wasn’t necessarily something that we wanted to address right away.
NASIR: Right, it reminds me of a question we actually get a decent amount is whether it makes more sense to purchase a business or start your own. Not to keep harping on the Covid context, but I think that’s going to be interesting to see how things play out in the next year or two or beyond that is you might have a bunch of willing sellers and a buyer might be able to come in and swipe the business at a discount as opposed to starting things from scratch and going around there because there’s obviously pros and cons to both, but I think there’s a real opportunity out there for potential buyers, assuming things can get back to “normal” in the foreseeable future, and you can kind of step in and revive that business, but it’s going to be interesting to see how that landscape plays out.
NASIR: Right and we talked a lot in the series about the differences between an asset purchase and an equity purchase. It’s always going to be an important issue, but especially when we’re in probably a recession right now and who knows how long that may continue, but when you’re acquiring a business versus starting a new one, you have to be concerned about the past were starting a new business, you’re just looking at the future. When you’re buying a business and concerned about the past, you want to think about whether you’re inheriting any liabilities. Often these distressed businesses have probably incredible amounts of debt, and whether that debt is connected to maybe contracts or relationships that need to be resurrected to the extent that you actually need to come in there and resolve those debts or not, or can you just get the assets and have the seller deal with that themselves? It really depends upon the circumstance of the business.
NASIR: Yeah, and that reminds me recently with another client, one of the big assets they were purchasing were for more or less these contracts that were in place. If that’s what you’re relying on as a potential buyer, you really got to go through those contracts and see if there’s a way for the seller to get out of that, either as a result of the underlying transaction of the purchase or it just reminds me of the force majeure too if there’s a way to get out of there because of that because it’s not just the debts. If you’re going to be buying a business, you have to make sure that the assets that you’re purchasing are going to hold up are going to just carry the value that you’re anticipating in the transaction.
NASIR: I think in this transaction, we ended up going with the asset purchase route which by the way especially from the purchaser’s perspective is usually the way that you want to go. It’s also the most common type of kind of small business transaction. When you get a little larger, sometimes that can be a little difficult and often those are more kind of mergers and equity investments and things like that. Especially where it’s a small business where it’s pretty easy to transfer assets and things like that, and start a new business, those are more common, but we didn’t actually deal with any kind of creative financing here in this case and that’s why I wanted to touch on it for a second because in this series, the buyer, financing was not an issue. But again especially now, where there’s a lot of uncertainty as to the success of the business going forward, we’re seeing a lot of seller financing opportunities in the sense that first of all no one wants to pay cash and take a big chance on a business unless they have some assurances that it’s going to be successful in the future especially the uncertainty. So you’re seeing a lot of structuring where the seller’s willing to finance it and also tie that financing to certain levels of success afterwards in the sense that depending upon certain circumstances assuring that the business is going to continue to function as expected which again is up in the air.
NASIR: And you’re looking at a few different options if you’re not cash-heavy, it’s going to be some sort of financing. Again, there’s pros and cons to doing seller financing at least in my opinion and experience, the seller’s probably — if you default so much that seller finance is probably less likely to enforce that as opposed to just a bank who’s just looking for the bottom line. The seller likely was trying to get out of the business and they don’t necessarily want to jump back in or if there’s some sort of claw back of the underlying assets or their collateral for some sort of loan, they might be unwilling to do that and just hope that well I can kind of let this ride out for a couple months and hopefully it works out. But obviously, that’s all dependent on the terms of the actual financing, if there’s personal guarantees, that can certainly change things too. Maybe if there’s some sort of relationship between the buyer and the seller, I think there’s probably a better chance that the seller would overlook or look past a default for at least a little bit. No guarantee that’s going to happen, but banks are pretty cut and dry, and they’re looking to collect and that’s how they make money. It’s just one of the considerations if you’re going to go to the financing route which like you said Nasir, is going to be most of these transactions.
NASIR: I definitely wanted to talk about how when you’re entering into a deal, one of the first things that I like to discuss is what is the essence of the business that you’re purchasing, and this goes back to a discussion as to whether you want to start a new business or buying a business, what is the essence of it? Are you buying things? Are you buying the actual assets because this business has a certain collection of supplies or what have you, or are you buying certain contracts that they may have? Whether it’s a certain space or location or lease. In this transaction, the location was a big deal. They didn’t own the space, but that location for that urgent care was a big deal and so that lease had value in itself. In another case, it may be okay well you have this really great contract with a certain client, and it’s possible to take over that contract, or maybe — and this sounds weird because you can’t buy people, but maybe it’s the team. Maybe you want to come in there and own the business because this team is really stellar, and it has its value. After you’ve identified the essence of the business, then it’s a lot easier to figure out exactly how to structure the deal, whether it’s an asset purchase or an equity purchase because again, if it’s the contract, an asset purchase may not work unless the other party is willing to transfer and that can be very complicated if the contracts are such like a client for example. Imagine going to all your clients if you’re in a service-based industry and saying, hey can you assign your contract to this buyer whereas if it’s an equity purchase, it’s much easier. On the other hand, if it’s a lessor and lessee a relationship and you’re in a building, the landlord, so long as you’re creditworthy doesn’t really care about typically assigning the lease to a buyer, and so these are some of the things that can help you identify how to structure the business acquisition.
NASIR: Right, and there’s ways to protect against that too. I think in this specific transaction, we built in some contingencies into the purchase agreement that needed to be satisfied. That’s a pretty common route to go, but I think the bottom line for what you just said is those are all items that need to be ironed out before the transaction closes or else you’re kind of out of luck at that point if you don’t get those taken care of or I guess maybe you’re willing to roll the dice if again you think this is such a great deal, but I think our general take on that would get those items handled prior to closing, and then you’ll be in a much better place day one of your new business.
NASIR: It’ll also help you deal with things that occur during the transaction. Again, let’s go back to this Behind the Buy series. Buyer’s buying urgent care, and there were different issues. There was one issue with the lease. If you guys recall, we find out very late in the game that the seller did not properly renew or exercise their options to renew the agreement, and I think by the time we got in there, there was like five months left to the lease and that was a big problem because you can’t buy an urgent care without that location because then it’s worthless. So, knowing that this is a critical part of what you’re buying made it easy for us as attorneys, but also for our buyer to quickly act and of course, again it worked out. We were able to negotiate with the landlord to extend and the market was such that the landlord was definitely not interested in losing any tenant at that time, and so that that worked out well. Same thing with remember what happened with the trademark. Again, just as a reminder, the seller received a cease and desist letter for the name of their urgent care. It was such that if you buy this urgent care and use that name, you may be walking into a lawsuit and may not be able to use that name. We were able to figure that out. What do we do Matt?
NASIR: We basically set aside part of the purchase price and set a time period for which the buyer would have an opportunity to figure out whether they were going to use the name or not, and then if they did, they would send the rest of the purchase price over to the seller after the transaction closes. With this, I don’t want to say there’s always a solution, but let’s say 96% of the time, there is a solution to it. 24 out of every 25 times, you should be okay.
NASIR: I agree with you. We say that there’s a solution, but sometimes the solution is to walk away and to me, that’s a solution in the sense. That’s weird saying that but it’s like again going back to the essence of why you’re buying the business. In this particular case, the buyer wasn’t buying the business all for the name. She was very willing to say the name’s nice and everyone knows in the community, but is it impossible to change the name? No. It just costs a little more money which is why we put a value to that. How much does it cost to change the name and remarket it and all that, and we assigned a value to it and we reduced the purchase price accordingly. I don’t know, first of all I thought that was a really cool solution we come up with. Not to pat our backs.
NASIR: Pat ourselves on back, yeah. It’s a little bit of an unconventional approach to it, but nothing crazy.
NASIR: You’re right, it’s not unheard of course, but still I thought that was clever.
NASIR: It’s the last episode, so we can give ourselves a little bit.
NASIR: We haven’t talked about that broker character. We had a whole episode dedicated to that guy and what I found interesting was that the broker in my mind kind of represented a lot of different things, not just that person in a sense, and I think we even used the term interloper. When you’re in a transaction, there’s certain people that may just be disruptive to the transaction itself, and sometimes, it could be a broker, in this case it was. But in other times, it could be their attorney. They’re just frankly bad attorneys that are not deal makers and not necessarily looking out for the best interest of their clients, maybe not intentionally but sometimes, they want to prove their value in these kinds of things and showmanship and they just get in the way of the transaction, there’s those types of people. Sometimes it’s employees. You have a manager or a mid-level manager that doesn’t want to cooperate in the transaction because they may lose their job or they’re self-interested. I’ve had instances where it was a very small business. I don’t want to get too much details, but it was a very small business, but we were trying to do a transaction where we need the cooperation of a certain employee, but that particular employee was also interested in buying the business. Their offer was too low previously, so we had a new offer and of course, now, this employee had to cooperate in selling or providing documentation to this prospective buyer and you can imagine the dynamics that can occur because of again that person ended up acting as an interloper. Like any transaction or whatever, you have to be able to deal with that and this broker was one of those people. But I think we handled that person well.
NASIR: Yeah, we did, and I think generally speaking, the less people at the table probably for the better. I knew you were going to mention the attorney piece because we’ve definitely seen our fair share of ones that have come in and been averse to the transaction, but to be fair, it could also work the other way too. I’ve definitely had situations where there is no attorney on the other side or they’re not heavily involved and then once we get involved, then it becomes a smoother transaction because the other attorney gets more involved. It can be good and bad, I guess that’s not just for attorneys, but any of these outside parties. It can work for tax professionals as well, sometimes they can be a negative influence on the deal because they want to structure something unconventionally but the general point is especially the people that are complete unknowns to the transaction from the beginning like in your example, at least the buyer was aware of this employee but if this person that comes out of nowhere like in this case, this broker who I don’t think our client had ever even heard of prior to this transaction. Those are the ones you really have to look out for because one, you don’t know what their motives are behind getting involved and two, they’re just complete wild cards. It could be good, but most likely won’t be.
NASIR: If we’re going to talk about the bad, I think we need to talk about the good because the opposite of an interloper of course, I think the best word is probably facilitator. There are great attorneys and great brokers and great CPAs, and frankly, great employees that can actually help in the business, especially attorneys sometimes, and this is frankly their job. This is what they should be doing if they’re representing their clients well, and I think we’ve played a positive role in doing so as well where you have clients, whether a buyer or seller that as principals, they’re just not the best person to be there to negotiate. Even if they are good negotiators, they may not be the best person to actually do the negotiation. Whether that is going into the legalese of the documents or big terms or small terms, Matt always knows if I like an attorney because I’ll definitely say it, I’ll be very critical, but when there’s an attorney that is good in my opinion it’s not their personality whether they’re friendly or not, it’s whether they represent their client well in a way that still tries to get the deal done. They’re not combative, they’re not inflaming and they’re kind of a proactive strategy of negotiation, and they don’t also get wrapped up in the hype of their client. As much as we’d like to think business is impersonal, it’s incredibly emotional, and again having that representative through your attorney can be very helpful. Of course, again there’s a gradient. The opposite can be also true of course.
NASIR: There’s definitely been instances too when the other side again doesn’t have an attorney or there’s not heavily involved that we’re just hoping that they–
NASIR: Yeah, they call their attorney. We even asked them hey, can we talk to your attorney? That’s definitely happened.
NASIR: That reminds me of the — I don’t think we’ve had any references in the entire series, maybe we had, but the Michael Scott business is the most personal thing in the world. A lot of it’s joking, but it actually has some truth to it.
NASIR: This transaction closed and our client was happy, the seller sold their urgent care, buyer purchased their urgent care, and I think that’s a success in my book, but like I said, I think being able to walk away sometimes can also be a success. You’re avoiding a mess sometimes by doing so, and if you’re on the seller side. A lot of our series is focusing on the buyer’s perspective, this is about buying a business, but we could do a whole series about selling a business too. It’s a completely different paradigm, but not selling to a certain buyer because that person or persons may fall through down the line or cause other issues whether it’s legal issues or stress. Sometimes, it’s just better just to even take a pay cut because you have a better chance of going through the acquisition. This is very similar to selling a house. We’ve already made the analogy regarding an inspection, but if you have a multi-offer situation with different prices, but you have a strong buyer who is paying cash or has a loan from a reputable lender that has an approval letter, or the number of days that they’re willing to close, these kinds of things can also be taken as an analogy to other buyers that it’s not just about the purchase price. Ultimately, you’re trying to get that close, and that closing date episode was obviously a very exciting time for our buyer because that was at the home stretch, but not with incredible work and due diligence. When you have multiple offers, at the end of the day, it’s about the attractiveness of the offer like you said, it’s not just the purchase price. There’s always other things you can do to make an offer more attractive and get the seller to accept it. I don’t really have anything else to say about that.
NASIR: That’s our series. We’re going to wrap up our Behind the Buy series with this episode. It’s something that we definitely enjoyed quite a bit, but we definitely could not have done it and I say this sincerely without the help of our production team, and all the support staff that has helped us with the content and so forth, the editing and all that, but also our sponsor which is probably the most critical step in actually being able to do this, and forgive me, I know they’re important but I can’t remember — Matt, you have the notes to that right?
NASIR: Yeah, it’s our lead sponsor for this entire series, exclusive rights, Pasha Law PC, a law firm practicing in California, Texas, New York and Illinois.
NASIR: Right, forgive me, it’s been a while, I forgot that’s who it was. But yeah, they’re awesome and of course if you have any feedback for us, we already received some really fun feedback during the publishing of our series, but of course please leave some positive reviews on all the different social media channels. We’re coming back. We have new episodes in the pipeline here. Of course, we have a ton of content. We like to do deep dive in certain subjects and throughout this entire podcast series, we’ve still been releasing written long-form content that you can dive into, but also stay tuned because more episodes to come.
NASIR: Definitely and like you said, you can always go back and listen. We’ve been doing podcasting for quite a long time, not all these newbies that have set up in the last however many years. We predate most, I think.
NASIR: And of course, if you guys have any questions or comments, you can send it over to email@example.com. We are very active in social media and also please leave your positive reviews at the various sites that publish our podcast, whether it’s iTunes or Spotify. I don’t know why they don’t have a review site, but all the other ones, please leave those five-star reviews that helps a lot in expanding our audience, and we really appreciate that, but thank you also for listening to our Behind the Buy series.
NASIR: Yeah, just to second that, thank you, everyone, for listening along on this Behind the Buy journey, hopefully, there’s something that everyone could take away from this series and if not, I suspect you are going to take something away or use something from this down the line. Like Nasir said–
NASIR: If you take something away, you have to give us something back.
NASIR: That’s true. It has to be a net-zero, so we’ll make sure that happens, but again, thank you everyone for listening along. Of course, if you have any questions either about something specific in this series or your business in general, again, you know how to get a hold of us and as always, keep it sound, keep it smart.
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