By Andrew M. Apfelberg, Rutter Hobbs & Davidoff
Whether an acquisition, lease or contract with a vendor, every business transaction has its own particular pacing that develops. It is important to maintain that pace in order to effectively take the transaction from concept to signed agreement. However, when the parties involved focus exclusively on maintaining the deal’s momentum, they tend to ignore red flags that pop up, as well as their own inherent reactions to these cautionary signs. Getting caught up in the adrenaline rush of trying to close a deal is, in fact, a great way to wind up either with a transaction that does not deliver the opportunity you originally sought—or with a big bill for a deal you had to abort at the last minute.
Let me give you a case in point. Recently, a client wanted to acquire all the assets of a business as well as the property on which the business was located. The price was fantastic and the sales broker assured my client that the prospect was a rare opportunity. But the seller then delivered a skimpy purchase agreement, and put significant pressure on my client to review and sign the document within 24 hours of receipt. After a late-night and rather frank conversation with me, my client did not sign the document, and asked instead for a short no-shop period during which she could conduct her due diligence. The seller refused the no-shop restriction but, nonetheless, my client decided to proceed with negotiating the deal.
A day or two into the due diligence process, it came to light that one of the seller’s key employees did not hold a necessary license and had, instead, worked out a side-deal with the seller. My client instructed me to work around the problem by inserting an indemnification provision into the purchase agreement. The seller then provided some self-prepared financial statements, but would not give my client access to the back-up data or the seller’s previously filed tax returns. My client felt she could trust the seller and took him—and his financials—at face value.
In the meantime, I revised the purchase agreement and prepared the balance of the missing documents typically associated with this type of transaction. In response, the seller refused to accept any of my proposed changes to the language of his purchase agreement and was hesitant to agree to the terms of the other documents. He insisted that the sale was “as-is” and that if my client did not like it, there was another eager buyer in the wings who had already offered more money. My client the requested that I “trim down” the documents in order to appease the seller.
The transaction wound up not closing at the eleventh hour. After all the documents were laboriously negotiated and revised, one of the selling members refused to sign the non-competition agreement.
My client was livid. She had incurred significant legal, accounting and other fees, and invested more than eight weeks into the deal. She felt cheated, and looked for someone to blame—but ultimately concluded that the blame fell squarely on her shoulders. She was so eager to close the deal that she ignored obvious warning signs, failed to investigate red flags that popped up and refused to follow her “gut” instinct, which told her that the deal seemed questionable.
Unfortunately, my client ignored the following ten warning signals, and ultimately paid the price:
1) The deal seemed too good to be true.
2) The seller insisted on an overly quick closing of the transaction.
3) There was hesitancy in providing requested due diligence items in responding to transaction documents.
4) The records or documents reviewed in the due diligence process were incomplete and disorganized.
5) The other side was unwilling (or unable) to develop a transition plan for post-closing of the transaction.
6) The other side insisted on preparing the transaction documents, when the custom is for the buyer to prepare them.
7) The seller refused to negotiate the business terms or language of the agreements.
8) There was insistence on an “as-is” sale, and a refusal to offer any material representations or warranties.
9) The other side exerted significant pressure to close despite the existence of outstanding questions.
10) The seller had a questionable reputation within the community.
While the existence of one or more of these items does not necessarily mean that a deal is not a good one, it does mean that you should take the time to gather additional information and carefully analyze it before proceeding with the transaction. By continuously looking out for these red flags, you will inherently slow the momentum of a deal down just enough to analyze the information and issues presented without jeopardizing the pacing of the negotiations.
Above all, listen to your instinctive responses to these warning signs. In most cases, you inherently know what is right and what is wrong, and what makes sense and what does not. Never be afraid to walk away from a deal that simply does not feel right. There is almost always another opportunity just around the corner. When asked what his most profitable transactions were, a highly successful real estate developer answered without hesitation: “The ones that I didn’t do.”
About the Author: Andrew M. Apfelberg is a corporate transactional attorney for privately held middle-market companies. He represents clients as their day-to-day general counsel and in significant transactions such as mergers and acquisitions, financings, joint ventures, licensing, entity formation, agreements between shareholders and the establishment of manufacturing facilities in Mexico. He is a partner of Rutter Hobbs & Davidoff Incorporated, a full service law firm in Century City (www.rutterhobbs.com). The firm provides comprehensive transactional and litigation services to companies, their principals and entrepreneurs. Apfelberg’s clients benefit from his strong business and finance background gained from working for investment banks prior to attending law school. This experience enables him to more effectively structure transactions and negotiate agreements to maximize the return to the client and increase the likelihood of getting the deal closed. He was awarded the most coveted AV rating through Martindale-Hubbell, and was selected as a “Super Lawyer” in the field of Business Law by Law & Politics in 2005, 2006, 2007, 2008 and 2009.