Who's on your transition team?
Who’s your favorite professional sports team? The Detroit Tigers? The Montreal Canadiens? The New York Giants? Whoever it is, no matter what sport, the players on that team have a position they play. They have specific assignments and they were recruited because they had a specific talent.
If you could equate your career as a successful business owner to a football season, you would be the quarterback, the coach and the general manager. You drafted the players, wrote the playbook, and threw a lot of touchdown passes. Your skill and perseverance gave you a chance to play in and win the Super Bowl, which is our metaphor for a successful exit.
Humor us a little further. It all comes down to the last play. Four seconds left and you’re down by two points. You have the ball on their 30 yard line. At that point, everything you have ever worked for is in hands of three guys that have been on the bench the whole game. Your long snapper, your holder, and your kicker are three specialists who have only one chance to execute a difficult sequence of events flawlessly. If they blow it, you lose.
Think of your transition team as that field goal unit. A business transition team includes your advisor/broker, your attorney, and your accountant. Just like your field goal team, everybody has a very specialized job. How absurd would it be if your holder decided right before the crucial play that he wanted to be the kicker?
We once sold a high volume pharmacy for a gentleman who had done an impeccable job of building his business over three decades. We had conducted a national search and located a buyer who had experienced similar success on the West Coast. He was not happy with the business climate in California, and was in the process of liquidating his holdings with the idea of a fresh start back east, and for that reason he was willing to pay a very high premium for a flagship store he could build around. Negotiations were deliberate and purposeful. This guy was a buyer and he knew he was buying quality.
The deal was under contract quickly and we arranged financing through a boutique investment bank that had an appetite for pharmacy transactions. That’s when our holder decided he wanted to be the kicker.
The financing was a combination of cash, seller financing, and an SBA loan. After agreeing to all terms, our seller declared that he was not willing to subordinate one dime to the SBA and if the buyer couldn’t finance it without the SBA’s help, the deal was off.
When a seller accepts an offer, takes money in escrow and watches the buyer purchase a house in the community he plans to become a member of, and then refuses to close, he is asking for some real trouble. Why his attorney didn’t advise him of this is something we didn’t figure out until it was almost too late.
We ultimately learned that it was the lawyer who was trying his hardest to turf the deal. Through discreet channels, he approached the seller’s wife and advised her that they were taking a tremendous risk subordinating their seller note to the SBA. He told her horror stories of a recent deal where a buyer had defaulted on not his SBA loan but the secondary note the seller was holding. They couldn’t evict him because his debt was junior to the SBA, and the SBA wouldn’t allow them evict him because he was current with them.
Which can happen. When we finally figured where the resistance was coming from, it all made sense. Our client had a rather naïve blind loyalty to his attorney, assuming that all attorneys act in their client’s best interests all the time. The attorney knew that if the deal fell through, he might earn another fee defending a sure lawsuit and maybe ruining the next attempt at a sale as well. To him, anything was better than losing a paying client.
Right before the seller walked away from the one guy who wanted the deal badly enough to pay about $800,000 more than anyone else, we called the lender, who was a former pharmacist who had been hired by the bank to underwrite such loans. At the lawyer’s insistence, he had already agreed to increase the LTV once, a rare deviation from their standard practice. He agreed to this because even under the new terms the deal still cash flowed, and the buyer had a long and verifiable history of successful repayments of previous loans.
The conversation went like this:
“Mike, how much paper do you have on the street?’
“Two hundred million”.
“And how many defaults?
He took that as an insult. “Defaults? I’ve never even had a late payment!”
At that point we advised our client that his attorney was about to cost him over a million dollars in lost proceeds, legal fees and judgments. And we asked him to ask his attorney what industry the nightmare SBA scenario was from. Turns out it was a hardware store. Fortunately he was able to see the light and listen to the people who he should have empowered to run the deal in the first place. If the deal had fallen apart, there would have been a nuclear war. The seller didn’t realize it because the buyer was a low key guy who maintained an even keel at all times and didn’t show much emotion every time the lawyer made another demand, even after the deal had been negotiated and signed. And he would have probably maintained the same demeanor while his attorneys were tearing our client and his attorney to ribbons.
In a football game, the center snaps the ball. The holder places it in the optimal position. And the kicker boots it.
On an effective business transition team, everyone involved is a specialist who does his own job. However, the broker/intermediary is the captain of the team. He packages and markets the deal, finds the buyer, and negotiates under parameters previously agreed upon with the seller. Selling businesses is the name of his game. The attorney should memorialize what is agreed upon. The accountant offers tax advice and provides the broker with the financial information he has compiled.
Frequently we coordinate the efforts of no less than four separate professionals when you add the services of an appraiser and a financial planner who helps the seller invest the proceeds. And when one of those professionals steps outside of his area of expertise, it’s like a heart surgeon trying to perform brain surgery. Business transactions involve many moving parts which require a complete array of advisors who understand their role and respect that you are the ultimate decision maker.
© Players Capital Group 2016
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