MAU 47 | M&A Process

 

It takes a lot of courage to jump into mergers and acquisitions, more so if it is your first deal. Equip yourself with the knowledge of the issues people in the industry commonly encounter with the process and go in prepared. Owner of the Law Office of Joel Ankney, PCJoel Ankney, shares his expertise and experience on the subject matter. He raises several scenarios that surprise his clients about the process and gives his strategies on how he deals with them and earns their trust. Learn how to close your deals as smoothly as possible by being ahead of the curve and raising your awareness and understanding that an acquisition is not an event, but a process.

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Common M&A Process Surprises That Catch People Off Guard With Joel Ankney

I love when I need attorneys who bring a practical approach to deal-making. Joel Ankney of the Ankney Law Group is that type of attorney. Joel has been practicing law for many years and during that time has helped countless people buy and sell businesses. He graduated first in his law school class at William & Mary. He has written two books, Here’s the Deal: Everything You Wish a Lawyer Would Tell You About Buying a Small Business and Before You Leap: What a Lawyer Wants You To Know About Starting a Gig Economy Business. In fact, the University of Illinois Gies College of Business uses Joel’s Here’s The Deal book in its entrepreneurship through acquisition class. 

Joel, welcome. I’m looking forward to discussing some of your practical advice.

Domenic, thank you for having me on. I’m excited to talk to you.

Joel, for the M&A Unplugged Community, if you could give us a quick background on yourself and what you’ve done. I’m excited to get into some of the practical advice that you offer in your Here’s The Deal book and how you approach helping clients get through their deals.

I grew up in the Washington DC area. My father and my grandfather were small businessmen. I decided to go to law school because I wanted to work with people like my father and my grandfather. You already went over that I have a Psychology Degree from Brigham Young and a Law Degree from William & Mary. After I graduated from William & Mary, I practiced for three years at Hunton & Williams. I did environmental law because the economy was not doing well and they couldn’t put me on their transactional team at that time. I then switched over to another law firm, Mays & Valentine, which later merged into Troutman Sanders and worked there for about nine years doing transactional and intellectual property work and even some entertainment law projects. I started my own law firm in 2003. I am a purely transactional attorney. I help people buy and sell businesses, start and operate businesses, and negotiate about any type of contract. Over the years, I’ve had a lot of fun working and representing people, helping them buy or exit businesses. I try and approach my work with them as a counselor, somebody who can walk beside them through the process.

I would imagine that your undergrad in Psychology helps you quite a bit in the practice of law helping people through transactions. As an M&A Advisor for many years, I find that the psychological aspects of what I do sometimes outweigh the technical aspects of what I do. 

I’d like to think that it does help me. One of the things that I learned from my father is his clients were loyal to him because they trusted him. My background in psychology helps me build that trust with my clients.

What led you to write Here’s The Deal? How did you get to the point where you said, “This book would be relevant.?”

Clients will be loyal to you if they trust you. Click To Tweet

A couple of things led me to that. One of the things that led me to that was that I had perceived myself for many years as being a startup attorney not so much of an M&A attorney. I had a son who was preparing to go to college. During the summer before he left, I had him work on a research project where he reviewed projects that I had done for the first ten years of my solo law practice. We’re doing deals for the first time. In other words, they weren’t serial dealers, serial investors or serial M&A people. Anytime they came in to see me, this was a new experience for them. What I observed was many people thought that either the buying or the selling of business was an event when it was a process.

I wanted to write the book to help people learn about the process of doing a deal. More so because what I had seen was that by not understanding that it was a process, many people were surprised about things that happen during the process. I don’t like it when my clients are surprised. I wanted to have essentially a guidebook or a handbook that they could use as we went through the process together. It did those and has helped the relationships that I’ve had with my clients. As I give them a copy of the book at the beginning of the deal process, it’s to help them and also help us improve our relationship.

That’s such a good point. I couldn’t agree more with you that this is a process. The thing that I talk to my clients about a lot is you need to do the proper preparation. If you prepare, you’re better likely to have a good outcome and understand that, as you said, it’s not an event. It doesn’t happen overnight. There are lots of steps along the way. With that said, as you and I talked, you outlined four points from a lawyer’s perspective, they’re not legal in nature, but you bring all of that experience to these four points and they were relevant. I’m hoping that we can spend some time unpacking those four items. The first one on your list was you’ll pay more than the purchase price, which is something that is stark comment for people, “What do you mean I’ll pay more than the purchase price?” What are you getting at there?

I’d like to address something you said about these four points. They’re not based in the law, they’re not legal points. A big part of what I do, and I’m sure you’d do a lot of this too, we’re project managers a lot of the time as we work through this process. Even though these might not have been directly founded in the law or based on the law, there are obstacles or challenges that I have to help my clients get through. The first point is a lot of people are surprised about the fact that they’re going to need to bring more money to the table to buy a business than just the purchase price. That extra money that they’re going to need is going to be used to pay for a number of different things that are going to happen as they prepare for closing.

Can you give us some examples there?

If you’re buying certain types of businesses, you’re going to need inspections done. You might want an environmental site assessment done. You might want somebody to come in and inspect the integrity of a building or of the equipment that you’re purchasing. You’re going to have to hire some people to come in and do those things. You may even be required by the bank, for example. If you’re buying a business that includes a building, a facility, some real estate, and you’re going to get a bank loan. The bank is certainly going to require you to do some environmental due diligence on that property. When you hire people to do those types of inspections, that can add thousands of dollars to the cost of your deal.

That’s such a good point and thousands can be underestimating it, especially when you start to get into inspections. When it relates to a building, you could start with phase one, but if there is something found in phase one, you might have to go to phase two. If you have issues around who has to pay for that, is it the buyer or the seller? Sometimes those are shared costs, but those numbers can rack up quickly and become a significant part of the overall cost of the deal.

You’re right. I’m being conservative when I say thousands. It could be on the higher end of thousands, not the lower end. Some other examples also include the professional fees you’re going to pay. What are you going to pay your attorney? What are your legal fees going to look like? I’m always hand-in-hand with an accounting firm as we walk through these deals. You’re going to have your professional fees to your accounting firm as well to your CPA. If you’re getting a loan from a bank, the bank is going to charge you money for that loan. You’re going to have to pay an origination fee and pay some points on the loan. You’re going to pay the bank’s attorney’s fees. That surprises a lot of people. A couple of other quick examples. If there are leases involved, there may be some transfer fees that have to be paid to the landlords to transfer those leases. Those costs are low but they’re still there. Finally, a fairly low cost but you want to set up an acquisition entity like a limited liability company that takes the assets. There’ll be some costs associated with that as well.

MAU 47 | M&A Process

M&A Process: As a buyer, keep in mind that the revenue stream of the business you’re buying won’t have an immediate impact the day after closing.

 

Those are all great points. It’s wise advice that people understand that they’ve got a pot of gold while the chunk of that could go to their equity into the deal. They need to keep some side for all of these other hidden costs because lots of these things you can’t finance through the transaction. You could get a working capital line and use that for some of these items but then you could be depleting the capital that you need to run and operate the business. That’s something that I often see is people will use their working capital lines to cover some of these unexpected costs that could leave their business in a precarious situation if they don’t have enough in that working capital line.

I love that point and that’s a point that I didn’t intend to talk about. You’re right, that post-closing working capital is not a cost but it’s something that you have to plan for. If you try and eat into that working capital to pay some of the closing costs, you could put yourself in jeopardy going forward.

When we see businesses get into trouble, it’s because they completely underestimated what they needed in a working capital line or what kind of powder they needed to keep dry because they’re new to the business and they’re trying to figure it out or rainy day like we’re experiencing with the COVID crisis.

Another thing that I see is that a buyer may think that they can rely on the revenue stream and that the revenue stream of the business is going to have an immediate impact the day after closing. In other words, they think, “All I got to do is get the closing and then the business will support itself after closing.” That’s not the case.

Speaking about money, the next surprise that you have on your list is how you’re going to finance the transaction? What’s involved there? What may people overlook in regards to that? 

What surprises people a lot is how long it takes to get the money in hand, whether it’s a bank loan and even more so if you’re trying to roll over your retirement like you use a self-directed IRA or a ROBS or Rollover Business Startup approach to this to rollover your 401(k). Those things take a lot of time because there are a lot of hoops that you have to jump through to get that money in your hand for closing. That’s what’s surprising to at least a lot of people that I work with is how long it takes and the number of hoops you have to jump through to get that money for the closing.

We see that time and time especially if you’re a smaller business and you’re doing an SBA loan, people think that they go through underwriting. Once they’re done with underwriting, it’s done. In reality, they’re only halfway through the process after they get an underwriting approval because the second half of that is the closer for the bank gets involved, they have to do all their closing checklists, a third-party appraisal has to be acquired. That takes weeks. People think that underwriting is the finish line and you’re at the 50-yard line.

I’m glad you brought up SBA loans because they are a lot more involved than a commercial loan from a bank and a lot of people are surprised. The reason why they are much more involved is that there’s a regulatory process that overlays the whole loan transaction. It relates back to that first point as well. An SBA loan can cause you to incur more costs than a regular commercial loan.

When you’re planning to buy a business, you need to bring in more money than just the purchase price. Click To Tweet

There are pluses or minuses. As we both know, with an SBA loan you get a long amortization to lower interest rate with a regular commercial line. Your amortization is going to be much shorter and a higher interest rate but no personal guarantee on a commercial loan, but definitely a personal guarantee on the SBA loan. Trade-offs there. Understanding all of these things and going through all of it goes back to your point about it will take much longer than most people realize to figure out the right way to finance a transaction, what’s involved and then getting through the process itself.

I did a transaction where we spent close to six months trying to sort through the different financing opportunities. My buyer had a solid credit background but he was looking for some specific tax treatment on the financing. It took us quite a while to work our way through. We did three different options that we looked at because of the complexity of each option. It took us a long time and that meant that we had to push closing back. We closed 3 or 4 months later than we had initially anticipated closing.

You and I both know being transaction people, that’s never a good thing because anytime you introduce delays in the deals, that could be a death march in a lot of ways because all sorts of things can go sideways when you introduce delays into a deal.

Even in that particular deal, the seller was patient with us. We weren’t at risk so much with the seller but the business was a seasonal business. The longer we pushed the closing back, that meant that my buyer was not getting as much advantage from the seasonal aspect of the business that he had first hope. Instead of entering the season in the beginning, we entered the season in the middle. That’s a little thing that a lot of people initially might not think about.

That could be significant dollars. It goes back to the working capital issue that we talked about. You might need more working capital than you otherwise might’ve needed if you bought it at the beginning of the high season. Joel, let’s go into number three, which is about legal documents. People underestimating how much is involved and what needs to happen in order to be protected so that when you buy a business, you don’t have a-ha moments later on that are going to cost you significant dollars.

For a new buyer, they may feel the only legal document that’s in play here is a letter of intent. I do some deals that don’t have letters of intent but also the purchase agreement. They think that’s going to be the only document involved here. From my perspective, I’m trying to protect my client. I’m looking to do a couple of different things and I need different legal documents to accomplish those objectives. For example, one of the things I’m trying to do is to make sure that we’re getting title to all of the assets. I may need several different types of documents to bring the title to those assets into my buyer. I might need a bill of sale.

If there are vehicles or equipment titles, I’m going to need all those vehicles and equipment titles. If there’s a lease or multiple leases, I’m going to need a document to assign those leases to my buyer. One of the things that I see people overlook frequently is if there is intellectual property to be transferred like trademarks, copyrights to software, or even trade secrets like the secret sauce, the secret recipe. A lot of times that may be mentioned in the list of assets in the purchase agreement but there’s not a document transfer title to those assets into the buyer. One thing I’m looking for is how am I going to get the title into my buyer?

You also mentioned some other ancillary documents but critically important, promissory notes, personal guarantees. You have a lot of other agreements that could come into play depending on the structure of the deal. You’re right, people completely underestimate what’s involved there. Each one of those is a separate negotiation as well.

MAU 47 | M&A Process

M&A Process: When you’re a young attorney at a big law firm, make sure you learn the importance of the representations and warranties in the purchase agreement.

 

One set of legal documents is the agreement, another set of legal documents is going to be, “How am I going to get title to assets into my buyer?” Another set of documents is going to relate to the financing itself. That can be broken down into if the seller is offering some seller financing, there are going to be documents related to that. If you’ve got a commercial lender, you’re going to have a separate packet of loan documents for that loan as well. It can be a lot. It can be hundreds of pages. Clients sometimes aren’t happy with seeing stacks of documents but they’re necessary.

I know we hear this from clients from time to time, “What’s the bare minimum I need? I don’t want to overspend. I have to be careful.” You walk a fine line here because you try to explain to them, “This might be painful and it might be a higher number than you thought in all these documents, but it could save you hundreds of thousands on the other side.” How do you work that through with clients when they want to minimize how much they’re spending on the legal side but they could be saving hundreds of thousands somewhere?

It goes to what I like to tell my clients, one of the things they’re hiring me to do is to be a filter for them. I do have clients who have limited budgets for example. They’re leaning and looking at me to tell them to help them prioritize what issues do we have to address and what issues are perhaps were willing to either not address them as hard or bypass them and take a small risk of what we do with that. That’s a big part of what my role is in a transaction is to be that filter, help them understand and educate them on what the most significant issues are, and how we’re going to resolve them. Perhaps some of the other issues that we’re crunched for money or time, we decided to take the risk and move forward without resolving them.

Is there anything else before we move on to the last point?

As we were talking, one of the things that’s dear to my heart is when you’re a young attorney at a big law firm working on transactions, one of your first types of assignment is to help with the disclosure schedules on a purchase agreement. That helps a young attorney learn the importance and significance of the representations and warranties in the purchase agreement. When you’re the buyer working through the reps, warranties and the disclosure schedules with the seller during negotiation is part of the due diligence process and the risk assessment process. I’ve had buyers who don’t fully understand why we spend so much time on reps, warranties, and disclosures. Once I am able to show them the importance and the value of the information that we’re getting out of the seller, that helps them understand. There are a lot of promises that are being made and if a promise is broken or if the promise doesn’t have a solid foundation, that can cause a lot of trouble and expense for a buyer after the closing. It’s good to dive into that stuff. It takes time. It’s part of that process. It’s something that I educate clients on quite a bit.

To that point, Joel, do you have your clients get involved in the assembly of those disclosure statements? Do you find that if they’re involved in it in some way, shape or form that it highlights that for them or is it more you recommend that they closely review what is produced?

If I’m representing the buyer, it’s more of the latter. I don’t have them involved at the beginning of that process but I do try and take some time at the beginning of that process to explain what we’re going to be doing, why we need to do it, and how long it’s going to take. As I receive information from the seller, I am sharing that with my buyer and asking them to review it as part of the due diligence process.

Moving on to your last point which is well-taken, it’s going to take you longer than you think.

You take a lot of risks when you don't give your attorney enough time to protect you. Click To Tweet

That’s the umbrella statement for this discussion. I have had clients come in with relatively small transactions, $1 million to $3 million and tell me they want to close in two weeks. I’ve learned rather than tell them, “This is going to take longer than you think.” I will ask them a series of questions like, “Are you getting a bank loan? Is there a lease involved? Are you looking to get some seller financing? What kind of due diligence have you done? Have you had your CPA look at the financials yet?” As I ask those questions, they come to a realization. We can do it frankly. I have turned around deals quickly but you take a lot of risks when you don’t give me enough time to protect you. I try and ask the right questions to help them come to their own realization that it is going to take some time to get through this.

On the seller side, what’s your advice when somebody is looking to sell? They also tend to think that once they put their business on the market, “This will be sold and we’ll be off to the next venture,” whatever that is. In short order, what are you helping the sellers think through there?

From the seller side, there’s much less to do. I try and educate them on what the buyer is going to have to go through so that they can understand that there are going to be times when I’m going to ask them to be patient. The buyer has a lot more things to do than the seller has to do. They’re not going to have a lot of control over the timing of it when they’re dealing with the lender or a landlord. That timeline is going to be affected by outside people. With a seller, what I’m asking them to do is to put themselves in the buyer’s shoes a little bit, understand what the buyer’s doing. To have patience and to realize that from time to time, the buyer is going to ask for more time for one thing or another.

I’ll say one of the things that we do with sellers quite a bit is we try to prepare them ahead of time for diligence and what’s going to be involved in diligence. Even to the point where we ask them to assemble data rooms before they even go. We get out onto the market because even when we get ahead of the curve like that, there are still many documents that a seller has to produce for the buyer. If they don’t do that work ahead of time, it will grind down the process once a buyer does come to the table and make an offer. We’ll try to do our level best to get sellers to populate a lot of that information early.

I love that idea. I have worked on 2 or 3 deals where I’ve represented the buyer and the seller has done that. They’ve created a virtual data room so that when the Letter of Intent is signed, we get a link emailed to us to that virtual data room. It’s full of documents. We generally ask for more but we’re off to a great start because they’ve done that prep.

Joel, this is tremendous. As I started off in my intro, this is good practical advice that people need to hear. I love that it’s coming from an attorney because you see so many deals. The legal stuff is the legal stuff and you’ve got the experience to handle that but it’s all these other things that people don’t anticipate that can throw them off. As we’re wrapping up here, any high-level comments or final thoughts that you would like to share with the M&A Unplugged Community?

I love doing deals because I love the preps like you say, the non-legal aspect of it. I love the relationships that I create with my clients. The interaction with opposing counsel because we’re all pointed in the same direction. We’re all trying to achieve something for our clients that’s going to benefit them. We’re trying to build something rather than tear something apart. I do like people to be educated, to know that at least have a general understanding of what the process is going to be like. It is going to be difficult at times but also to understand that because I’m on their team. I’m always at-bat for them. I’m going to help them filter issues. I’m going to be able to tell them what is customary, reasonable and shouldn’t spend a lot of time and anxiety on it. In the end, it is a process that can create a lot of anxiety and stress for people. A lot of times, I like to tell my clients, “I’m not sleeping at night so that you can sleep at night. I’ll take on a lot of the stress and anxiety for you so that you can focus on your business and focus on preparing for the transaction.”

Joel, I’ve appreciated you visiting us and sharing all this great information. If people wanted to reach you, how could they get in touch with you?

MAU 47 | M&A Process

Here’s The Deal: Everything You Wish a Lawyer Would Tell You About Buying a Small Business

It is easy to get in touch with me. You need to search my name, Joel Ankney. It’s unique and unusual. I have a website from my law firm that is simply my name, JoelAnkney.com. I’m on LinkedIn. I’m on some other platforms as well but the website is the easiest way to find me. It has all my contact information on there too.

Joel, thank you. I appreciate you being here.

Domenic, it was wonderfully fun. I enjoy swapping ideas with you.

Let me recap a few things that Joel brought up, which are great reminders if you’re looking at a transaction. First, if you’re looking to buy, you will pay more than the purchase price. There are many other things that have to be covered in the transaction that you need to contemplate. Being prepared and understanding what those are matters. It will take you longer to secure the money than you think. There are lots of places to secure the money. Understanding all of your options and weighing those options ahead of time will put you in a better position to do the deal once you find the right one. You will need more legal documents than you think. I see this time and time again in every transaction. If you hire a good M&A attorney with a lot of experience, somebody like Joel Ankney, he will cover your back.

They will know what is necessary, what’s needed because the last thing you want to do is shave $1,000 off of your legal bill to find out that you overlooked something critical and it costs you tens of thousands or hundreds of thousands later on. Overall, it will take longer to buy a business or sell a business than you may think. It takes time and not every deal that comes together gets done. You have to restart and go to the next deal or go to the next buyer. You have to be prepared that this is not an overnight process. If you would like to learn more about the process of acquiring or selling a business, please visit our website at SunAcquisitions.com or feel free to reach out to me at [email protected]. I look forward to seeing you again on the next episode. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.

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About Joel Ankney

MAU 47 | M&A ProcessJoel founded his law firm in 2003 after working at two large international law firms. Joel is an attorney in Virginia Beach, Virginia. He helps people buy and sell small businesses, start businesses, negotiate contracts, and protect and profit from their intellectual property. Joel has been practicing law for over 28 years. Joel earned his undergraduate degree in psychology from Brigham Young University. He then graduated first in his class from William & Mary Law School. After law school, Joel worked with two large international law firms focusing on mergers and acquisitions, but also practicing environmental, intellectual property, and entertainment law. He started his own law firm in 2003. Joel is the author of two books: (1) Here’s the Deal: Everything You Wish a Lawyer Would Tell You About Buying a Small Business; and (2) Before You Leap: What a Lawyer Wants You to Know About Starting a Gig Economy Business.

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