Divestitures from a Legal Perspective

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It's going great. Thank you for having me.

My pleasure. Thanks for coming back. Can we kick off with a little bit about your background?

I had been practicing law for close to 20 years and most of that time I've been a deal lawyer, which basically means I've been the primary lawyer for mergers, acquisitions, divestitures, joint ventures, and a variety of other strategic transactions. Some of that time it was in private practice. Some of that time was at Lyon Double Sell. And so I've had the opportunity to do deals all around the world. Private deals, public deals. Many of those lessons learned we'll discuss today.

Yeah, absolutely. Because you were there 13 years and knowing what the company's done, been part of some really interesting transactions.

I have, I've been very fortunate. A few weeks after I joined, the company lined up itself filed for bankruptcy and to this day it's one of the largest bankruptcies in US History. So I was able to work with my colleagues and the C suite at the time to help navigate us through chapter 11 and to emerge successfully. So subsequent to that, I've been able to provide legal support through a variety of transactions. And specifically in the last five years, I led the team that helped acquire a Schulman, which was a publicly traded company out of Cleveland, Ohio. Most recently, in the past year, I was the lead attorney for our JV investment where we acquired half of a site, petrochemical site, from Sasol in Lake Charles, Louisiana. So I've been very fortunate in my career to be part of some amazing deals and frankly work with some phenomenal teams.

I love the diversity. And from a legal perspective, how would you depict the main differences between an acquisition and divestiture?

The way I describe it is an acquisition, the work is really in the front end. Prior planning, if done well, if done efficiently and effectively, will lead to a successful transaction. When dealing with the divestiture, you really have to get all your ducks in a row to ensure everything is designed, developed and as importantly, or more importantly, presented appropriately. Acquisition, a lot of the work is done in the back end. You're doing due diligence. You're looking at the target you want to acquire as the seller. When you're doing a divestiture, it requires a significant amount of work in the front end. Doing that correctly, doing that thoughtfully, will typically lead to a successful deal.

Can we walk through a carve out situation?

Yeah.

Where do you start and go from there?

So whether it's a carve out or selling a business, maybe it's helpful to discuss what's the first step? The first step that the team needs to understand, and absolutely the legal team needs to understand, is why are we doing this deal? Are we doing this deal because we need cash? Are we doing this deal because this business no longer advances the overall company strategy? Are we doing this deal because this particular site has a lot of legacy liabilities that we want to shed? Are we doing this deal because, frankly, we want to go a different direction? If the entire deal team, and especially the legal team, if we don't understand the why, we can't develop the how. No one should be discussing divestitures or frankly any M and A until you understand the why. After that, how are you doing a carve out? Are you selling a legal entity? Are you doing a bilateral deal? Are you doing an auction process? How are you hoping to effectuate the divestiture? And once again, understanding the how will have a profound impact on all the work you have to do and all the steps you have to take to ensure a successful divestiture.

I like how you start with defining the why. Really the strategy of how, what's the drivers of doing this carve out and then think of how you're going to do it. Yeah, let's walk through those steps. I really want to understand this because I get it from the corp dev side, but I think we know legal folks do a little bit more work.

Well, different work. The corp dev teams I've worked with are phenomenal. But here's where you do work with the corp dev team. First step after the how and the why is identify what you're actually selling and from a legal perspective, the issues that may arise based on what you're selling. So let me give you an example. If you're selling a legal entity with certain assets owned by that legal entity, there are going to be contractual issues. And in those contractual issues there may be change of control where the contract provides that if the legal entity attached to this contract is sold, the other party can terminate. Well, if the real value of the business you're trying to sell is attached to that contract and you can't transfer that contract because of that change of control provision, how much is the business worth? That's a real issue. So the first thing the legal team will do is scrub all the contracts attached to the asset or business being sold to make sure there are no change in control issues. Second, employment issues. Do we want to keep some of those employees? Are we fine with those employees being transferred with the business we're trying to sell? And then how valuable are those employees to the operation of the business? Do we need to put retention agreements in place? Do we need to make sure that management team is working for us as a seller? Or in their back of the mind they're realizing that they're no longer going to be working with us in a year from now, so their loyalties lie elsewhere. Are they tied for a year or two to the asset in question? Because the buyer may not know how to run the asset and so they will need those employees to at least run the asset or train their folks and bringing them up to speed. The employees can walk off the site as soon as the deal closes. What value does the asset have? You also look at tax issues. Never forget your friends in tax, because any deal may have tax consequences. And so you always want to clear your proposed transaction with your tax advisor to make sure there is no adverse consequences of going to an equity deal or an asset. Deal or some combination thereof. Your debt instruments. If the business or asset you're looking to sell is collateralized, then your bank will have an interest if you're trying to sell that asset or business. So you need to scrub your debt instruments to make sure you have the ability to actually sell that asset. Or if you need your consent, permits. If the permit is in your name, how will the acquirer get those permits? How will the acquirer have the ability to run those assets on day one? Licenses. Same thing. If those assets are dependent on having certain licenses and those licenses are in the seller's name and not the buyer's name, how are those transferred? Intercompany agreements. If it's a carve out what you mentioned a few minutes ago, maybe Let me take a second and explain it. A carve out typically is when you sell a part of your business or part of a site you own. You could have two companies or more occupying a larger industrial site or a larger real property site, or any type of space, physical or not. And so how are you going to share that particular site? Well, there's going to have to be intercompany agreements. Who's going to handle electricity for the site as a whole? Who's going to handle garbage disposal? Who's going to handle parking for your employees? This is where a lot of things fall through the cracks. The mundane issues of how to run a site day in, day out that now needs to service two companies and two sets of employees serving two different management teams. How are those issues going to be handled? Are there agreements in place to manage those relationships? And last but certainly not least, regulatory issues? If you're selling to a strategic buyer, are there going to be antitrust concerns? Are there going to be concerns in terms of when they're doing due diligence, which I'm sure we'll talk about in a few minutes. Are they getting access to your commercially sensitive information? Are they getting access to your customer lists and other highly sensitive information that if the deal goes sideways, compromises your competitive position and national security issues? A lot of companies produce products that the United States government has an interest in or other governments have an interest in? And do they want those products being sold or managed by an entity from another country that may be hostile to them? So you ask what the legal team has to look at to prepare for divestiture. That's probably maybe 10% I want to get in this.

Before we go through the rest of the process, let's just make up a company and saying, hey, we're making up you got same multinational corporation, bunch of business lines. And I want to even start with the strategy because is that coming up in an annual review of our assets? Because I'm always curious how do organizations conclude the carve out? Was it prompted by some external interest, something of that I want to get a sense of like where do you come in? Is that anything? Or is that just purely the business thinking? Like, oh, these guys want to buy it. Yeah, we can get something. Sign an loi. Hey Andrew, by the way, we just agreed to go sell this thing. When do you actually come in and help make sure that's going? What does that look like just in that strategy part?

Sure. And it varies. Best practice is the strategy is front and center for every single action the business development team and the businesses take. I used to run flogo campaigns. What I reminded myself and what I reminded my team is every day, if your actions aren't being taken to advance to get the candidate elected, your number one goal, then you shouldn't be taking those actions. So that checks everybody up. Am I picking up this, Am I making this phone call to help the candidate get elected? Am I answering this email, help the candidate get elected? Am I developing this brochure to help the candidate get elected? What am I doing to advance that goal? And I've taken those lessons and applied that to my legal practice. Frankly, I think that's the best practice practice for a company as a whole. What is your strategy? What is your end goal? And in terms of business development, as you look at the different business lines, different regions of the world in which you do business, different activities, if all of them are not advancing your goals, then you should be taking a serious look at why are you doing that? Why are you expending company time and resources on activities, business lines, individuals, countries, but don't advance your goal? And if the answer is you shouldn't be, then at that point you should be talking about divestiture or shutdown. So that to me is a best practice. When does legal get involved? Best practice? From day one. Because when thinking about a divestiture, when thinking about all the strategic actions a company should take, there's a legal consequence to all that, whether you like it or not. Lawyers influence everything. One needs to be cognizant of the legal ramifications of any action they take. In my view, a best practice is to have the lawyer in the room when the strategy is being developed. A lawyer should be in the room when the business development team is entertaining different options, whether acquisition or Divestiture, Because I don't think I'm biased here. A lawyer can bring a lot of value to that discussion, not only through their legal expertise and experience, but through their approach to analyzing different issues and challenges.

Yeah, absolutely. A whole different view thinking and ultimately you're going to have to make all this come in the legal agreements.

Exactly right.

More you understand the better. So we got this company and we had our meeting. We decided it brought you involved, did the best practice and you knows about it, has a good sense already starting to think about scoping. How does that work? Because what you described and you gave me a good number of, we talked about change management, good control provisions on customer contracts. You got the employee agreements, the tax, debt, liabilities, permit licensing, a lot of the shared services you described I think would parallel over to TSAs transition service agreements.

Yep.

And then regulatory. What you described sounds like you're going to need to get a number of other folks in the company involved through that. How do you orchestrate that? And is there a certain sense of priority that cascades down? Are you trying to all this at once?

You have to prioritize and you have to be able to work with a team. No one person, especially when talking about a large multi billion dollar global company, is going to do it all by themselves. So you need to have a thoughtful risk business development team and an active, rigorous, thoughtful legal team, finance team, hr, commercial, depending on the industry, environmental, ip, intellectual property is huge. I don't care what industry you're in, you need to have a team in place that understand the issues and understand what they need to do. And frankly you need to have a leader who can coordinate all that. When looking at a large multi billion dollar transaction between those who are working for the seller and those who may be working for them. As an investment banker, outside counsel, 10, 20, 30, 40, 50 people, a strong project management leader is essential. I'll take a step back and discuss how all those different groups start gelling together and working one, you get a team together representing all of those different stakeholders. But before you really can go to market and as I said at the beginning of this discussion with a divestiture, it's all about getting the work done right at the beginning. You want to put together a data room and the data room is going to have all, all the contracts, all the licenses, all the permits, et cetera that would be of interest to the buyer. Because the buyer's job is to do the diligence to make sure what it is bidding can be justified to its Shareholders. This is why the data room needs to be as thorough as possible and as easy to use. I have been involved much in my early days of practicing with some data rooms that looks like it was put together within 90 minutes and it's sloppy and there are agreements missing and the folders are mislabeled and the files say one thing, but it's another. Well, if you're trying to sell your house, you stage it, you present it, you give the impression to the person buying your house that this is worth every penny and more what you're considering buying, where you think about paying for this house. That mentality should also apply to your virtual data room. If you're asking a buyer to bid 100,000, 100 million, a billion plus, you need to present that well, that is going to be a first impression for the buyer, like it or not, of how well your asset or businesses run. And so if your data room is not organized properly, is not easy to use, what kind of impression are you giving? Think about how you sell a house. If you're staging a house to be as attractive as possible, same way as you stage a data room, two other items that go to the buyer that make a first impression. The teaser. And so whether you are running the sales process or you've engaged an investment bank to run a sales process, it is typical to send out a teaser. A teaser is a two to three page document that basically says, look at this asset. Look how great this asset is. How could you live another day without this asset? It tries to tease out all the potential buyers that may be interested in this particular asset or business. A potential buyer will look at the teaser and go, what? Wow, I'm interested. They will express that interest to the investment bank or to the seller, depending on what communication is required. At that point, the potential buyer is asked to sign a non disclosure agreement. They sign a non disclosure agreement and they subsequently receive what is called a sin, a confidential information memorandum. A confidential information memorandum is about 50 to 100 pages of details around the asset or business in question. It has financials, it has description of the org chart, it has a description of the assets. It's a thorough way of giving the potential buyer comfort in the asset it's looking to buy. Going back to that staging of a house, I've seen transactions where the sim looks like it was put together by a bunch of folks over a three hour period. And I've also seen it where it's glossy and grammar is correct and the spelling is correct and the pictures are pretty this is another opportunity to present your best case why this asset should be sold for the price you want and putting your best foot forward that this will be a professional, thorough and efficient process. And once again, between the data room, the teaser and the sim, that's low hanging fruit that a seller should get right to ensure all buyers in the process understand they're dealing with a professional outfit.

Clarify the strategy. Then we're really scoping things and got a whole series of work to do to define this from those list of things we talked about. What you described is now more of a preparation that we're actually building the assets that are going to be marketing materials for the business. In there you reference working with an investment bank. Can you walk me through when do you know it's time to get the bank involved? And even from a legal perspective, are you involved with that? You got to read the engagement letter and making sure we're not obligating ourselves to something screwy.

Absolutely. I think every company has different criteria of when they engage investment banks. If you really don't have a good feel for the parties that may be interested in the business you're trying to sell, you may go to investment bank for their knowledge and for them to hold your hand throughout the process. You may also look to an investment bank if you're dealing with a very large transaction where their expertise will be invaluable to help you walk through the transaction. So every business has, I'll say, different criteria when they tap into the investment banking community. Look, investment bankers know what they're doing. A lot of them are fantastic advisors, not only with getting the business sold, but in terms of the marketing materials you mentioned. They develop these marketing materials day in, day out. They know what appeals to potential buyers in different industries in different business lines. So invest in bankers. While very expensive, don't get me wrong, more often than not you get your value out of them. They are incredibly helpful in terms of the marketing materials I mentioned and in terms of putting together a data room, putting together a confidential information memorandum, if done right, will likely take weeks, possibly months. And to have their guidance on how to package those materials where it appeals to the greatest amount of people and will inspire them to bid the highest amount is worth their weight in gold.

Anything on a legal perspective that you look at if you reviewing multiple. And how does that work? Because you do a bake off and you have the different investment banks come in and they essentially always want to get to the end and get the projected price they're going to get for the business. How does that work? Are you looking at terms side by side through that or do they essentially get decided and then you get called in?

And going back to what I said, the legal team should be in the room day one. So a best practice is the legal team is sitting in on all the pitches by the investment banks. In those pitches, the investment banks may promise certain things that if you engage with me, we'll give you X, Y and Z. You want to make sure whatever they promise or represented can be found in the contract. There's also going to be commercial terms, what percentage they get of the deal. There's also going to probably be a tail where let's say for whatever reason you decide not to pursue the deal this month. But what if you pursue the deal six months from now? Does the investment bank get a piece of that action? Most investment banking relationships have tails, whether it's 6, 12, 18 months that if you sell the asset in question during that time period, regardless of whether they assist you at any point after you walk away from the transaction, they get a percentage that protects their interest. And so what is heavily negotiated in any investment banking deal is the percentage they would get their compensation for the deal and the tail. Because what you don't want as a seller is a 24 month or a much longer tail where they may not be helping you at that point, but they still get a percentage of the deal. And let's say you aren't happy with that investment bank for whatever reason and you've gone to another one, now you're paying two. If you're paying two investment banks, that's less money in your pocket. So as the lawyer for the you leave the commercial terms typically to your business development team, your attention really has to be focused on the tail confidentiality provisions. Making sure that the appropriate firewalls are in place, especially as these investment bankers seek out others within your industry and making sure whatever information you share, because let's be honest, they are going to be in meetings with your C suite, they are going to have access to your confidential information, including pricing. What cannot happen is the relationship ends and they go to your competitor. So you need to have very robust confidentiality provisions in those investment banking agreements to ensure nothing adverse happens for either party.

What's market for investment banking fees these days?

I'm going to give you the typical lawyer answer. It depends. We were talking before this call how incredibly busy 2021 was. Well, during that time period investment bankers could exactly high demand at much higher rates. Maybe they could in 2008, 2009. So like any negotiation, a lot depends on where the market is at the time.

Okay, fair enough. We created the Deezer sim, got the data room looking nice and organized, what goes on from there? Because at this point we're working the bank, they should either guide us on a targeted outreach approach or a broad auction. And they start floating around these teasers. Where do you keep an eye on the ball and start knowing when you need to get back on some of these things? And I'm sure there's some legal templates you're using along the way.

Absolutely. And I know I'm sounding like a broken record here, but best practice is I'm not jumping in and out. Legal is not jumping in and out of the process. Legal is there every step of the way. Once the management team decides we're going to pursue a sale, a best practice is weekly meetings where the different stakeholders report what is happening and what needs to happen over the next 30 days. So you're right, we've put together a data room, we've put together a teaser and the confidential information memorandum. So the teaser has gone out. Those who, with maybe the assistance of the investment bank, we've reached out to a broad swath of folks, strategic buyers, private equity. We have received interest from a variety of parties. They have signed the non disclosure agreement which will be new, which if they have any objection to the NDA template we've sent out, those will be negotiated by the legal team. The NDA has been signed and they have received the confidential information memorandum. With that confidential information memorandum will be a letter and the letter will state by X date we expect your preliminary bid. And so it can be arranged, it can be subject to further diligence, it can have all these caveats and frankly it will be non binding. If someone is probably sending you a binding bid by that point, either you're in bilateral negotiations or it's a scam. Because in an auction process, let's be honest, at this point, they've seen your quote unquote marketing materials, but they're going to want more than that before they make a binding bid. Whether it's the NDA or the letter I've just described, all of that is drafted by legal and a best practice will be to have those templates ready to go. You've sent out that request and that the date has passed, the due date has passed. So now you have before you all these potential bids and it is now time to decide the business development team, management team and the legal team. Which potential bidders are going to be brought into the second round? What are you looking at? You're going to be looking at price. You're going to be looking at liabilities. What liabilities do you think the bidder can assume you're going to be looking at? Does the bidder have the necessary capitalization to make this acquisition? Is the bidder someone with a strong reputation that you would feel comfortable sending your employees to work for? And overall, before any of those questions are asked, why are you doing the deal? What was your strategy? Remember, everything comes back to the strategy. If it's simply you need the money, then maybe there's a bias toward those bids that have the highest amount. If the driver of the deal is to just shed liabilities, who can assume these liabilities tomorrow and we have a clean exit? If the driver is to get our employees in a safe spot, who has a good reputation for taking care of employees, especially in acquisition, Your strategy drives every single step of the way. So you have looked at all your bids, you've measured those bids against your strategy, and now you've invited maybe four to seven potential bidders into your second round. The second round will involve access to your data room. It will involve management presentations. Going back to what I said earlier, prior preparation will have a profound impact on the success of your transaction. During all this, reach out during all this preparation for the SIM and for the teaser, you also need to prepare a management presentation where key folks from the business line or from the asset you're trying to sell will prepare descriptions for the potential bidders. And it may just simply be a script. They may offer Q and A. But here is your opportunity for the seller to once again demonstrate to the buyer, this is a business you want to buy. And this is a business that justifies for top dollar. It is also a potential opportunity for the management team that may be going with the business to demonstrate their value. So management presentation site visit if you're buying a site and possibly a proposed purchase agreement. So let me take a few moments to one, talk about the data room that I mentioned at the beginning and to the purchase agreement. You have now spent six to eight weeks preparing a data room that is staged packaged well. Well, as you're preparing the data room, you also need to think about who will have access. If your bidders are strategic, more likely than not, they're your competitors and you don't want them so early in the process to have access to your customer list, your pricing schedule, your commercial T's and C's when your contracts with your customers terminate, because that will give them an unfair competitive advantage. So if you are going to have some strategic bidders in the process, one, you should segregate that information so strategic buyers so you can tie appropriately, decide when to give strategic buyers that access. And two, the legal team should develop a clean team agreement. What's a clean team agreement? A clean team agreement compels the buyer to designate certain individuals within its organization or outside, maybe third party consultants. Only those individuals will have access to the competitive sense of information I just described. They will prepare a summary to aggregate that data and make sure that data is no longer competitively sensitive. And more often than not, they will show that summary to the seller. So the seller can also get comfortable that its competitively sensitive information is not going to the buyer. So that is a best practice in terms of setting up the data room. Let me talk about the purchase agreement for a few minutes, which is a huge lift for the legal team as the process is going along. It is very common for the seller to develop the purchase agreement. It is a decision of how seller friendly you want to make the agreement. And frankly a lot of that is dictated by the market. Is the asset you're selling in high demand where you are expecting a tremendous amount of interest. If that's the case, make it as seller friendly as you want to be. If the asset is something you're just desperate to get rid of, then probably a more neutral approach is the best. If I don't know the why, I can't develop the how. And this is where the legal team needs to work very closely with its business development team and the investment bank to decide how much of an interest will this asset or business generate. Because that will dictate how the purchase agreement is crafted and what liabilities stay with the seller and what liabilities will go to the buyer. After the buyer has had access to the data room, the management presentation, the site visit, it's going to be asked to mark up the purchase agreement. As it's marking up the purchase agreement, the buyer is deciding which liabilities it wants to assume, which liabilities it doesn't, what indemnification rights the seller may have, what limitation damages the seller may have, and really the insulator agreements like the transition services agreement. Clearly this is where the interests of the buyer and seller diverge. The seller wants a clean exit. The seller wants the greatest amount of cash value and is short of indemnification rights as. I'm sorry, as limited indemnification rights as possible. And in terms of compensation, in terms of how long they'll last. And of course the seller wants a limitation on damages, the buyer wants the opposite. And so that's why it's important for the buyer to mark up the agreement at a certain date after this. And so this is, we'll call this round two. The seller will receive a marked up purchase agreement and a bid letter. And really the marked up purchase agreement, we're not loi.

You know, I'm thinking of the banking process that we would do an IOI to get down to the 4 to 6 and then have them submit LOI. Or in this case, which I, I'm curious because I've heard of processes where there is no exclusivity period and you run it through an end. And is that essentially what you're doing is.

Yep.

Presenting your marked up pa?

Sure. So the process I'm describing is an auction process where you would receive the marked up purchase agreement and a bid letter. Depending on what the process dictates and depending on the interests of the parties, this could be where you have that binding letter of intent. I commit to you that here is the markup. I will sign this if you agree to this seller. I will sign it tomorrow. I also have financing ready to go. I'm also committing to treat your employees a certain way. Since a markup typically involves negotiation. I've seen it both ways where that's binding and non binding. To your specific question on a binding letter of intent, where I've seen that most often used is in a bilateral negotiation. You've gone through a lot of the steps I've mentioned, but it's really only one other party. You really have been throughout the entire process locking down the different issues, whether it's consideration, identification, liabilities, how employees will be treated, severance, et cetera. And in this bilateral negotiation, if you've been locking down these issues over time, at a certain point the buyer will provide that binding letter of intent. Okay, it's time for me to fish or cut bait. And so here is my binding letter of intent. I am willing to do the following and be bound by this, at which point the seller will either accept or reject. In an auction process, you rarely see that binding letter of intent because you're really going step by step to narrow down the number of bidders until you get down to one. Once you get down to one, go back to what I just described about a bilateral relationship. You may get to that binding letter of intent, but in at least the phase I'm talking about, Right now, throughout the auction process, you're not quite there yet.

And you could run a process where you don't have anything binding, you just run it all the way to a direct purchase agreement.

Absolutely.

Which isn't fun for a buyer, I would imagine.

No. And once again, the market dictates a lot. If you have a very attractive business and asset, the seller has all the leverage in the world and the seller can dictate this will be non binding until I decide it is binding. That gives a seller a tremendous advantage. One, they know how much interest this business or asset is generating. They understand where each party is landing in terms of consideration. Now the market shifts overnight and you may be in a situation where the asset or business in question no one really wants and therefore the leverage is tipped toward the buyer. And I've seen situations where the buyer in really phase one when they get to teaser. I'm only interested in discussing this. If I get exclusivity, don't bother me. If I'm not going to get exclusivity, it all comes down to like anything, life. Who has the leverage and are they willing to exercise it.

Have you ever sent a time bomb offer?

Yes. And it's worked and it hasn't worked. But frankly, if you're the one sending that time bomb offer, you better be able to be prepared for the other person to call your bluff. I also have seen this. You send a time bomb offer, it's rejected and then the other party goes, just kidding. Can we continue the conversation now? Clearly in that case, the leverage is tipped to the other side. So once again, only make a threat if you're willing to act on that threat. Negotiation 101, it's just.

Yeah, in that situation, what do you do? So let's go back to I'm selling a business and now I'm doing a carve out. What are the main differences when we're at this stage? We talked about TSAs, which I know is a big thing. There's a lot of these little ongoing things we're going to have to deal with that we need to document, really lay that out. Besides TSAs, which we can definitely unpack here, is there anything else?

The TSA reflects a broader question when dealing with carve out versus divestiture. A divestiture and goes back to the strategy you're looking to walk away, have a clean exit. Your pressure points in a divestiture is to get the most amount of consideration and to limit your liability across the board. Those come into play in a carve out as well. But in a carve out you're still living with the person. Especially if you're carving out an industrial or other type of site, you're still going through the same gate as the buyer. Your employees may still be grabbing lunch with the buyer. You're still going to have to work with them on issues that impact the site, whether it's garbage disposal, parking, traffic issues, community service events. It runs the gamut. Your ability to be as aggressive in a carve out, I would say is not as great as it is with a divestiture because you're still living with the other party and as employees. Importantly, whether it's TSA or other ancillary agreements, have you thought about all the issues I've mentioned? How two separate businesses are going to operate and work together within the same geography and the legal team with the business and the operation and the commercial teams need to sit down and go through every single scenario because that is where things fall through the cracks. And if one of those carve out agreements, those intercompany agreements that will help govern the site are forgotten, then whoever has the leverage post carve out is going to use that leverage. The best time to address the menu of issues I've shared with you today is during the negotiation of the carve out itself. You never want to kick the can on the ancillary agreements because I see more often than not that comes back to bite you and because the leverage shifts after the deal is done.

Because you're drafting the TSAs, the legal.

Team is drafting the purchase agreement and the tsa. So in terms of the process letters I've mentioned, you may also put besides this markup, this purchase agreement, please tell us how you're going to manage our employees that may transfer and please share what transition services you may want. In addition, with the purchase agreement, I may send over a suite of ancillary agreements that address not only transition services but trash, easements, real estate, operation permit and other issues with a carve out. To be quite candid, the purchase agreement is the least of my concerns because the purchase agreement I and every lawyer in town has a template for the purchase agreement and you can refine that as much as needed. For any particular deal. Where a lawyer brings the most amount of value in a carve out is is thinking about those ancillary agreements bring to bear their expertise and experience of what about this? What about that? How are we going to manage this? If the other party now has control of entry and exit, how do our employees get in and out some of the most mundane pedestrian stuff you can think of. But if it's not done right, you will see more value erode from the deal than you could possibly imagine. If those ancillary agreements are not done properly and softly. In my personal view, a good lawyer will be focused on those ancillary arrangements and agreements from day one. And at carve out, that's where the value lies.

There's not a lot of templates for those. You said most of them you got to draw from scratch.

There are templates, but you think about it. With a purchase agreement, identification, warranty, purchase price, any decent lawyer can go through the sections of a standard purchase agreement. But a services agreement are particular to the services at that site. A transition services agreement will be particular to those services you're willing to provide post close. And the buyer is willing and eager to pay for post close. So that requires far more work and far more teamwork. Because as the lawyer, I'm not at that site day in, day out. I'm going to have to reach out to those folks who are to share with me what services, what dials need to be turned, what items need to be thought of that are essential to run that site. And frankly, as the lawyer, I'm not in a position to know that. I will depend on them to let me know.

When you're reviewing this with buyers and I'm trying to imagine them, does they, do they see this somewhere in the sim where there's, here's an itemization of TSAs that are likely going to be part of this deal.

Yeah, you will more likely not have it in the sim. Now here's a fundamental difference between your strategic and your financial buyers. Your strategics, which are more likely than not in the same industry as you, run the same types of sites as you. They know what to ask for. If you're missing something, they'll go, what about this? What about that? How are we going to handle this? And if they forget to ask, they probably have folks already on the payroll. They know how to do all that stuff. So your financial buyers are going to be far more dependent on a TSA and far more dependent on you as a seller to think about all these ancillary agreements. Because it is highly likely that your strategic buyers understand the issues involved and understand the responsibilities they will have to take on day one over your financial buyers who are just looking at it as an investment and they have zero experience when it comes to running and operating the site that is the site or business being sold.

What are some Do's and don'ts of TSAs.

Well, as a seller, you want to provide as few services as possible and for as short amount of time as possible. It all goes to your strategy. More likely than not, your strategy is I want a clean exit. So you want no TSA if possible and if there a TSA is required, as short as possible. Goes back to what I said earlier. What's your strategy? Your strategic may or may not be the highest bidder, but if it gets you a clean exit and that's your end goal, you may sacrifice some of the consideration to effectuate your strategy. Your financial buyer over your strategic will probably want a longer term and more services because their learning curve is much steeper and they're going to have to get up to speed on what it takes to run that business or site. Moreover, with drafting any tsa, the mantra I repeat over and over again to anyone on the team is helping me. No good deed goes unpunished. And so you may need to do a TSA to get the deal done, but you should be charging an appropriate amount. The TSA should not be a giveaway to get the deal done. I talked a few minutes ago how ancillary agreements can erode value. Those TSAs if you're dedicating a tremendous amount of your resources, licenses and people to managing the TSA relationship and not getting compensated, you're losing money every minute of every day that TSA goes on. So remember, the TSA should be for fair value or a markup frankly, because you are providing a service and the TSA should also contemplate your goal. If it's a clean exit, is your primary goal, then as short and sweet as possible.

There's a whole topic and talk about the dollar company for sale and everything's all through the TSAs and what you're actually getting.

Exactly. But it all comes down to why are you doing the deal. And that should govern how you package your marketing materials, how you package your data room, how you package and draft your agreements, including the purchase agreement and including the TSA and other ancillary agreements. Everything is dictated by the strategy.

Let's talk about the difference between purchase agreement of an acquisition versus a carve out. Are there any distinct differences there in.

Terms of what the seller wants? In a divestiture, you want the clean exit. With a carve out you have those ancillary agreements and so your ability to be aggressive is muted. But as the purchaser you also have different interests. In a carve out, you do not want value being eroded through those ancillary agreements as well because you have decided looking at that asset or business in question is worth worth x amount of dollars you have paid that amount. But if you are now paying a premium via those intercompany agreements or via the psa then how you justify that deal to your shareholders is slowly creeping away the focus and I've seen this forgotten more often than I can count the focus in a carve out whether you're the purchaser or the seller really needs to be those answer agreements because the purchase agreement don't get me wrong, it's very important but once a dollar number is established the consideration for the asset or business in question is established. Yeah, you're going to know negotiate identification. Yeah you're going to negotiate lt's but where your value can increase and decrease after close and for a 2, 3, 4, 10, 20 year time period are those ancillary agreements. So they need to be done right and they need to get the attention they deserve.

Andrew, what's the craziest thing you've seen in M and A?

Everyone forgets why we're doing the in the first place. Deal fever. Deal fever is a very deadly thing and very costly thing. We probably could do an entire discussion on some of the worst deals ever. Thankfully, I've not been part of those because they've been ranked and no company I've ever been associated with is listed on that. You start off with Time Warner and AOL and you can go down the list and you forget why you're doing the deal. You forget how much the asset is worth and you let your ego get in the way. And I've seen all three occur and it's never good for the shareholder.

You've never seen it in person on a deal. You've seen it from the sidelines.

Thankfully I have. I've been very fortunate to work with some top notch teams.

I wanted a story that's so true, you wonder. There's so many of those classic examples that you read about that anybody can reference. Even books I've worked on we've referenced. But it's so true. Have you seen any studies around that?

I think Harvard Business Review has done some. The AOL Time Warner deal has been examined over and over again. You look at GE and their acquisitions over the years which in retrospect and even in real time made no sense that they've had to unwind. Look, there's a very sad history of companies pursuing transactions that did not advance our strategy and over time it eroded shareholder value over time. It had a horrible impact on employees through bankruptcy or other events. You just come down to why are we doing the deal? Are we paying the right price? Are we selling it for the right price? If you're on the other side, are we checking ourselves and checking our egos at the door? And one of the things I always encourage is a strategy moment before any discussion around any transaction. Let's remind ourselves why are we doing this? And is the discussion we're about to have and the decisions we're about to make those advance this strategy. Going back to the campaign I mentioned a few minutes ago, my job is to elect that candidate. My job is to advance the strategy of the company. If I'm taking any action that goes against those two goals, I'm doing the wrong thing.

Thanks for bringing such a great theme to this podcast.

Thanks. I've enjoyed it.

Those of you listening, if you know anyone that's been a victim of deal fever and would like to share their experience. Because we always want to learn. We always want to take lessons learned. And that's what M and A science is about. Learning from experience. But if you know anybody that would be open just to sharing, I think it'd be great just to us to learn a little bit more about what are the cause and effects and how to treat it.

Absolutely. Unfortunately, it's a common ailment that good management teams and good lawyers try to squash.

We'll create an initiative, build a cure treatment for it.

Build a cure, exactly.

Andrew, thank you so much for your time. I enjoyed this conversation and learned a lot.

Appreciate it. Thank you again.

Till next time. Here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post. Add a review on Apple Podcast. We'd love to hear from you. If you need help standing up an M and a function or option optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A science reflect only those individuals and do not reflect the views of any company or entity mentioned or or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.