M&A, Due Diligence, and Integration from an Attorney's Point of View

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. In this episode, Luke Fedlam and I explore M and A in the legal world. Luke's experience includes working at a mid sized law firm focusing on mergers and acquisitions and as an in house M and A attorney at Scott's Miracle Grow where they focus on strategic acquisitions. He shares his knowledge on getting assistance from outside counsel as well as representing the seller. We discuss renegotiating terms, financial leverage and the integration process. Here's more on Luke's background.

So I'm an attorney. I'm mergers and acquisitions attorney. I've had experience working both at a law firm and then now in house at Scott's Miracle Grow. When I was an attorney at a law firm it was a mid sized law firm and I focused on mergers and acquisitions, mostly middle market sized transactions where oftentimes we were representing the seller. And now that I'm at Scott's, I've been at Scott's for a couple years and the focus here is on a lot of strategic acquisitions. For the most part we've been very acquisitive over the past few years and I've gotten the opportunity to work on numerous deals of varying sizes and complexities as I advise my business counterparts and work with our outside counsel to execute kind of our strategic business vision. So that's really the focus and that's kind of where my, my background lies.

You know one thing I'm curious about is you're an in house attorney and you mentioned you work with external outside attorneys. Can you explain that, what the difference is and how maybe your perspective or value is different than an outside counsel?

Absolutely. As in house counsel or a company, my client is our business and so I work typically with our business leads, the people who are going to take over that business that we acquire as well as our deal leads, who are the people who are managing the actual transaction from a business perspective. And I work with them as my clients to help advise and protect them through transaction. As I work with outside counsel, the focus there is for them to help us to execute the deal, to make sure that everything gets papered the right way. And so I'm playing a dual role of managing our in house folks as well as, you know, our in house business counterparts, but also our outside counsel. Outside counsel I lean on for one for drafting, but really more importantly for their legal advice for their expertise in complex transactions. Because my expertise really does lie in our business. So I know and have to be intimately familiar with our business. So I can highlight to the outside counsel kind of an understanding around what our business objectives are and those things as it relates to our business that we need to protect for, that we need to plan for and that we need to strategize around. So I'm kind of that legal business expert, if you will, in house around our business. And so I can advise our in house business folks around kind of some things to avoid, things to watch out for, negotiation perspective and point of view. But then also kind of turn on the other hand and work with our outside counsel to ensure that they're drafting agreements and helping us to organize a transaction that meets our business objectives.

That makes sense. You're focused on the intricacies of your business while the outside counsel may focus on very specific things related to the transaction itself.

That's exactly right. We lean on our outside counsel to be experts in various issues. You know, I could draft a purchase agreement, you know, I could draft a lot of these documents, but, but don't have the time to, because my time is spent on delving into the specifics of our business issue, spotting triaging issues kind of like as soon as possible. And then sometimes there are issues that we need people to, our outside counterparts to delve into particular issues. And a lot of times our issues in our business could be very complex because there could be an issue that has regulatory implications. And what does that mean from a drafting perspective? What does that mean from, you know, kind of protecting, protecting us from our, you know, in our reps and warranties, etc. And so various issues need various expertise. And so, you know, what we do is we lean on our outside counsel for that. And when you think about the transactions that we're dealing with on a daily basis, they're going to have areas of interest around environmental health and safety, regulatory issues, intellectual property issues, tax issues, employment issues. And so there are all of these different things, you know, areas of interest that are affected by any of the transactions that we do. And so we really rely heavily on our outside counsel to help advise us through those issues and then their specific kind of M and A attorneys to help just push the transaction along from a legal drafting perspective.

So when do you get involved in a transaction?

So I'm involved in the transaction from the very beginning, when we first identify a target that we're interested in. Typically there have been a couple, maybe one or two conversations, kind of from business lead to target, you know, target ownership, where there's initial conversations showing some level of interest. But as soon as we get to the point where we believe that it's a target that we're interested in having some type of strategic transaction with, I'll get involved. And so part of that is because we want to make sure that I have a solid understanding of kind of all of the transaction dynamics. And so when we start to think about, you know, even contemplating either an expression of interest or a letter of intent, we want to make sure that I've, you know, had that opportunity. And we have another M and A attorney as well, where we've had the opportunity to be a part of those conversations so that we're not leaning on either our outside counsel or even drafting ourselves a letter of intent that doesn't have the context of kind of the overall picture. So we do a lot of strategic vetting when we're initially looking at potential partners, potential transactions to get involved with. And so through that, we constantly are having internal presentations to see where a particular transaction might fit into our overall family of products or various solutions that we're solving for. So our legal team, especially myself and another M and A attorney, are heavily involved in those upfront conversations and analysis to determine whether or not a transaction makes sense for us to make. And then once that decision is made, and it's really a group decision, both from our leadership, our executive leadership, as well as kind of all of the members of our deal team, if we decide that this is a transaction we want to go after, then we're already positioned, I'm already positioned to help either draft that LOI or work with outside counterparts to have it drafted and move forward in the transaction.

You're really early in the transaction. What's your approach to due diligence?

So, you know, it's interesting, our approach for due diligence, and one of the things that we're big on is before we really get into the LOI phase, we want to have a little bit, as much as the target will share, a little bit of financial diligence just to understand so that we can make put together an LOI with an offer that makes sense. And so we obviously, as we're the buyer, oftentimes we want as much information as we can possibly get as early as possible. But oftentimes that just doesn't happen. As everyone well knows, the target wants to protect as much information as possible until we have some type of LOI in place. So typically, we like to get the financial information first so that we can use that from a tax perspective as well as just a valuation perspective. And then once, typically once we do enter into an loi, then we kind of open it up and we unleash the process of due diligence.

You know, one question, are most of your deals proprietary or through a bank process?

Typically our deals are proprietary where we have either identified a target or someone has approached us, target has approached us, showing interest in potentially selling or having some type of strategic relationship. We do have banks, investment bankers involved in various transactions, transactions depending on what those transactions require, typically size, complexity, etc. And sometimes if we're going after a target that maybe is involved in an auction process, we'll have others investment bankers involved in those.

Now do you find it easier to get access to information in the proprietary transactions versus bank control process?

That's a great question. A lot of times on the proprietary side we can get a lot of generalities in advance. So because now you're talking oftentimes about, you know, potentially family owned businesses or businesses where there's been a significant relationship built between somebody on our business side and that business owner. And with that you can get a really good sense without having to see all of the documents, all of the data. You can start to get a good sense for things that we'll need to look out for potential issues or what type of transaction it's going to be. We'll see on, on the kind of the quote unquote more formal or you know, bank related transactions. That's where we'll get it. We can get a sense, but it's a completely different style of transaction. It's much more formal, if you will, emotion isn't as involved. And so again, at that point we get the information that either the banker has or that the target is willing to unleash at certain points within the timeline of the transaction. And so, you know, oftentimes what we'll see are situations where we'll get some initial dump of information, typically financial, and then as we progress in the transaction then they'll open up other parts to whatever data room we're using and kind of, you know, make us make available us all the other information.

It seems like you get more control when it's a proprietary transactions. Does it also affect the time length.

In completing the transaction control that we kind of may have in the proprietary transactions? It doesn't necessarily affect the transaction timeline really at all from our perspective. Typically the biggest driver of the timeline is the target and whatever timeline they have in mind. So here at Scott's, once we've identified a target that we're interested in and creating a strategic transaction with, if we all are on board with executing the transaction, we're going to drive as fast and as hard as we can to get it done. But we can only drive as fast and as hard as the target is willing to go. And so oftentimes, as you know, with private companies that are family owned, a lot of times there are a lot of other things that are involved with their sale of their business, like estate planning, that they'll have to go through tax planning on their end. And so while we may have quote, unquote, control in terms of better positioning, I guess how you're defining control, if we have, you know, kind of better positioning in that, you know, we're, we're driving the transaction, again, it's only going to be driven as fast as that business owner is willing to go.

That makes sense. What are the biggest risks that you come across in deals?

The biggest risks that we come across in deals are really the risks of the unknown. And in any transaction, you try to get as much information as possible through due diligence. You want to capture, you know, everything that you can. But oftentimes, you know, there are situations where you just weren't able to capture all the information or something came up that wasn't expected. And those are the risks that you always try to mitigate. So obviously we'll do that through transaction documents, through indemnification. But the biggest risk is just that unknown because nobody wants to be in a situation where you're going through a transaction and, you know, either you have closed or you're just about to close and new information comes to light that people weren't aware of, which obviously can, can derail a transaction. So, so definitely biggest risk is, is just the risk of unknown information.

What would be some examples of something you would come across that would be a showstopper in a deal, coming across.

Showstoppers in a transaction, there really aren't a lot of showstoppers from our perspective. A lot of times we want to be able to figure things out and figure out a way to either protect ourselves through indemnification and other means or just, you know, figure out a solution to the issue before we close and then move on with the transaction. So one showstopper that we came across in a transaction, I guess about a year ago was outside of the US and it was a situation where we wanted to purchase actually a peat moss field where they harvest peat moss. And we were going back and forth for actually a few months with the owner. And these peat bogs, it's a natural resource. And so some of these peat bogs are owned and leased by the government and others are private owners and you can purchase them from private owners. And so we were looking to purchase such a bog from a private owner. And through the negotiation we're going back and forth on a lot of different things on price and everything. And we ended up getting to the point through diligence where we found out that zoning, that the land wasn't actually zoned for harvesting. Now this is an incredibly small town and what's interesting is that the owner had been harvesting for a whole number of years, but that's just a private owner. And so now if a publicly traded multinational corporation comes in and, and we want to take things over and start harvesting, obviously the risk profile changes completely. If that zoning didn't change and so the actual owner didn't want to push to get a variance, a zoning variance in the local municipality. I think obviously because of the risk that she might then be barred from harvesting on that land since she wasn't able to or wasn't willing to push to get that variance, then obviously that wasn't something that we were going to be able to get our heads around because again, there's just too much risk for us to buy an entire multi acre peat bog and then ultimately not be able to harvest it. Then we're just looking at a bunch of land. So again, showstoppers come up. They're somewhat rare because usually if both parties are trying to get a transaction done, you're able to work your way around it. But every now and then you get one of those showstoppers that arises.

Yeah, that's interesting that when you mentioned the risk profile changes and it's a lot more risk for your company to take just because here's these absence of licenses and zoning. But they're going to look at it different when a large company has a possession of it versus a private owner.

That's exactly right. And we deal with that quite a bit because oftentimes if we're doing transactions, let's say that are in smaller towns where the owners maybe know the local officials and things like that, they may have run their business in a way that we're just not able to run when we go in, we buy business and then run that business. We have to follow every regulation, every ordinance, every law to the letter just because of what it sets ourselves up. For and what we want to protect ourselves for. Whereas an individual owner may or may not take that same stance. And if we come in and purchase or acquire some type of manufacturing plant or some type of asset, we want to make sure that we're going to be able to go and completely execute our business in a way that we know we have to, in a way that we want. And if for whatever reason we're not able to do that, then obviously the risk changes and our desire or appetite for such a transaction might change as well.

Now, are there certain things that come up where as soon as you see it, you, you know you're going to have to do some additional diligence on it?

That's a good question. It's a pretty expansive question because I think there are things that come up across multiple different areas and functional areas that will cause us to know we need to do more diligence whenever we have, like we can pick almost any functional area, intellectual property, for example. If there is something that comes up where there's been a challenge to the target's intellectual property, either through their filings or use of certain names or intellectual property assets that we're going to purchase as part of the acquisition, then instantly red flags, and we need to get to the bottom of whatever those challenges have been to make our own assessment as to the validity of that target's ownership or use of such a mark. If we look at environmental health and safety from our perspective, there could be information that comes up in like a phase one environmental report around the actual land that we're buying that instantly more diligence might be required based on what the findings are. And you can really do that kind of, you know, based on each functional area. And that's why here at Scotts, our diligence team, or the people rather that are involved in due diligence is very expansive. And so, you know, when you think of this notion of really kicking off or unleashing our due diligence process, it's very in depth. And we have experts in various areas, from intellectual property to environmental, health and safety regulatory, our risk and insurance teams, our real estate folks, our tax folks. So there's a lot of people that are involved, you know, obviously HR and even we call them bt, the same as IT or information technology teams are involved as well across the board. So that we can make sure that everything that we're buying that the target either appropriately owns and, or licenses that which we're acquiring. So it's a, it is a very in depth diligence for us is a very in depth process.

So it sounds like there's a lot of things that could trigger additional diligence. What about items that would cause you to renegotiate terms?

Yeah, so I'm actually dealing with that as we speak. You know, potentially renegotiating terms a lot of times is going to have to do with the financial aspect. And so, you know, being in a situation where, you know, and this has happened, you know, various times where we maybe create the LOI or look to create a LOI based on certain financial terms and we ultimately realize that the numbers really aren't what we thought they were. And so therefore we need to renegotiate either the amount that we're willing to invest in or purchase, or if it wasn't a complete acquisition, then the percentage ownership that we're looking for. So we've had situations in the past where we initially were talking about doing the LOI and valuing the company based on obviously using a multiple, but based on their earnings, their ebitda and if earnings don't end up being what they projected them to be or what they thought they were, or we've had situations where debt has been higher or coming higher. Once they've kind of put everything together than they maybe initially thought or had initially relayed to us. In those instances, it's a no brainer that we're going to have to redo our financial modeling and determine one, if we still want to do the transaction and then two, presuming that we do what the new financial terms of the transaction will be. But typically when we're renegotiating terms, financial terms, it's typically because of some change to the financial picture of the target company. When we come up with things issues in diligence, then typically what we're doing is just figuring out ways to protect ourselves against them as opposed to renegotiating the financial terms of the transaction.

Would there ever be things you find in diligence that would cause you, hey, maybe this is an unexpected expense or some big change we have to do fundamentally with this company, or maybe something affects integration plan that would cause you to change the finance perspective?

Yeah, there are definitely things that could arise in diligence that will cause us to change the financial terms, but it really wouldn't be changing necessarily the overall valuation financial terms, if that's what you're referring to, but rather it might cause us to require the target to pay off or use sale proceeds to pay off certain things at closing. So, you know, Oftentimes we may come up with various agreements or different contracts that the company is involved with that, you know, that we don't want to take on or that come up that, you know, we're, you know, we don't, we don't see the need, you know, to either to take on their financial obligation that we may negotiate out of that and cause the target to then to satisfy those. But typically those are the types of situations where we would negotiate some type of financial benefit to, you know, to our acquisition of the company as opposed to necessarily just, you know, renegotiating the purchase price. The situation that we, that we find ourselves in a lot of times with the targets that we go after, they're typically family owned businesses and the meaning of the purchase price, it's valuable to them. So oftentimes they'll have a number in their head that they want to get. And if it makes sense and we can prove it out through our financial modeling and valuation process, then they come to that number, whatever that number might be. And let's just say it's whatever $90 million, let's say. And if that were the case and something came up in diligence, our first move is not going to be to adjust that 90 million to 89.5 million or 89 million or some other number. It rather be to figure out how can we resolve the issue at hand and if it would require some type of financial payment by the target. There's something to that whole notion of behavioral finance and just personal perspective on things. For us to say we're going to pay this contract off or we're going to close this contract out and require it to be paid in full at closing is a different situation to a seller than for us to say instead of $90 million, we're going to give you $89.7 million. So it's, and that's kind of the art of the deal, if you will, in the sense that we have to have to be smart in terms of how we handle the relationship aspect of the transaction as opposed to just the science of the deal, which is the hard valuation numbers and kind of the actual organization of the transaction itself makes sense.

So you're not using the diligence process to negotiate price.

Not typically. But that's not to say though that if there' big and I just can't think of any examples that we've necessarily dealt with if there's something that big that comes up outside of financial, again, if it's something in the financial aspect that we uncover through diligence that earnings that they reported to us were incorrect or somehow misstated or that something else was uncovered in terms of a loan, let's say to, you know, some past owners or family members or something like that, that gets uncovered then absolutely, that's a no brainer. We'll renegotiate purchase price based on, on what, what those findings are. But typically if it's the other diligence around, non financial diligence, typically our first move is going to be to figure out how to handle that before we necessarily go straight to purchase price.

Got it. One thing I was curious about is your relationship with the counterparty's attorney. How does that play out? And if you ever had somebody you just wanted to strangle.

So working with counsel on the other side can always be interesting. I've had situations when I was at a law firm working with other counsel on the other side that you absolutely do just, you just have a hard time having a smooth transaction with. They can be challenging. And that's for a host of reasons. Sometimes it's posturing. Sometimes other target companies use their outside counsel to try to be, you know, to try to play the bad guy role so that they can play the good guy role. And that's fine. I mean that happens in the situation here. Now that I'm in house, it's interesting because oftentimes I'm working with, my direct contact is either with the owner of the target or their designee for the transaction. Sometimes they might designate a COO or a CFO to be the one that kind of manages the diligence and that kind of negotiation process. So I'm usually working with them, sometimes with their outside counsel. But because I'm in house, usually the outside counsel is pretty easy to work with. They may give our outside counsel a hard time, but that's what we have outside counsel for as well. Right. I mean we get the joy of not necessarily making them the bad cop, but rather allowing them sometimes to deliver hard messages to the other side. And so, you know, that kind of comes back to this whole notion of how kind of the art of a transaction. And there are a lot of different ways to negotiate various items. Right. So it could be business owner to business owner. So our in house person, non lawyer on the business side, you know, working directly with the owner of the target company to have conversations around, you know, specific issues. But then it could also be me as the in house counsel having conversation with their in house counsel or with their owner. Or it could be situations where we have our outside counsel going direct to outside counsel to be able to deliver messages as well. So it's kind of finding that balance. But what's interesting is at the end of the day, everybody has their own personality and style and there's nothing better than working with in house and outside counsel on the other side that is collaborative, that wants to get a deal done, that are smart around transactions, that think through and are thoughtful and kind of smart in terms of how they want to work through the transaction. When you have those situations, and especially when you're dealing with complex strategic relationships, it's nice to have qualified, smart, thoughtful counsel on the other side.

So there's some etiquettes in the industry and it doesn't always turn into a redline pissing match.

Yeah, there is definitely some etiquette that, you know, both in house and outside counsel use, you know, especially to get a deal done. Now we're fortunate, right? So I'm fortunate in this role that typically we're the acquirer. Typically we're much, much, much larger than the targets that we're going after. So because of that we do have the leverage, but we don't use that to, to our benefit. Because ultimately when we buy strategic asset or if we make some type of strategic investment in a target company, you know, we want to be good stewards of whatever that is that we just bought, alright? So the family that created it, the people that created that asset and grew and developed that asset to the point that it was something that we would want to purchase, we want to be good stewards of that and make sure that we can continue to grow that asset. So it doesn't help us at all to use our leverage in ways that really make us act like an ass to the people that we're working with and trying to build a relationship with. Now when I was at the law firm, typically we were on the sell side of the people that we were representing. And in those situations, I have been in situations where the other side had the leverage and they used that, I would say negatively in some respects to their advantage, which can really just make for a challenging overall transaction.

Any interesting ways to counter that?

Well, a couple things. I mean, I think there are strategic deal ways to counter that where if you're representing, and I'm going back to when I was at the law firm, if you're representing a seller, oftentimes the seller doesn't have to sell. And so I think even though the acquirer has kind of financial leverage, the seller owns the asset and so the seller can very easily put things on hold, slow things down until things kind of calm down a little bit, if you will. So in our respect, typically we have the ability to walk away. We have the ability, as we look at targets, if the other side is being kind of obstinate and not trying to move forward in a productive manner, we have the ability to say, you know what, we're just going to. We need to take some time or we need to walk away for a little bit. And in those situations, the whole goal is to get to the point where ultimately people feel proud when we close a transaction on both sides. Proud of how people conducted themselves, but proud that, you know, we feel like we paid a fair price and the sellers feel like they got a fair price.

It sounds like culture plays a pretty significant role in this process. Are you involved in the integration process?

I am involved somewhat in the integration process, typically just for the initial legal integration and making sure that legally that all of our ducks are in a row, that all new agreements are in place, et cetera. But we have a very robust integration process. In fact, here at Scotts, we have a team that is part of our strategy team whose focus is on integration. And what we do that's unique, I think, is that we have members of that integration team involved in our deal team from the beginning. And so now it's not like the entire deal team just kind of closes the deal, shakes hands, packs our bags, and goes on to the next transaction. Even though it feels like we do sometimes. We have people on our integration team that are involved from the beginning, so they're constant throughout the transaction through closing, and into the integration process, so that the owners, who oftentimes are staying around for a period, some period of time, have some level of comfort in still having a familiar face or familiar faces involved as we go through that integration process.

It's interesting because the more I talk with different corp devs, it seems like that's how the process matures. Where originally it may start off with completely separate teams for diligence and integration, and it becomes this handoff. But as a company goes through a series of transactions, they evolve into similar to what you described, where the integration folks are heavily involved and get involved in the transaction as early as possible and are part of that diligence. And I know one thing, Luke, you mentioned is the importance of process. Could you maybe tell me a little bit about that process you have and how you keep it intact to manage that many transaction?

Sure. So your integration really is as good as your due diligence is. And so the process really does start back at due diligence. So we have, you know, most law firms are quick to provide a, you know, due diligence request list that will go from the buyer to the seller of all the information that the buyer will want to have about a particular target. What we do is we have done enough transactions over the years that we have what I would affectionately describe as a daunting request list of a ton of information. And so what we do is it's a master list. And There may be 400 different entries of what we're looking for. But what we do is before we even move into the diligence phases, we'll have a kickoff meeting where all of our functional areas will be represented, and we'll go through the transaction, explain to them what type of transaction it's going to be, the structure, you know, the timeline, so that the functional experts have a good understanding of the transaction. And so we know whether we'll explain whether it's going to be stock or share purchase versus an asset purchase and the implications that that has. And so then what we have is all of our functionality experts will go into that massive request list and start paring it down and taking out those lines, those questions that don't apply based on their knowledge now of that particular transaction. So then what we get to is we get to a much more manageable request list that will be sent out to the target. And throughout the process, all of those functional leads, those functional experts here in house will be involved in the process. And so we'll have regular. We have a regular, I call it battle rhythm, if you will, where we get together, we talk through diligence. Any findings, you know, are kind of. We use that, you know, red, yellow, green markings on all of the different requests. You know, is this something. Have we gotten the information? If we have, you know, is it green? Are we good to go? Is it yellow in terms of something that we need to do some more investigation in, or is it red that something came up that got flagged that we definitely need to spend some time with? And so that process and our folks on our strategy team that ultimately help with integration really helped. They actually manage, oftentimes manage that request list in terms of the information that's coming in. And so they manage all of our different functional experts across the company to make sure that we're getting that information that we need, that it's getting reviewed, analyzed, and then ultimately answered so that we can appropriately draft documents and move forward in the transaction. So that as we go through the transaction, and let's say that once that kind of request list gets closed out, then that same person or persons from our strategy team help to manage the integration process. And so again, we have another kind of checklist of information and all the different functional areas of all the things that have to happen during our 30, 60, 90 day, 180 days into a transaction, so, so that people are aware of what has to happen and then ultimately can report back to the larger group, including the business owner, et cetera, kind of where things stand. So there is a very methodical process that we work through. So, you know, legal will present any issues. It's all in the same format. Are there any issues in terms of integration? Where are we at with all the various, you know, contracts and agreements that need to be either resigned, re reinstated, et cetera? You know, we'll go through with ip. What's the transition looking like in terms of, you know, transferring assignments and getting things re registered in our name, et cetera, onto environmental, onto, you know, tax, etc. And so everybody will go through and will represent their areas and that key integration person or persons will be on site, will. They'll be on location, wherever that target might be, so that, you know, they can help manage that actually on site. And it's not just something that's done from afar because again, going back to the whole notion of building relationship, what we don't want to have happen is a situation where we buy a company and then we don't actively engage on site and build relationships with the employees that we are keeping on site. And you know, it just creates a bad situation where we're the, you know, we're the headquarters. But the people, wherever that target might be, don't, quote, unquote, feel the love or feel integrated, you know, from the perspective of, you know, not having a relationship with us as the acquirer. So a lot goes into it. That integration piece is critical. So therefore we've dedicated a lot of resources to it in terms of people, but then also in terms of process.

How do you overcome that last part? Because it always seems the biggest challenge with integrations, the culture fit, making sure that mesh is there and the positive energy between the companies. Is there a strategy for that or is it just, hey, let's just make sure we got a warm feeling throughout the process. What do you guys do?

Yeah, so it depends. And so we have bought over the past few years a lot of different types of companies. And so while we Always want to. We will always share what our expectations are, what our cultural attributes are as a company that we believe in. But at the same time, it's not about necessarily changing a culture. Right? So we're buying companies that have been typically well managed, that have grown quite a bit. And so we want to keep that quote unquote local culture intact. We don't want employees to necessarily think that everything's changing. So oftentimes, with a lot of transactions, we find that a lot of times things like our benefits are going to be better that they're going to be able to have and participate in than what they had previously. We're very, very rich, if you will, with the benefits that we provide to our employees. And so being able to spend time to develop relationships, to help educate the new employees on who we are, what our expectations are, and what it is now that they're becoming a part of and sharing with them that we're not trying to come and change everything. Right. We want to continue to be good stewards of whatever brand that is that we bought. If it's manufacturing, we still want to make sure that employees, employees are taken care of at least as good as, if not better than they were previously. But that takes time, right? All of these things take time and dedication and awareness. And so we have an awareness that, just like you said, we have to kind of be very focused and deliberate about integrating culture and integrating kind of processes and ways of life, if you will, into our processes. But that's done with a confident yet compassionate touch, understanding that people are oftentimes when a transaction happens like this, people are concerned that they might lose their job or that things are all going to change and it's not going to be the same. And so it really is educating, deliberately focusing on the employees and sharing with them what life is going to be like post close of this transaction and how hopefully we're going to make it into a better success situation that they're in time.

And transparency, absolutely.

Transparency is critical. When people think that everything's happening behind closed doors, when the employees don't feel like they're a part of the process, it can be tough. Now, granted, for confidentiality purposes, you know, typically employees don't know until the transaction actually closes. But we're always there on site when the transaction closes so that we can have immediate conversations with the employees that they're not hearing it from press releases or in the news, that they're hearing it from us, that we're explaining the transaction. Typically we do that hand in hand with the former owners. And we talk about how the owners will still typically be in most of our transactions, are still involved in some form or fashion with the day to day so that they're not just vanishing all of a sudden. So, yeah, just time and transparency will help for a successful transition.

What would you say is your biggest challenge in executing that process?

The biggest challenge, I think in executing the process is making sure that the outgoing owners stay engaged in that transition. So typically we will set up some type of consulting agreement or some type of relationship with that outgoing owner to still have them engaged. But that engagement means different things to different people. So oftentimes when they get a sizable check at the end of closing, we want to make sure that they're not going off to sail around the world, if you will. But we'll still stay engaged in the process because we need them to help transition their employees that they've hired, that they know that they have relationships with. We need their help in. In helping make sure that our messaging, our communication, our values are being communicated to their employees. And they're a critical component to helping make sure that that's a successful transaction and transition.

Rather, have you had owner bailout after closing?

We've had owners that have. That have bailed out mentally. We haven't had anybody that has just completely disappeared. But we have had some owners that are required to spend so much time in the business that don't necessarily do that and aren't as helpful as we thought they might be in transitioning clients. The worst thing that I could hear, that we could hear on our end is when an outgoing owner says in response to a question, oh, well, it's your company now. Right? Because what we want to see as best as possible and part of what we paid for is for their help in transitioning. So that what we get is a company that is running as smoothly, if not smoother, than it was previous to the transaction. And so we need their help in making sure that that happens.

So no bailouts, just drop in motivation and engagement?

No, no bailouts. But it's funny how receiving a sizable, you know, proceeds at closing can. Can affect somebody's motivation.

That's good. I interviewed a guy last week who told me the CEO bailed out. He literally was in the Caribbean when he's supposed to be for the first meeting after the transaction.

Wow.

I changed my mind. I'm good.

Yeah. One of the things that we've been challenged by, I think is more the engagement once you. During the process before closing. Because Oftentimes, you know, you have owners that will maybe start spending the money in their head before we actually close the transaction. And we've had numerous situations where Target's owners want to take vacations. And my thought is you can take as many vacations as you want after we've transitioned this business. But for now we need you to stay engaged.

Have you had post closing surprises?

We have had some post closing surprises that have arisen. Not a lot because again, we do a pretty substantial and pretty solid due diligence. There are some things that will just come up and we were dealing with one situation. Now again with a transaction that's happening outside of the US that we're trying to work through that, that again, something that just arose, you know, we didn't know about it and the owners kind of may have known about it. And so we're evaluating how to handle and we're kind of literally in the, in the middle of trying to figure, figure all of that out now. It's rare though. It's, it's rare that major surprises happen. There are some things that come up where, you know, maybe, you know, I had a situation with a transaction where we got a letter that said that they were, it was a vendor that was owed, you know, X number of dollars that they hadn't been paid and it was a vendor that we didn't even know about. And you know, we had to work through that process of figuring out, you know, you know, how it gets paid and by whom and when and everything. And so, you know, things will, things will come up, you know, especially when you're dealing with, you know, family health businesses. Oftentimes they're not as good at record keeping as kind of more large and established corporate transactions and corporate targets are. But again, you know, that's why we ask all the questions and that's why we push to ensure that we're protected in terms of the reps and warranties and indemnification of the transaction.

Makes sense. So little things will definitely come up, but having a good diligence process will help with that. Any big blow ups after the deal?

I haven't been a part of any major blow ups after the deal that I can think of.

What's the craziest shit you've seen in M and A.

Man? I've seen some crazy things, but, you know, when things are crazy, they become easier to identify. So in trying to keep confidentiality, I have seen situations where I was working, I was working on the sell side as outside counsel and I'VE seen situations where a CEO where a company was getting an investment by private equity and when the CEO started to see the writing on the wall that he may not survive the investment, that he or she might have done everything that they could to ensure that the transaction didn't happen and potentially even sabotaging the transaction, those situations are just mind boggling because now you have, you know, you have a CEO on the one hand, but then you have the owners of that target on the other hand and that you're trying to, that they're all supposed to be on the same side. And when that starts happening and they're really not on the same side and you're supposed to be representing them, it creates for some, some crazy shit that you have to deal with.

What would you do to sabotage the deal?

Well, again, we go back to the whole relationship piece, right? So you have situations where, you know, that CEO has a long standing relationship with the owners. And so, you know, we might have a conference call, you know, all hands call with everybody on the phone and we think that everything is one way. And then that CEO then goes and has a personal call with the owners. And you know, the next thing we know, we get a call and things aren't the way we thought they were. So, you know, it's this whole notion of, you know, this idea that. Well, do you, you know, do you really want to have some corporate investor come in that really doesn't understand our business? Right. I mean, you can have situations where, where that can happen. Because again, you know, you're talking about owners oftentimes in all of the transactions that I've dealt with, you have owners that care deeply about their business that oftentimes they've grown that business from the ground up. And so it's their baby. Right. And so, you know, if you have somebody that's telling you like, hey, your baby needs, your baby need, you know, a little bit more, a little bit more tender loving care before we send them off to college, you know, then, you know, maybe, maybe the owners change their mind about doing a transaction.

Wow. It's having one of your own give you the poison pill.

Exactly. That's exactly right.

Yeah. That's interesting. So let's say I am an M and A attorney and I'm taking on an in house counsel role that you've had. What advice would you give to me in terms of things I've learned over the years and just to help me prepare for this role?

If you're an attorney that's transitioning in House, the number one thing you can do is become an expert in the business. That is absolutely the hardest thing to do because you already know the technical side, you know how to draft agreements, you know how to negotiate transactions. But what you need to understand is how the business operates, what are the biggest challenges to the business and the internal kind of politics, the internal dynamic of the people involved in transactions and the interest that they all have. Ensuring that you can create and help to manage a transaction that really serves everyone's interests and ultimately protects the business and what it is that we're trying to do. When I first started and I first transitioned from outside counsel to in house, I started on a Monday and a week and a half later I was negotiating an LOI in Toronto and I barely knew the people that were on the same side of the table as me. And they're, you know, my co workers, my business clients, if you will. Getting a solid understanding and knowledge of the business and what it is that the business is trying to achieve. The strategic goals of the strategic objectives of the business. If you can do that. The sooner you can do that, the more effective advisor you'll be to your business clients and the better manager of outside counsel you'll be because you'll know specifically what you need to protect against and protect for.

That makes a lot of sense and I think that's where you'll probably leave the best impression or create the most value for the company too.

Absolutely. And that's what you want to do. You want to be a value add. And you can add value to transactions when you can help the business to identify issues that they need to protect against and negotiate around before it's too late. So when you can identify those issues, it just makes the transaction run smoother.

Thanks for tuning in to M and A Science. We hope this podcast provided valuable insights. If you have interesting M and A stories or suggestions to share, reach out to me. You can find my email in the Show Notes as well as any links or tools mentioned in the podcast. Join us next time when we uncover more perspectives to successful M and A transactions. This podcast was brought to you by Day One Day one takes an agile approach to the management of the entire MA lifecycle process. We develop strategies to drive innovation to create the highest return on MA transactions. Day one can work with you to implement custom solutions for your most complex problems. Visit ondayone.com to learn more.