It is incredibly important to get the right counsel involved in your transactions at the right time so that you don’t end up in a dispute later on. Jessen Gregory, attorney with Ruddy Gregory, PLLC talks about preventative medicine in terms of business transactions. Jessen says the majority of their transactions are mergers and acquisition transactions where someone is trying to sell or purchase a business or an asset within that business or get financing thereof. RG is a member of an international alliance of business attorneys that they can reach out to if a client has a transaction going on in any other country across the world. Jessen talks about what they do in their firm and shares some useful information about pothole avoidance, de-risking your business, transitioning your business, and everything else you need to know in between transactions.
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Mergers, Acquisitions, And Other Business Transactions with Jessen Gregory
Better, sooner than later. A little prevention.
Preventative medicine in terms of a transaction.
Thank you, Bob. I’m very happy to be here.
I appreciate your time. If you would tell us a little bit about your business and who you serve.
I’ve been practicing for 13 years and I am licensed in California, Colorado and Texas. I’m part of a boutique firm. We have two offices, one here in Cherry Creek, Colorado and one in Washington, DC. There are six lawyers total. We provide high-quality services at an affordable rate. We have the same experience that large firms do. We are a smaller scale version of the same thing.
We have a collection of attorneys. What is the specialty that you guys focus on?
In the Denver Office, we have a general business practice. The majority of our transactions are mergers and acquisition transactions where someone is trying to sell or purchase a business or an asset within that business or get financing for some avenue thereof. In a transaction like that, you always see a piece of commercial real estate, whether it’s the sale of commercial real estate or a lease transaction or transferring that lease, so our business is heavily involved in commercial real estate as well. Our group in DC represents the alternative investment community, so hedge funds, registered investment advisers, private equity funds and the like. We’re also a part of the Alliance of International Business Attorneys. That means that we have a group that we can reach out to if you have a transaction going on in any other country across the world.
For the business owner that’s going like, “That’s not ringing a bell for me,” I’m a typical business owner and I go, “I’ve got a warehouse that’s no longer a key to my operation and I want to liquidate or I’ve got a warehouse and I want to move. I want to sell one and move to another.” What are the typical things that a business owner misses that they should be thinking about if they’re going to go down that road?
I’d like to separate the two into the asset itself versus the real estate because those are two separate questions. I’m thinking about concerns related to both of those.Not affording yourself that ability to have somebody who thinks outside of the box is a detriment to your business and future transition. Click To Tweet
Before we go any further so everybody knows, this is not to be construed as legal advice. If you have questions, what’s all the disclaimer stuff you’re supposed to say?
Unfortunately, I can’t provide the world with legal advice. You have to be under engagement of my services. In a typical transaction where you’re selling something of value or purchasing something of value, you have to understand (1) whether or not it’s heavily encumbered (2) whether or not there are alternative issues related to that asset, (3) how the business itself is being run and (4) how a sale might impact the assets within the business. If you’re talking about a warehousing business, I assume that there are contracts with respected goods coming in and out. You have to understand what happens to those contracts If you’re going to sell. Is the buyer going to be liable to take those over? If you’re the seller, you want to make sure that you are limiting your liabilities and maximizing the price that you’re getting for the asset itself.
For the business owner, we’re looking at pothole avoidance for lack of a better term. The thing is, what do you typically get asked? You said, “Maybe a better way of doing that is talking about some of the common pitfalls that business owners run across.” Let’s say that I’m a Baby Boomer and I have a business and I thought I would live forever. I have decided all of a sudden, based on the doctor’s advice that maybe I’m not going to live forever and I need to sell my business. When you guys get engaged to help a business owner, what are some of the things that you try to encourage them to consider to avoid the pothole down the road?
If I can insert myself anywhere in this transaction, I would try to be involved before the thought of I want to sell my business even comes about. If you have partners, we would suggest something called a buy-sell agreement, which helps a business prepare sufficiently for a transaction either a death, a disability, a divorce or someone voluntarily wanting to leave. I have a multitude of examples of situations where someone would need a buy-sell situation. I can give you one. There was a franchise company based in Colorado here and the majority owner was the younger of the two partners. Business was going great. They had over a hundred operating franchise stores nationwide. Tragically and untimely, the younger of the two partners passed away and there was no buy-sell in place.
The company itself is faced with trying to purchase the estate interest for the younger partner. That still leaves the minority partner in the minority. It’s not a great scenario for him to have had to go into this arena. Essentially, a buy-sell that had been funded by insurance would have been perfectly appropriate in this situation. If I could insert myself before the question comes up, if we’re already talking about someone’s approached me with this price and these terms, what am I looking at? That’s the most important time to contact an attorney. You have a term sheet in front of you. A term sheet in most instances is non-binding except for confidentiality and some other of the provisions usually therein. You have to think about the issues that you’re going to face in the documents, in the term sheet. If you have already signed the LOI without having counsel give their input, then it’s very difficult to peel back some of those layers when you’re trying to negotiate the document. I like to tell my clients and my colleagues that if you can get me involved, if you can get me in front of the other party at the term sheet stage, I can save you headaches and issues that come out and down the road.
I think about the old adage if you think the quality adviser is expensive, try either no advice or poor advice. Your discussions with a general statement, if there some of the readers that are in the boat of either contemplating ownership issues, buy-sell issues or what happens if somebody shows up at my doorstep, the biggest mistake they can make is not calling you. How do people find you?
I think about a typical business owner commentary. My adviser and this tax guy or somebody else has told me what my business is worth, that we could do this ourselves. What would your response be to that?
My response is if you go in against a potential buyer or seller on the other side, they’re going to have a litany of advisers on their side. They’re going to have a CPA. They’re going to have an attorney. They’re probably going to have several attorneys possibly including a tax attorney. They’re going to have people who are advising them all along the way and if you come to bat without the proper equipment, you’re behind the ball. The more you restrict yourself and having the proper advisers on your team, the further your pit becomes. The further you dig yourself into that hole. Once you realize there is a problem, it’s very difficult to come out. One of the things you’d asked me, what are some of the questions that don’t get asked? For me, it’s about the questions that don’t get asked at the onset, In a transaction you’re in a situation where you have to look into the future and think about what issues you’re going to face.
For instance, we were involved in a transaction where a company was a purchasing a service company. We, as counsel, said over and over again, “Where’s the pipeline? Where are the contracts in the future? Where’s the future work coming from? How are you developing your pipeline? How are you getting your customers?” I see work for you for eight months. If we’re going to purchase your company and give you a salary, we need to see more than eight months’ worth of services that you’re going to be providing. Despite our best efforts, that has become a problem post-transaction. That’s one example. There was another example. We do a lot of commercial real estate. Not getting an attorney involved when you’re purchasing a commercial real estate asset if there’s an issue, it becomes your issue to solve when you go to sell it.
If you’re the buyer and you see an easement that’s running through the center of this commercial property, you say, “I’m not going to purchase that property until you have that easement removed.” That’s the obvious solution, but if you buy it without contacting an attorney and understanding what an easement is, then that becomes your responsibility to fix in the next iteration of the transaction. It’s much cheaper to be the buyer and say, “You fix that problem, seller. I’ll buy your property when that’s cleaned up” than to be the seller trying to get your contract finalized and get to the closing table with a clean piece of property when you’re the one who has to fix the problem. Particularly if you’re talking about an easement through the center of your property.Once you understand how someone else is communicating, it's much easier to understand how to react to them. Click To Tweet
I was thinking back to your comment on the contract length on the service company. Had you been involved with the service company pre-sale, one of the comments that can typically be made is can you extend the length of your contracts with your customers. You have visibility of cashflow for some period of time since it will change the value of your company. You think about it, “Why do they know that?” From the seller side, if you don’t know that and from the buyer side, you don’t have visibility of cashflow.
Not only extension rights but also assignability. That becomes a total transaction killer. Again, this is not legal advice. If your contract says something like, “This contract is not assignable by other parties without the prior written consent of the other party,” why don’t you add some additional language that says something like, “Except for upon the sale of all of the assets of the company.” Then you avoid that problem because that contract is basically assignable by its terms. You don’t even have to invite the comments of the third parties and you can transfer that contract smoothly to the purchaser.
Over your career, you’ve got years in your career. You’ve done over 100 transactions. I’m sure there are none of the same. You think about the litany of, of challenges and problems. The pushback that I hear from many business owners is, “I know what my business is worth.” They discount the value brought to the table by perspective and assembling the proper team. There’s going to be an enormous transfer of businesses as the Baby Boomer generation ages. They’re either going to transfer because they want to or because they die off. It’s going to occur. In thinking about if you’re working with a company, pre-sale, you’re brought in with this that we’re getting ready. Ultimately, how early do you want to be brought into the transaction or pre-transaction?
It depends whether a broker is involved. There’s a challenge between brokers and attorneys because one is overly concerned with a successful outcome and the other is supposed to be concerned with the best interests of their client. I would say before a term sheet is signed, let a lawyer take a look at it. If you’re talking about a company that is service driven, and enters into a lot of contracts for its services, have a lawyer take a look at your service contract. See where it can be buttoned up. Think about the transition. Who is my target? Who is an excellent candidate to purchase my company? Do you have a relationship with that group? Is it synergistic? Is it your family member? Are they ready? Do they have the skill set? Do they have the emotional intelligence to run a business? Do they have the desire? If they don’t, you need to think about the next steps because there are so many Baby Boomers that are going to come across the time to sell their businesses in the upcoming years. It’s a much better solution to find somebody who wants to purchase your business than to be in a position of a fire sale where someone has passed away, unfortunately, or someone is sick and is getting ready to transition their business. Any business is worth much more before those events occur.
I think about the broad category of a lot of the stuff that you were talking about. It sounds like de-risking a business. You go through into your first order of business, what your biggest risk to your business. Your previous example of the majority owner is a younger person. The minority owner is older. You’ve got a demographics that would tell you the older guy is going to pass first or gal didn’t happen in this case. They go, “It wasn’t in my thought process.” You think about how simple that would have been or if they’ve been instructions in the de-risking phase. When you talk to a business owner, they’re typically pretty busy. When you talk to them about that, how do you get them to step out of the running of the business to step into thinking about on the business instead of in it?
I hate to be the doom and gloom party, but I always say, “Think about what you would you do tomorrow if this happened?” Wouldn’t it be so great to have fail-safes in place so that you could go forward and transact your business as it is maintaining its value to the best of your ability . The things you can control are protections. The more protection that you have going into a situation like that, the better. Also, knowledge. An attorney is a wealth of knowledge of different transactions. Thinking outside the box and finding tools that maybe worked for one transaction but don’t work for the other. Let’s find a different avenue. Not affording yourself with that ability to have somebody who thinks outside of the box is a real detriment to your business and to future transition.
I think about the emotional investment of the business owner when thinking about transitioning the business. It’s already bad enough that you think about your mortal, which is a tough topic. You think about, “I spent my life building this business, which is who I am?” You think about, “What do you mean it’s risky? I’ve run it for years. How do you think it anyway, you’re going down that particular road?” When you go through looking at folks and assisting them, what are the top one or two reasons in your history that transactions failed to transact?
It’s a couple of things. The one I’m thinking about the most is a failure of a business owner to understand the liabilities that are going to transfer to the transitions company, to the buyer or your partner if you’re transitioning out. What liabilities are going to transfer? What you’re going to be left with and face, “Did I properly negotiate the purchase price to understand the liabilities that I still have once the documents are signed?”
Are you walking away or do you still have some stuff in the car?
Many times, it’s not a great scenario for a business owner to walk away. We definitely recommend that that owner stays on as an employee or a transition services consultant to be part of the company going forward. Obviously, that person has to be compensated for their time, etc. It’s an important transition point because you have employees, you have customers, you have vendors that are all used to dealing with the same person and to walk away creates a lot of commotion. Another one is a blending of the cultures. Very often you see two like service companies merged because they have synergies, but their cultures are totally different. Particularly looking at the younger generation coming into the workforce, you have to understand the culture of one group may not mesh with the culture of the other end. You have to set forth the parameters from the beginning, so everybody understands what’s going to happen as of the transaction.
I don’t know if you can make this broad statement but when you look at businesses unbalanced, those that sell without advisers or a team and those that sell with a team assembled, can you characterize where the one sells at a higher price than the other?Self-care is not selfish. Click To Tweet
It may not necessarily reflect in the actual purchase price, but in the value of what you have either bought or sold. It certainly does. The purchase price for the assets could be X, but the transition services agreement or an employment agreement that you go forward with could have the real value. The usual term is called an earn-out. That means that if you continue on with the company and it continues performing as it has, then that’s where you’re going to get the meat, the value of your purchase. Without that, if your number is X but then you’re an employee for the next year, but you don’t get any benefit for being an employee other than a salary, what’s going to encourage you to grow the business from the time in which you sell it? What’s going to encourage you to do your best to transition everything that needs to be transitioned over to the buyer? Without being fairly compensated for that, it doesn’t work that well.
I think about the businesses that their intellectual property or their intangible value is a great deal of what potential buyer is considering whether it’s your local buyer, a strategic buyer. When you look at that and you talked to a business owner, do you talk much about the intangible value and how to preserve or protect the intangible values in the company?
One of the most important things that are a fail-safe in a transaction is withholding your client list until the very end. If the potential buyer knows who you’re targeting, you sell your services to and your services are not all that unique, you’ve lost the value of your transaction. There are confidentiality provisions that usually cover some of that but not always. It’s my job to be inherently distrustful of the other side. It’s not that I try to be an obstructionist to the other side or confrontational, but I want to make sure that the proper protections are in place for my clients such as not disclosing the intellectual property or the real trade secrets and client lists and things that are important until the last minute, until we get to that point. For instance, you can list whatever your software is, but that doesn’t mean you give them the code until the very end or the access or the passwords or whatever it is to run your software services.
I think about all of this stuff that we’ve talked about in broad brush format. For the client that says, “That’s exactly right. I need to reach out.” On the client that reached out to you and in the first call, what should I expect to hear from you when we’re in this exploratory phase? I’m trying to figure out where you fit in and what I want to do.
I want to hear about what their company is like and where they perceive their value and what their future plans are and how I can best accommodate. Usually after they go through that whole scenario, then I respond with what I’ve been doing with my career and examples of things that I have done and that I’ve been involved with and the services that we provide and how I differentiate my services from that of any other small firm in the city or across the nation. If your follow-up question is, “How do I differentiate myself?” we like to say that we provide extensive value at an affordable price because we have lawyers in our firm with 40-plus years of transactional experience, as well as experience in the different alternative investment areas that I was speaking of earlier. We have represented a multitude of buyers and sellers as well as the investors so we know the issues that each will face.
I come across a lot of the same counsel on different deals. We strive to provide our clients with the ability to contact us at any time. I know a lot of people try to shy away from providing their cell phone or answering emails after hours. I do think it’s important to have a boundary set for your own personal well-being. My clients know that I only take off one week a year where I am unreachable. We go to my family’s ranch in Wyoming. I’m only unreachable because there’s no cell service there because I cannot answer. You can leave a message and I’ll get it when I get back into cell service. That time is important for me to recharge and let my brain calm down and not be constantly looking at my email and my voicemails and trying to accommodate. Having said that, we usually respond to emails and phone calls within a half day if not a full day. When you call our numbers, you actually get us. We don’t use paralegals and secretaries and things that are going to slow down the communication process. You dial right into our offices.
That’s a good start for what we were talking about here. I think for the folks that are reading go, “Should I do this or not? It’s inexpensive to make the call too.” If you talk about a litany of things that you’re concerned about, there’s a prioritization or de-risking that occurs. This is the first thing you should do. This is the second thing you should consider doing. Low hanging fruit first. For the folks out there, you’d be making a mistake by trying to do this solo because typically the buyer, this is not their first rodeo. For the seller, it could very well be your first Rodeo.
If it’s your entire life’s work, you definitely want to be in a safe position. It’s of utmost value to be best protected in a transaction.
My advice to the owners out there, don’t wait until you have a term sheet on your desk. If you’re thinking you’re going to transact, start two to three years before you get ready, engage quality advisers and get busy doing that. With that being said, we’re going to shift gears. This is where I get to quiz you, which is perfect. Influential book or one that you liked that’s altered your perception of how you conduct yourself in business or life?Sitting is the new smoking. Click To Tweet
I’m a voracious reader, but I would say that the majority of the things that I read out of the office because I read legal documents all day are fictional based. I love something that takes me completely outside of my world. I would say as far as a professional book, I read a book called The Sweet Spot by Wendy Walpole. It’s a great book that talks about different communication styles and how people are who they are. There’s no reason to try to be a different type of communicator. Once you understand how someone else is communicating, it’s much easier to understand how to react to them. I’ve always found that reacting off the cuff is a dangerous way to conduct your business. It’s much better to digest, and try to understand where they’re coming from and then ask questions and react accordingly.
A failure in the past or an apparent failure that’s helped you best and set you up for future achievement?
A while back, I was part of a different firm. Through many different circumstances, we separated. One of the main reasons was that they weren’t comfortable with the transaction that I had brought into the firm. I separated from the firm and represented the client by myself. I took a risk in doing that. Both by leaving the job and the payroll that I was used to. I successfully closed that transaction. It was an incredible success for me because the transaction itself was successful and the clients were extremely happy. They’ve referred me to other clients. They have kept in touch. They’ve remained happy with the outcome, which I think is a big gold star. I also felt a lot of self-worth in doing that because I discovered that I was a competent, an intelligent attorney that provided excellent counsel to my clients. I could count on that to continue to grow my business.
If you can put an ad on page-one of the local business paper sharing your message, what would it say and why?
It would say, “High-quality counsel at an affordable price and a positive experience.”
Many folks are reluctant and you typically hear, “If I had only known, I wish I had.” It’s incredibly less expensive to get quality advice to start with instead of waiting until the problem has arrived at your doorstep. My general banner is reach out. Good quality advice because it’s less expensive in the long run. Allocation time or initiative, what’s helped you in your company most?
My networking activities have increased my clientele. Networking is such a tricky, slippery slope because you’re busy doing your work and if you’re not networking, you’re not adding to your own pipeline. The second that you stop networking, you’re killing off your pipeline. Maybe there’s a certain balance that occurs naturally where you’ve networked enough that your clientele continues to grow. I also think it’s important to be a part of your community. If people see you participating in the community events with other colleagues, they understand that you want to have a relationship with them both socially and professionally. You want to be out in the field instead of behind your desk. I’m also an incredibly social person by nature. I don’t freeze at a networking event, but I understand it’s not for everybody but it’s the thing that has grown my business the most.
That’s a separate and distinct skill set that’s been able to network effectively. Most unusual habit or what others consider out of the ordinary that’s helped you the most?
I am a firm believer that self-care is not selfish. That making time for your workout, for your other self-care routines is imperative. Having a monthly massage is not a selfish allocation of time. It’s important to stay healthy and to continue to get self-care because the new slogan is sitting is the new smoking. If you’re not getting up and moving around you get stuck. I sit on an exercise ball and I have a standing desk that I move up and down throughout the day. I don’t think that it’s selfish to take some time out of your day every day for yourself.
The analogy is we always get a notification on our vehicle when the oil needs to be changed and we religiously go, “If I don’t change the oil in my vehicle, it won’t last.” You go, “For me, I’m going to stay nose to the grindstone.” Do we need a warning light?
Over the past few years, what belief or protocol have you established that has most impacted you?
Aside from providing quality service and making sure to communicate effectively with my clients, in any small business we face collecting on the invoices that you send out. I think that the whole firm’s mentality of making sure that we’re checking on that leads to a better result in the end. Getting paid for the work that you do is an issue for every small firm and every small business.
What advice would you offer to business owners, those getting ready to sell a business or a portion of his business or her business for the first time?
Surround yourself with a quality team, not just an attorney but also an outstanding CPA, a business manager, and the right insurance folks.
Most common misconceptions about you and your role in the legal profession and how you help businesses?
There are so many. I’d like to say first, the most common misconception is that one lawyer is capable of doing everything. I had a very lovely client who asked me to handle her quickie divorce. I said, “That’s like asking your brain surgeon to fix your broken foot.” It’s not the same thing even though you’re the same type of profession. We’re not qualified to do every single thing within the law. The more people stay within their own lanes, the better it is for everyone’s business. The more I can refer things like divorce, like estate planning, like litigation to my colleagues, hopefully, the more that they, in turn, refer the business work to me.The most common misconception is that one lawyer is capable of doing everything. Click To Tweet
It’s like, “I don’t do brain surgery on the weekends.” There’s a great reason why not. Looking over the past few years, what would or should you have said no to and why?
Probably being involved when parties are already in dispute. I try to strive for parties to settle. Litigation is expensive, timely and messy. It’s disheartening, but sometimes it’s necessary. The more I can refer those people out and get out of the way, the better. If they’re not willing to settle, if there’s a possibility of settlement, I’m all for preparing and proposing a settlement in a course of action because litigation is extremely expensive and you have to have the heart and money for it. One thing I have said to my clients before is, “Would you rather be right or do you want to go buy a new house?”
In the day-to-day operation, what’s your personal self-habit or talk that keeps you focused?
I try to have a positive attitude. This life’s work is difficult. It’s not for the faint of heart. At any instance, I can get an email that would throw me off for the rest of the day and to try to maintain a positive attitude, so that it doesn’t get reflected in anything else that I’m doing both with my other clients and also with my family at home.
A quote that you find meaningful or use frequently?
This is one that we usually tell our clients that there’s not a problem that exists that enough time and money can’t solve. Essentially everything will get resolved. To try to have that in the back of your head when you’re facing a problem versus feeling very out of control and that’s why you hire counsel. That’s why you hire lawyers because we’re skilled in trying to solve your problem in the most effective way possible. If you don’t have the right counsel to solve your problem, then you have to be forthcoming and go out and find somebody who will represent your business interests to the best of their ability.
Jessen, I appreciate you taking time out and sharing your wisdom.
Thank you, Bob.
- Jessen Gregory
- Ruddy Gregory
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- The Sweet Spot
About Jessen Gregory
Licensed to practice law in CA, CO and TX, Ms. Gregory focuses on corporate and commercial real estate transactional work with Ruddy Gregory. Her practice involves complex mergers and acquisitions business transactions including asset-based senior secured financing, acquisitions, private equity, venture capital investing, commercial real property transactions, and general corporate transactions. Ruddy Gregory offers its clients big law experience at small firm rates, and prides itself on expeditious delivery of documents and speed of communication.
Prior to joining Ruddy Gregory, Ms. Gregory and her father practiced as Gregory & Gregory, LLC. Her work there included acting as general counsel to an oil recycling company; advising clients on general corporate matters, loan refinancing, purchase agreements, employment issues, trademark issues, permitting, operations, and other transactional matters; and working on the drafting, review, and negotiation of various corporate mergers and acquisitions, reverse triangle mergers, subscriptions, financing, buy-outs, and dissolution of companies and commercial real estate transaction work including reviewing, revising, and drafting letters of intent; purchase and sales agreements; and leases. Ms. Gregory also assisted clients in general corporate matters, mergers and acquisitions, and finance, with an emphasis in commercial real estate and real estate financing. In 2009, Ms. Gregory was recognized for her Pro Bono work in the Denver Bar Association’s publication, “The Docket.” Ms. Gregory earned her Juris Doctor from San Diego School of Law in 2005. She also holds a Bachelor of Arts degree in Political Science from the University of Colorado.