ByrdAdatto’s tagline is “Creating Simplicity” for a reason. In this episode, Michael and Brad share the story of a “simple sale” that turned out to be anything but simple. Tune in as we share the five steps every merger and acquisition (“M&A”) deal should follow, and the red flags to avoid.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at email@example.com.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I am your host Brad Adatto with my co-host Michael Byrd.
Michael: As a business and healthcare law firm, we are sometimes triggered Brad by certain buzzwords our clients will say in conversation. We know that there’s a potential disaster when we hear these words and are immediately on high alert. This season’s theme is red flags.
Brad: When we’re discussing the trigger word, we are shocked by how many red flag words we hear in a given day. Michael, as a reminder, when we hear a trigger word or red flag one of us will say ding!
Brad: Very good, Michael, thank you. I’m glad you’re ready today and have got your A-game with us. So today I thought we could have some fun before we start today’s episode [00:01:00] and it has some music trivia.
Michael: Ding! Well by now the audience knows you well enough to know that you’re about to go deep into the eighties. Here we go again.
Brad: No you jumped the gun, Michael. I haven’t even mentioned which year.
Michael: So here’s some music trivia.
Brad: So the band that we’re going to talk about right now, they sold more than 75 million records worldwide, holds the title to American’s number one gold record award-winning group of all time, has earned 30 gold albums, 14 platinum albums, 3 albums made being multiplatinum and had a Marvel comic book series made about them. And the initial name of the founders they were going to go with was Lips.
Michael: Kiss? I mean [00:02:00] your target audience is sitting across from you. Unfortunately for you and I our audience is not necessarily locked into, well, actually, it’s not the eighties here. Kiss is a seventies band so you really tapped into your early childhood years, but any person who developed in the eighties and went through junior high in the eighties would be very familiar with Kiss and Scorpion and Quiet Riot and Twisted Sisters. Do I need to go on?
Brad: And of course you’re correct. Kiss was founded in the seventies. They were known for their shocking live performances where they had fire-breathing, blood spitting, smoking guitars, rockets, levitating drum kits, man who doesn’t need and love Italian drum kits, explosions, and of course everyone’s favorite part, face painting. But they also had really big hit songs, Rock And Roll All Night, Detroit City, Shut It Out Loud, [00:03:00] Calling Dr. Love the Hotter Than Hell.
Michael: You’re about to start seeing that is really going to take us in the wrong direction and so great that you’re taking me down memory lane and really tapping into my insecure teenage preteen years as a junior high young Michael. But what in the world does this have to do with today’s show?
Brad: Of course, I thought you’d never ask so thank you. Well, besides Kiss the band representing this awesome rock band, you may have had term the term in business, K.I.S.S.
Michael: Yes. Keep it simple stupid. K.I.S.S is an efficiency type word you hear kind of in business and business jargon and it’s all about keeping a process as simple as possible which you kind of were failing at today, by the way. But maybe if we’re done talking [00:04:00] about old rock bands and the concept K.I.S.S we can get onto today’s show.
Brad: Yeah. The principal sounds great when describing a deal or in this case, a rock band, but sometimes also can harm parties if you keep it too simple. So, all right let’s get going, Michael. So today’s story is about a medical practice. They’re interested in expanding to other states so they hired this consultant who we’ll call Vinny Vincent.
Michael: Why Vinny Vincent?
Brad: Alright, good question. Vinny is a former member of the rock band Kiss. He was there from 82-84 and this is, believe it or not, this is a time in which they decided no makeup. So where Kiss the band attempted to follow, Kiss the principle by getting rid of all the makeups, smoking guitars, rock music, et cetera.
Michael: I’m going to have to say ding, because I truly if [00:05:00] you say what’s the one thing you associate with the band Kiss, it’s the makeup. And I didn’t even really remember that they had this season where they didn’t have the makeup
Brad: Because it was two years.
Michael: Well I’m having a very negative impression of this Vinny Vincent, and he’s going to be a character of our story. So tell me about him.
Brad: Vinny was a well-known speaker in the industry, I guess kind of like Vinny Vincent was a well-known rocker, was perceived as a person who had
Michael: Ding! I heard perceived with really high emphasis.
Brad: You are catching on too fast. With hundreds of M&A deals, and then he was hired by our client Dr. Scale, who was the main owner of this medical practice to help acquire new medical practices.
Michael: Okay. Why Dr. Scale?
Brad: I thought you never ask. Dr. Scale had successfully built a one location medical practice and six other [00:06:00] thriving offices in a very short period. Scaling his business, mostly by himself with lots of sleepless nights.
Michael: I hope you didn’t exhaust yourself with that creative energy calling someone who they’re trying to scale Dr. Scale, but wow.
Brad: I almost went with Dr. Love, but you know, it’s just too Kissy.
Michael: Okay. Well I’m not going to ring the ding bell yet. When you said that he was scaling this by himself, but I’m ready to do so because that is usually not a good recipe. Tell me more.
Brad: Yeah fair point. That that can be a disaster if you’re scaling by yourself sometimes, but Dr. Scale was based in the west coast. He was looking to acquire practices all along the west coast and then even thinking about going to the east coast. And Benny had convinced Dr. Scale that he had the [00:07:00] experience, the network of contacts and clients to assist. And by the way, he wants to do it very aggressively with this new aggressive growth expansion.
Michael: You know, Brad it is kind of a boring story so far. I mean, I don’t really see anything to ding or what red flags there are. It just sounds pretty normal. Another business trying to scale other than that you named the person, Dr. Scale you know, I don’t really know what’s so exciting.
Brad: I thought you would never ask, Michael. Thank you. So the first deal, and again, for clarity, the first deal that he brought to Dr. Scale is a three location deal out of state where Vinny has a financial arrangement with the seller
Brad: They want to close in a few weeks.
Brad: They will close with the base agreement Vinny provided to both parties
Brad: And the title they’ll get to use a title company. A title company to prevent the liability from transferring to Dr. Scale.
Michael: Ding! [00:08:00] And can I pause and ask one quick question? You said Title Company. Was this a real estate deal?
Michael: Oh, double ding! Oh my goodness I can barely even keep up with the red flags and you delivered. I believe I hit at least four dings, probably five or six, actually and there are so many red flags in a very short amount of time, but before we get into why I dinged you so many times. I’m assuming that you had a conversation with Dr. Scale about these issues?
Brad: Yes we did. And we can get into all the details in the second half of today’s show, but what was so maddening about the situation is Vinny had a number of conversations with Dr. Scale, of course, without us on why the speed of the closing deals were so important.
Brad: And this is how everyone in the industry does it.
Michael: Ding, ding!
Brad: Seller of the three locations. [00:09:00] Didn’t really think they needed attorneys involved.
Michael: Ding, Ding!
Brad: My goodness. How many dings can you give for that? As the seller had closed through a title company and used the same paperwork, so it must be okay.
Michael: Ding again.
Brad: Yes. And then this is just a simple sale of three locations. So let’s not come.
Michael: Dang. Wow. I’m actually going to have to get a drink of water here too, because my throat is getting sore from all these dings. I guess there’s a lot to unpack here. Let’s take a commercial break. And on the other side, let’s talk through this and see what lessons can be learned from the story and I am really curious about how this turns out.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. Now, Michael, this season we’ve been talking about red flags and dinging, but before commercial you hit with me so many dings I think our audience may have lost track of the story as there were so many red flags.
Michael: First, I want to be clear. We’re not against simple sales. That was the whole premise is that they wanted this simple sale and if that’s the solution is great. I mean, you know, our tagline is creating simplicity. If there’s an [00:11:00] easier way to do it, we’re all for it. When we hear it in context to stories like today, the red flag hits because there’s a lot packed into that statement. That can mean they’re trying to skip something and trying to hide something, they don’t understand the depth of it. And so while we don’t want to over-complicate any arrangement, sometimes deals have some complications to them and you have to deal with it. For example, Brad, when a party’s acquiring another business, like this example, there’s a lot of pitfalls that have to be addressed and potential liabilities to address whether you’re the seller or the buyer there’s different considerations. And what’s crazy is that our situation was representing the buyer and the buyer wants to really be [00:12:00] protective of what they’re acquiring. Like what are you about to acquire? I can maybe make the case if you’re selling something and saying it’s yours as is. When you’re representing the purchaser, I mean there’s a lot of concerns that come up when you’re just trying to kind of skip ahead and just kind of sneak it through under the guise of keep it simple.
Brad: Yeah. And I think maybe we should take a bigger step back, Michael, you know, all those are good points, but really why would you have an attorney in a deal in general? So let’s just think about in a highest level, you and I have heard often is you’re about to go out and let’s say you’ve always wanted to buy this Lamborghini and it has been your dream of buying it. And they are now say a $300,000 vehicle. You’re so excited that you’re going to go get [00:13:00] it and you go out and buy it and you decide, you know what? I really don’t need insurance for this because I’m a really good driver. I mean, I’ve never gotten a wreck in my entire life. Why would I need insurance for this time? And then you go out and five minutes later, you smash and destroy your $300,000 lambo, something you’ve been working so hard to get, and it’s gone in a heartbeat because you didn’t insure it. And so a good attorney when it comes to you going out and spending millions of dollars or even $300,000 to buy a business, whatever it is, we’re there to help hopefully if anything, to reduce your overall liability and set the expectations of that party, helping again, protect you as you said, even the buyers. And hopefully there’s an alignment of what are those in goals that you want. So again, we don’t want you to wreck your brand new Lamborghini. That’s why you use insurance to protect it. And that’s why often attorneys are brought in because a good business attorney has done these deals over the years, they know where these pitfalls are, they know how to do it. [00:14:00] And when we have a speedy closing where the client wants to get done immediately, we’ve talked about this in other episodes, there are a lot of potential unknown liabilities that can transfer and it gets lost because we don’t have time to look at it. You didn’t have time to look at it. And so basically, Michael, I think the part that most people have to understand, the whole reason why we come alongside or any attorney should come alongside with you is really to help protect you so that you don’t have all these unknown liabilities that show up after closing
Michael: And what’s crazy is remember the person that didn’t want the attorney here was Vinny Vincent. This wasn’t even our client. This was the broker. And so the red flag I’m dinging is like, okay, why in the world would a broker not want an attorney involved with the seller
Brad: And the seller?
Michael: Yes, that’s what we’re about to talk about next, [00:15:00] but even going back to your point, Brad, I mean, we did an episode in season three Too Good To Be True. There’s a whole episode on that so let’s talk about the financial interest that he had in the seller, which creates some serious questions in the thought of wow I don’t want the attorneys to get involved. Well, why wouldn’t you want the attorneys to get involved? Well, because they might get in the way of the deal closing because if the deal doesn’t close, I don’t get this liquidation event or payment from the seller. And so you have a conflict of interest and in this industry these business broker types are not regulated in the same way like other professionals like us as attorneys, we will get in trouble with our state bar. And obviously medical providers are regulated by the medical board from professional conduct related things. [00:16:00] And here it’s something that per se is not unethical, but was clearly not aligned with our client because you know that his behavior made you think that his only interest was in closing the deal, not in making sure that everything was okay with our client. The expansion on that is that people do deals with business brokers all the time. And you have to watch out for that because business brokers, the good news is a lot of times they get paid upon successful completion of the deal. That’s fantastic, but there’s a risk because as a broker you don’t pay unless it closes. The bad side of that story is that they want to get paid. And so they want to close. And so they will take shortcuts, including carving out [00:17:00] attorneys, using their own documents, keeping it simple, all these different things that are ingredients in this.
Brad: And I think just to add to that point to the audience, to be for clear, it wasn’t just that he was getting paid on the closing. He actually had a financial interest in the seller too so it was a twofold piece, whereas he was getting paid by our client to represent our clients to help them. And then he actually had an ownership in the deal he brought to our client as the very first deal.
Michael: So now let’s talk about the title company, which was just a crazy, crazy piece, but you might want to give us a vocabulary word.
Brad: The title company might be a vocabulary word, for our audience probably knows, but doesn’t understand why you dinged it. And so most of our audience, most likely you bought real estate throughout your lifetime, or know people who have bought real estate over the years. And you end up closing it with an actual real estate title company. So why did you ding it? [00:18:00]
Michael: To your point, you close a piece of real estate, a title company does all their research and when you close, you get title insurance, because they will write that for you that says you have good title to what you’ve just bought. So you create this feeling of buying and getting what you think you’re getting and having some protection that comes from that. But when you see it in a business deal, it has kind of a different meeting. Title companies will be involved with business deals sometimes and oftentimes it’s when they’re holding money in escrow. So it’s, you know, we’re going to pay you a million dollars and we’re going to send the million dollars to the title company. And the title company is going to collect signatures and then we’ll disperse things as according to the instructions, but it’s a little bit [00:19:00] different than a real estate function. They’re not writing your title policy on a business transaction. And so the ding here was Vinny Vincent basically saying, well, let’s use a title company and this quick simple deal, and that’ll just kind of wash away all the potential liabilities. So talk a little bit about how that transaction was structured, what he was trying to accomplish there.
Brad: There’s nothing in its nature that we can think of that a title company can wash away liabilities. It’s there to confirm title. That’s really it and mostly for real estate. And so often you and I have talked about this in other episodes about asset purchase agreements or stock purchase agreements. That’s where if [00:20:00] there’s liability associated with the transaction, you really want to concentrate on protecting the purchaser via the due diligence that you can talk and looking over whether or not you’re going to stock purchase agreement or asset purchase agreement. This was an asset purchase agreement deal is what we pitched because again we wanted to limit the liability. The fact that we were using a title company did not add any additional layer of protection, which is what he had pitched in the very beginning of it. So that’s why I was so awkward to try to explain to our client that just by closing a simple one simple agreement, simple sale through a title company, there’s no additional protection that he’s receiving by closing it through that.
Michael: But Vincent didn’t sound like he knew what he was doing.
Brad: Yeah. That’s a pretty good catch there, Michael. Okay. So let’s go through some more dings that we had and there’s a plethora of them near the end of our opening, a [00:21:00] dialogue and you dinged this statement, everyone in the industry does it.
Brad: The seller doesn’t think they need the attorneys.
Brad: They’re using the same paperwork. So again, you dinged all these statements. Maybe you can tell the audience as to why you dinged them though.
Michael: Well, if I had a nickel for every time I heard that everyone else’s doing it. It is probably the most frequently asked question we deal with across the board. And so I’m going to ding that for the rest of my life. I’ll ding that in my sleep when I hear it because we know as lawyers that it doesn’t move the needle from a protection perspective. It in some circumstances you can acknowledge it may change the risk, but in a business deal where you’re going to be doing a huge acquisition, the everyone [00:22:00] else is doing it does not ring true. And we know how everyone else is doing yes so we know that it was just trying to be a power move because he is either too dumb to understand or was just trying to make us feel dumb with it. I mean, look a smooth M&A deal should follow five steps. You need a robust LOI. You then you do your due diligence. Then you have definitive agreements that come after that. Then you have a closing with funding and notices and there’s [00:23:00] post-closing obligations. And so all of this clutter that we were dinging is essentially trying to skip a step along the way and it can cause devastating results.
Brad: Several steps.
Michael: Yes, exactly. And then you don’t have alignment of the parties and the liabilities that would be assumed are frankly terrifying, but we’d be committing malpractice to do the things that he wanted to do. And so you can kind of just with that, this is the way a deal does kind of shine the light on all of these things that Vinny Vincent had thrown at us, but as we get close to wrapping up today, tell us what happened to Dr. Scale and to Vinny Vincent.
Brad: So luckily we were able to convince Dr. Scale that number one, he did need legal representation [00:24:00] when buying three offices out of state and although the LOI was pretty sucky, honestly, it was not good, but that’s what the deal showed up with that it slowed down the deal cause it was so bad. When we started conducting our due diligence and started developing the purchase agreement we ran into some other issues.
Michael: So what happened with the deal?
Brad: After months of back and forth, we were actually not getting that much information from Vinny or the seller on the actual books, the records, employee, employee agreements, and who owned the assets, and all the things you typically need to close a deal to say, hey, this person owns this practice. They own the assets of this practice. They have the rights to sell these assets to you. And so it was just really troubling because we couldn’t figure out all these obscenely [00:25:00] normal things and we were able to communicate all these issues to Dr. Scale. And he eventually just came to a crashing in when Vinny went around us and called Dr. Scale and said that his attorneys we’re killing the deal
Michael: Ding! And by the way, I feel like we need some therapy. I mean, he’s screwing the deal up by not providing any of this stuff. He has a financial interest in it. He’s done all these things and he’s blaming us. I mean, come on. So what happened?
Brad: So Dr. Scale actually ended up backing out of the deal so Vinny’s back to, I guess, painting his face. He wasted, unfortunately months on a simple sale that was actually a very super complicated deal and because he was so focused on this deal, he missed out on other opportunities because, remember this is the first deal that Vinny brought him. And so it just ended up with the wrong way, with the wrong guy and went the wrong direction because he was [00:26:00] convinced that this was just a simple sale. So, Michael, you hit a bunch of red flags today but what are some of your final thoughts for today’s red flags?
Michael: The idea of K.I.S.S not the band, although they are awesome, but the business concept is appealing. I mean we all have to acknowledge that it’s appealing. We have it as our tagline, creating simplicity.
Brad: Yeah absolutely
Michael: I mean, keep it simple. We love it. The problem is it can be misused to really hurt someone. Because if you’re trying to get away with something which clearly Vinny Vincent was here, then you want to keep it at the surface because everything comes crashing down the minute you start digging in, which is why he was not turning over stuff and due diligence. And so the only way he was going to get through this deal was to keep it as simple as possible and make it happen really fast. All these things that [00:27:00] on the surface are emotionally appealing yet you know, from our view of the world, trying to protect our clients, can lead to disaster. So whatever happened to Vinny Vincent, the character, not the rocker?
Brad: So believe it or not, Michael, just a few days ago I saw his name on another deal that one of our clients is looking at to buy.
Brad: The good news is he’s no longer trying to use the title company for closing, I guess he’s learned his lesson that that’s not a good way of trying to close a regular business deal. But the rest of these crazy red flag ideas are still alive and well in his sales pitches.
Michael: Hurry up and close with the one pager simple contract.
Brad: Absolutely. Well, Michael, next Wednesday for our show, we will discuss Red Flags – Medical [00:28:00] Estheticians.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. [00:29:00] Please consult with an attorney on your legal issues.