Managing Risks and Liabilities in M&A

Managing Risks and Liabilities in M&A with Tina Kassangana

Kison: [00:00:00] I am Kison Patel, and you are 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.

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I'm your host, Kisan Patel, founder and CEO at deal room and Chief Scientist here at m and a Science. Joining me today is Tina Ana m and a lawyer associate at Mor Hock and Ro Mor Haw. And RO is a full service law firm known for its expertise in corporate law m and a real estate and commercial litigation, providing [00:01:30] strategic legal support to help clients navigate complex business challenges.

Today we're gonna talk about how to manage risk and liabilities at m and a. Tina, thanks for hosting me at your office here in New York City. Yeah,

Tina: welcome to the New York City office and thanks for having me.

Kison: I love when we can make these interviews happen in person and we kick things off a little bit about your background.

Tina: Absolutely. So I am a fifth or sixth year associate. I always mess that up. But class of 2019 St. John's Law. I went to Syracuse University for undergrad, [00:02:00] specifically international relations in poli sci. Interestingly enough, I actually wanted to be a sports commentator, so not a lawyer, but I had done lots of mock trial since sixth grade, and I realized that I'm acing all of these natural law theory classes and flunking comms communication.

So I should probably look more into this legal stuff. Competed in mock trial college. Law school level moot court at this moot [00:02:30] second year. And a lot of professors are probably upset that I'm not a litigator,

Kison: but

Tina: I'm happily doing transaction.

Kison: You were like born for this as a kid, and then you had all this experience doing mock trials.

Like how does that flow into your practice today?

Tina: Honestly, it's taught me to synthesize a lot of information and make it all work. In mock trial, you have a closed universe of facts, okay? And I was always the closer, so I need to know everything that's in that little binder. However, I also need to pay [00:03:00] attention to what's going on in the current trial.

At the end of the trial, I now need to pick and choose what actually came in, what didn't come in for my little universe, and how do I need to make this work per trial. It's the same thing as an m and a deal. So there's the diligence, that's the universe. So if I do a tech company sale or fire suppression sale, I know the general universe of what needs to happen, but I need to tailor it to this deal.

For example, cross examinations. That's just due [00:03:30] diligence for me. Yeah,

Kison: I like it. It is a strong correlation there. Yeah. What have you done last five, six years of this firm? What kind of deals have you worked on?

Tina: So we mainly are seller side, but we've also done buy side. We've seen a trend to more private equity.

When I started in 2019, the pandemic started. So I had to learn all about sell side, PPS, escrow, figuring all of this out during the pandemic, quite frankly. So we've done a lot of commercial [00:04:00] businesses, we've done some accounting firms, so a lot of different areas of business.

Kison: I gotta ask, how come it's always associate as a title for like ever, then all of a sudden goes to partner.

Why don't they have any like different steps in between?

Tina: Sometimes they do, so some law firms, they'll like differentiate the associate to like the senior associate to let you know that they're on their way. On and up and up. But yeah, no, the associate track is a long time.

Kison: I just thought that LO lawyers aren't that creative.

'cause you go to a startup, we'll take that into 10 different titles. So you're [00:04:30] constantly,

Tina: for sure, yeah. Lawyers will just try to keep things as simple as possible when it's not deal related.

Kison: Fair enough. What stages in the m and a life cycle do the biggest risk happen or arise? How do they come about and how do we manage 'em?

Tina: As an attorney, I would say that risks come up in every stage. The biggest ones, I would say there's probably three primary buckets. You have your financial pre-sell stage. That's where we talk about valuation risks. Then you have your, in the middle of the deal, [00:05:00] you'll have your diligence risks, and then you'll have your post closing.

Risks. Where now did things go to plan? Sellers and buyers are fighting over earnout metrics. Someone did a CapEx that was not supposed to be spent, and that affected the bottom line for calculations. Someone's upset that they're not actually running the business, which tends to happen with some of these smaller businesses when they sell to a private equity fund.

They're so used to running the business that now they're answering to someone [00:05:30] else. And oftentimes there's personality clashes and some of those things can happen. And the risk that we try to mitigate at that point is if something like that happens, how can we get you out and how can we still maximize if there's anything on the backend for your backend payments?

A lot of people talk about valuation gaps and how to deal with that with earnouts seller notes, which are, as a seller's counsel usually. I would not encourage things like that, and you have to be very clear in agreements. [00:06:00] So with earnouts, you have to figure out. What are we actually looking for? What's the metric?

Because it's not just revenue, it could be profitability. How are we defining profitability? I've heard accountants sometimes say that adjusted EBITDA just means deferred lawsuit. So we will heavily negotiate at the jump to make sure that everyone's on the same page. What are the accounting policies that we're using to calculate?

So that's a risk already that we're trying to mitigate at the start.

Kison: Can we role play this out? Let's do both though. I'm always focused on [00:06:30] the buy side. Yeah. Especially like right now on trying look at deals and build a pipeline and then we'll do the sell side. Yeah. I'll be your Virgin client first time doing a deal Uhhuh.

And part of it's like I don't even know how to work with an m and a attorney.

Mm-hmm.

Kison: Because I am that person that's gonna draft my own LOI sign it. Please don't like, Hey. Okay, let's start there. Yeah, let's talk about, I got a company, so I got a couple of them actually in the pipeline that I'm looking at.

I'm probably at early diligence like NDAs are signed. I'm getting the initial numbers on both of these [00:07:00] targets. I got the first pass of diligence, so I got it. I'm starting to work at putting a model together and it's looking interesting. Mm-hmm. I got a pretty good feeling that this is one we're definitely gonna want to try to pursue.

Okay.

Kison: Am I talking to you yet or not yet? Not yet. Okay. I get the model going and then I'm starting to wrap my head around what this company's gonna be worth. I feel it out for them just to be like, Hey, we're in the same page about this. I'm gonna push them to do some seller financing.

Tina: What's the same page?

So at this point, have you now already thought about some deal terms?

Kison: [00:07:30] Yeah. For me, I'm always thinking the price and as an early stage company, I wanna hold on as much cash as possible. Mm-hmm. And if I go to the market one, I wanna avoid equity. 'cause that's definitely, a lot of firms reach out to us about that.

Mm-hmm.

Kison: But we're growing fast. We're growing over 40% year over year. So when I look at the third party debt market for a tech company, private capital's gonna run around 16%. Mm-hmm. Unless you throwing a bunch of warrants in there. So then I'm like, wow, I trying to wanna minimize that as much as possible too.

Mm-hmm. So my goal would be to get the seller to take a [00:08:00] bet with us, hold some paper and roll over some equity.

Okay.

Kison: Ideally, like a third and third, Hey, I figure out how to get you a third in cash, a third in, you know, hold some paper. And then a third I'll, we'll roll over in some equity so you can give you the promise of the next exit or recap for us.

Tina: So based off of this fact pattern, this scenario, once you get to a point that you're actually really interested and you may set forth an offer, that's when you would call me. And also, since it sounds like you're very active in these transactions, you should probably just have also an attorney or a [00:08:30] panel that are just on standby who know that you're actively looking for sellers.

So that way we already know what your main target is, what your main interests are. So what you just shared with me, when you come now with another possible target, I'm already thinking about that third.

Kison: So I want to get to know you Yeah. Ahead of time. Mm-hmm. Just know you. Yeah. And then I, and you got an idea like, oh yeah.

Ke sign's out there trying to buy another tech company. And then once I get something in sight and I'm ready to put an LOI on the table. [00:09:00] Yep. That's when you reach out, I come reach out to you.

Yep.

Kison: Okay. So we did our analysis and we have a, an idea of what we wanna pay. I have a good idea. And let's just say, we'll use small numbers here.

I know on this podcast we love talking about things in the billions, but I'm not doing that. I'm trying to, the losing the virginity on this deal, it's really small. Let's say simple math, like $15 million. 'cause it's easy to break that in third. Mm-hmm. So $5 million we will pay. In cash. And then 5 million.[00:09:30]

We want seller financing with two. A favorable like Yeah, 7% interest. Okay. At least we wanna propose there. Yeah. And then we wanna roll over equity. Okay. On another piece. All right. That's what I'm thinking to propose. How's that sound in terms of this? But again, I never done this LOI. What other things that, should I be thinking about terms that we would wanna put in this LOI?

Tina: What kind of acquisition is it? Is it gonna be asset? Is it going to be equity? Is that'll also play a part in how we're structuring some of the finances? It'll also play a part in [00:10:00] employment agreements. Are we gonna tie a rollover equity to employment to get them to stay in that type of retention? Most of the time, sellers, if they have an office space or something, they're gonna want that included in the LOI.

Are you taking it on or is it gonna be excluded? So we're gonna have to go more in a bigger picture in the LOI, I hate to say big items, but it's usually the big items like the escrow. So in your 5, 5, 5. We also have to think about rep and warranty. So [00:10:30] let's say, hypothetically speaking, this is a fairly new company, but they're very attractive and you're not really sure what you're getting out of that 5 million upfront consideration, how much of that are you willing to put in escrow?

And the seller is going to come to us as your counsel. In this case, they want the least amount of money in that escrow. So some of those numbers may have to change. So the five that's in the seller financing, we might take two from there to put it in the upfront consideration and ask for a bigger holdback or like a bigger escrow [00:11:00] to cover for a longer period.

So sometimes we'll have to play with the numbers like that.

Kison: Why do I care on the buy side about the escrow amount? If it's all part of the total purchase price,

Tina: you'll wanna care. Because we have had situations where a buyer doesn't care and then they realize, wait, I don't have anything to go to. Sellers just sold their business.

They don't really have anything behind for me to get money.

Kison: So I want this as assurance. Exactly. Hey, I find out your numbers weren't what you told me, or some big [00:11:30] thing changed. Right. Okay. So what was like the typical percentage or range that I would want to do on the buy side?

Tina: 10% probably right now I would say is market.

Okay. But also this changes with rep and warranty insurance.

Kison: Yeah. I was gonna ask the hot ticket item, which I think is like now like very mature. I feel like most deals use reps and warranty. Yeah. And I feel like you can buy a policy anywhere, like people are selling that in the corner here in New York,

Tina: right At Canal Street.

Actually, no, seriously. We've seen maybe 0.51%. However, the [00:12:00] buyer will probably take over the main fees or they'll split it half and half with respect to the rep and warranty insurance and take that out of the proceeds. Yeah, rep and warranty insurance changes a lot of numbers and also changes the transaction documents.

Kison: I think most deals are typically asset deals.

Tina: I would say 50 50 I've seen. Really? Yeah, 50 50. Okay.

Kison: Yeah.

Tina: Asset deals get just nasty and weedy. Especially when you have buyers that are kind of like, yeah, I want everything. And then sellers who think that they don't have anything and then you, you're pulling teeth.

Like, okay, you do have [00:12:30] stuff. You have furniture, you have equipment, you have inventory, like you have stuff. So we kinda need to disclose, and it's not just, I'm selling my business carte blanche, here we go. Itemize

Kison: all the assets.

Tina: Yeah.

Kison: Versus what I would think is the people component would drive you towards the stock sale because mm-hmm.

That makes it smoother. Especially either people on Visa or people in other countries. They're like, oh, let's just keep this intact and do it more as a stock, but then carrying some liabilities, whatever they have pending,

Tina: that's actually when it's a stock [00:13:00] sale, we really get into some aggressive negotiations with the indemnifications in any type of liabilities that are gonna come post-closing.

Kison: How do we manage risk? Like where are he at LOI? And we're like talking about a lot of stuff. Even just the structure between asset stock sale. We talked about the holdback. Mm-hmm. Because we're gonna have that, or we use a reps and warranty policy. Mm-hmm. Which can help alleviate that and then win. 'cause the seller will get their money and then they still get the assurance.

And typically the buyer pays for that policy. Typically. Yes. We've seen that. [00:13:30] Okay. One of the things that we need to,

Tina: so you just mentioned we're past the LOI stage now, everyone's happy we sign, we're starting now. Some hardcore diligence. Is

Kison: that the main stuff though? Is it like, hey, here's the the holdback and then are we gonna go down asset versus stock?

Do we make that decision at LOI?

Tina: Yes. Yeah.

Kison: Okay.

Tina: Or you could say that based off of tax council review, we may structure it asset or equity, so you don't have to be so set in stone with respect to the structure, but the items that you definitely want to [00:14:00] have set, purchase price, who's gonna come on afterwards?

Key employees. Any other obligations that is really important to either party that you want to fight for upfront? We would typically suggest, let's hash it out in the LOI already. Okay. Even though it's technically non-binding.

Kison: So I could have like, Hey, here's three key people we've identified. Yeah. Like we want to have retention on these three people that they're agreed upon.

And then yeah, it could be anything in terms of, Hey, this is the must have, you said this thing, you had this license agreement [00:14:30] secured for 10 years, then that's gonna be critical to this deal, so let's make sure that's part of it.

Tina: Yep. And two months into the deal, we're still gonna run some QV whatever, but we need to see profit increasing at X amount.

And then sometimes you'll have that and there may be a breakup fee if someone doesn't hit a metric or everyone walks away pays their own respective fees. So there are also things like that.

Kison: Is it pretty loose because this OI is non-binding? I feel like there's a lot of diligence you can go to. I'm doing early stage stuff.

I can figure out how to get to the value off the [00:15:00] numbers pretty quick. Mm-hmm. But then there's a lot of, okay, but mm-hmm. Is this churn rate that what they claim it is there any little thing like that? They said they don't have any change of control revisions in their customer agreements. I've had this before.

What all of sudden you find out they have bunch change of control revision, tons to

Tina: happen

Kison: Dallas. It's like, whoa, how do we mitigate that risk? Because that's big surprise. Where do you strike that right balance because I, I, part of the other part of me is it's non-binding then. Mm-hmm. We find this stuff out later.

We'll just walk away from the deal.

Tina: You can. So part of the [00:15:30] LOI is trying to build a foundation of, if we go outside of these bounds, like where then is the foundation going to completely crack and break. So as your buyer's counsel, I'm gonna ask you, what are the things in this LOI that are binding for us, not with respect to seller?

And if you tell me I need these three key employees and something comes up in diligence about these three key employees, we can walk away, we can terminate and say that this was in the LOI. I've made it very clear that it was important to [00:16:00] me. They can't sue you and then say that you're in breach because you promise X amount, right?

For a transaction. And that these three key employees aren't gonna come along. So they might spend some money, they have to pay some fees, and then everyone just walks away. But the key thing about the LOI, it has to be flexible to account for the diligence, anything that comes up. That's the non-binding nature.

Kison: What about like the odd things that people bicker about towards the end of the deal, like working capital allocation and stuff like that? If you put that in their LOI or they just like, it's [00:16:30] like the routine to go at the table and pound your fist.

Tina: So the problem with working capital is. The first issue is you bring it up at the LOI that there's gonna be a working capital adjustment that the parties are gonna negotiate in the purchase agreement.

It's one of those, we'll cross that bridge when we get there, but we're gonna let you know that the bridge is there and then when you actually get to the negotiations of the clause, that's when, yeah,

Kison: okay. It's tough because all of a sudden you don't wanna put too much, 'cause then you're setting this tone like you're gonna be a pain ass person to work with.

Exactly. Okay. Fair enough. Wait, lo, I signed. [00:17:00] What happens next? Okay. Do I stop talking to you for a while? Do I just, do I start doing my diligence?

Tina: Well, no. So, and we're keeping buyer's counsel, I'm going to warn you at this point to be on the lookout for another NDA from seller's counsel, even though you signed the initial NDA for the finances.

Now that we're gonna get some legal due diligence, there's gonna be another NDA, okay? Because they're gonna want to protect just in case if something happens, you've already seen their top customers, you've seen their top vendors, you shouldn't be allowed to use that. So don't be [00:17:30] offended if they send you another NDA

Kison: step up NDA, okay?

Tina: Then I'm going to ask you to set up a data room and we're gonna prepare a due diligence request list

Kison: as the buyer or seller. Buyer. This is cool because that's what we advocate for is buy side m and a, buy LED m and a, and especially like a lot of roll-ups we work with, they have to control that process so they can plan integration better when they can drive the data room and the workflows around it.

Tina: Yeah. So you set the stage as buyer of what's the initial diligence request list, and obviously you can't [00:18:00] think of everything that might pop up, but there are a few that I call the crucial you're gonna need a. Legal, can you sell this business? Who actually owns this business? If there are any tax issues?

So sometimes if it's an asset sale and they're an S corp, when did they do the S corp election? Sometime that that messes with tax issues for them, not for buyer,

Kison: but I can set up all my requests in the data room and then the seller can fill all those requests. At that

Tina: point, they'll start uploading them and you'll also send it [00:18:30] to their legal counsel.

Kison: I like it. You're like Pilot m and a approved. I didn't wanna work with you. Now we're gonna go through this process. We put our request in. I'm gonna work with my different department leads. Mm-hmm. Because I wanna know engineering's got their concerns. We'll consolidate that in our data room or deal room.

Deal room and yeah, there you go. We'll invite the seller to come in and start these requests. And that starts happening. We'll start doing our diligence and then we usually have a little findings area. Mm-hmm. That we're gonna centralize all our findings. Yep. And what [00:19:00] then what happens? Communication still goes with you.

I know you. So at some point you gotta put a purchase agreement together.

Tina: As this diligence starts coming in, we are going to refer back to the LOI and touch base with you again. And at this point, we've probably already run a tax analysis. Best scenario for you, hypothetically, let's say you're gonna want to go with an equity deal in this one, and we're gonna present to you why we're gonna give you the different tax implications.

For both. If you go both equity or asset, you'll make the decision based off of that. We will then prepare the purchase agreement in light of that. [00:19:30] And we're also reviewing the diligence that's being uploaded in tandem.

Kison: Okay. That's a big factor, is the tax 'cause. That's how, yeah. What's the end victory gonna look like financially.

Mm-hmm. And then all these departments coming up with their findings and it's basically risk. They're identifying that, hey, there's this weird allocation they did from one year to the other. We wanna make sure that's what it is. Yeah. Or HR finds another key person that we need to really retain. I'm making stuff up.

You have better examples.

Tina: Yeah. That happens where they'll see a financial statement and say, what is [00:20:00] this? What is this employee loan, for example? No, we don't have any employee loans. There's an employee loan in every single financial statement that we've seen. What is this? You'll probably alert it to the business team and you'll also wanna alert it to me as counsel, so that way I can look at the financial reps and just flag it.

If there's anything that I need to be mindful of, if there's post covenants with respect to taxes, how has this number implicated the finances for the company, and how then is that going to affect you post-close? I need to [00:20:30] think about that. But then seller side, their counsel is gonna reach out to us and probably say, Hey, you saw this, or My client told me about this.

This is why they did it this way. And it may not even be an employee loan. They probably just booked something wrong. And now I need to go back to the purchase agreement and be mindful of they just did something wrong. Accounting wise, this is an issue, could potentially be a liability. How are we gonna address this in the purchase agreement?

And all of this, I'm going to tell you, in a lot of emails,

Kison: you're [00:21:00] drafting the purchase agreement on the buy side.

Tina: I said, we give the first draft

Kison: and then you kind of go back and forth with all basically departments that are reporting these risks. Yep. And you really need the clarification from them directly.

Yep. And we always talk about who quarterbacked the deal. And I always thought as a person that runs a data room by it's actually you.

Tina: So it's, it actually is the person who runs the data room. So it's the most junior associate on the legal side at least who's the most important quarterback. I can't make changes or revisions based off of facts and, and [00:21:30] documents if they don't flow that information up to me.

Kison: Ah, okay. So they technically quarterback it then you're, uh, what is your I'm Pat Riley. There you go.

Tina: Okay. Everything needs to go smoothly. I know what the GM wants, I know what owners want. I know what the players want and what the coach wants. How can we make this all work?

Kison: Okay. That's a lot to, to coordinate to make it happen.

I. What are like must have things on a diligence list to reduce risk.

Tina: It's understanding [00:22:00] who owns whatever asset company. You'll be surprised how many times there's an issue with that. It could be a family trusts, for example. People pass away and then interest gets divided, et cetera. And sometimes things get messy or you have outstanding equity from some other series.

So we need to figure out the universe of who the owners are. Want two, can you even sell this thing? So that's the first bucket I need, yes, to those first two things before I even [00:22:30] look at anything else. 'cause anything else comes back clear and you can't sell. It doesn't matter. After that, it's the financial diligence, which our tax partner will deal with that.

Then it's the contracts. So I need to be mindful of your business, what clients and customers you currently have, because there could be a contract that company is selling that you actually can't acquire because you may have a restrictive covenant in a current contract that would prohibit you from being in business with this other [00:23:00] contract.

So that needs to be taken care of as well.

Kison: That's the thing I gotta learn as we've built some functionality around contract analysis. Mm-hmm. I'm like, wow. Every company, I never think about even our own company. There's so many customer contracts, there's so many employment contracts. Then every, like every, literally everybody, every customer has a contract, every vendor has a contract, every employee has a contract.

I'm like, that's a big chunk of diligence to go through the, a lot of contracts to go through that. Yeah. When you start thinking about that, like what are the ways you start thinking about like risk and liabilities with all these different [00:23:30] contracts? How do you prioritize?

Tina: Priority is actually with the structure.

If it's an asset sale, I'm really gonna look for the assignment clauses. If it's an equity sale, change in control, this is actually something that first year associates learn, a clause that's assignment. And AI would probably also have to be taught this. There's very specific terms where you may read a clause and think that's a change in control and it's not.

It's actually just prohibits an actual transfer of the asset, not if the owners change. So there's that [00:24:00] analysis. I also need to be mindful of any regulatory risks depending on the business that you're in. So I'm also going to target that. And it also goes back to the LOI of what are your key markers and what do you really need?

So I'm also gonna look at loss runs for policies. If we're talking about workforce, and depending on, again, your business, let's say there are three key employees that you want, right? And I'm going to also target for these three key employees, not just what are their salaries, et cetera. If I [00:24:30] happen to notice that they have.

A worker's comp claim that comes up every two or three years. I'm gonna flag that for you. Like, why do you actually want this guy? There's something that's popping up here. So everything is tailored. Like what I'm looking for in diligence is what the

Kison: junior's looking for in diligence based on that structure.

Yep. So asset are looking for the assignments. Equity slash stock purchase. Yep. Change of control, those other areas. So these are Makes a lot of sense.

Tina: Yep.

Kison: Structure dictates like where you're gonna start looking for risks [00:25:00] in these contracts. Yeah.

Tina: And your obligations going forward. So in some of these customer contracts, there may be warranties that you're making.

Can you even fulfill those warranties? There may be indemnification obligations that you're gonna be taking on. Is that a risk level that you're willing to take? There may also be insurance requirements in certain contracts that you may not have currently. So how are we gonna deal with that?

Kison: That's a lot of stuff to get ready for this purchase agreement.

Tina: Yes. That's why there's like many drafts that go back and forth because we're dealing with the [00:25:30] information that's coming up in real time. So at the first draft, I may only have financial diligence, for example, and then I get customer agreements, vendor agreements, usually on a Friday night, and then I'm already thinking, okay, that needs to get changed.

Now in the next draft of what's coming along, a good seller's council is going to make those changes with the documents that have been uploaded. As buyer council, you also want to track everything that's coming in. What's the potential clause that this is gonna [00:26:00] trigger?

Kison: What about the clauses that are more specific to post-close or minimizing post-close risks?

Tina: Those are heavily negotiated, so that's mainly working capital.

Kison: Let's use working capital. Working capital, exactly.

Tina: That's what, 90, 120 days afterwards. You have to be explicit in what's the timeframe to give the report? What are the calculations? Is there a dispute mechanism? Are you gonna go to arbitration?

Have you already picked an arbitrator in like an a dispute resolution like section [00:26:30] in working capital? What are they looking for? If you're going to go with an independent accountant, for example. Are they an independent finder of fact or are they just going to look at the purchase agreement? What are the definitions?

Gimme the numbers. That's it. So that's all of that mitigating all of that risk and the fights and the liabilities that are gonna happen down the line. It's a lot of upfront planning for structure of if this then that, here's the resolution, everyone's happy. Now everyone just wants to get the deal closed, but we need to get into those [00:27:00] details.

Kison: All the things that could go wrong. Absolutely. We spell 'em out. What does that look like in agreement? Is it specific section to list all those out? Yeah, those all disclosures or,

Tina: so usually it'll follow whatever the issue is or whatever the topic is. So if it's working capital, it's probably a working capital mechanism.

Dispute mechanism there. Indemnification is another one that's heavily fought. Let's say there's a claim that comes in afterwards, who's gonna control that defense? Is it the indemnifying party or the indemnified [00:27:30] party? Is that going to change anything? Do you get expenses advanced? Are there certain claims where you can get expenses advanced?

Are there certain claims that are just barred? We also need to think about that and that'll pop up in its own section of the agreement. There may be other issues like escrow releases, if there's that 10% purchase price holdback for example, that also needs to be set out in the escrow agreement of, okay, are we gonna do joint instruction or are we just going to do, hey, here are the final calc, send it over to the [00:28:00] escrow agent and they shoot

Kison: it out.

Tina: But again, you have to think about all of these things.

Kison: The good old indemnification clause. Ah, I love it. Disclosures. Is that part of,

Tina: oh yeah. Disclosure schedules is probably, I would say the most negotiated

Kison: bit. Teach me this stuff. It comes up all the time and I don't like really know the mechanics of it.

Tina: Disclosure schedules. Best way I can explain it, it's you're making a representation at a moment in time. So at closing, seller is going to represent to you that their tax returns [00:28:30] are material in all respects, that as of this date here are their top customers. That as of this date or between these dates that they haven't had any litigation, for example.

But then let's say it's two or three months afterwards and then you get a claim, a litigation claim for something that happened during that time period. That's a breach of that rep.

Kison: I wanna tie the reps and warranty insurance on this. Mm-hmm. Because usually it's not like, I know we go to Canal Street and you go buy the policy, but yeah, they do a [00:29:00] bunch of diligence on their own.

Maybe walk me through that process of like how they actually like build that policy out to tie together with these purchase agreement.

Tina: Great example. I did buyer side rep and warranty insurance diligence and it is. You want to talk about a detailed process, everything needs an answer, and you're on a call.

It's almost like a senate hearing, quite frankly. You're on a call with the insurance company and they're gonna ask you questions like, why are we seeing this here? There's a potential for [00:29:30] liability here. Are you sure that there isn't anything here? Or, we notice this, we're gonna carve it out. And now maybe that's something that you actually wanted covered.

So the thing about rep warranty insurance, it actually changes how you address the actual rep and warranty section. So if you have rep and warranty insurance, you don't want to be too specific because if you're too specific, then it's carved out. If you're seller, everything that you disclose on your disclosure schedules are carved out.

So you want it to be as narrow as possible. [00:30:00] Buyer. You also want it to be as narrow as possible because you want to be covered for as many claims as you possibly can.

Right

Tina: now, let's take the rep and warranty insurance out, and now it's just seller has to indemnify us. If something happens, they want the broadest disclosure because they're gonna say, no, I told you it's no, it's done.

And it changes the mechanics like that.

Kison: That's so interesting. I never thought about it that way.

Tina: Mm-hmm. That's why lawyers are here.

Kison: Yeah. I admit it. Lawyers do a good chunk of the work

Tina: [00:30:30] sometimes.

Kison: Pretty much do like 80% of the work in m and a deal.

Tina: You guys do all the hard work, you identify them, and we just have to make sure you guys get to the finish line.

Yeah.

Kison: Yeah. It's a principle. Now, I was gonna say, as a banker, back in the days, we take all the glory and fame and credit.

Tina: Yeah. I hesitate to do that because. I wait until all the statute of limitations are done and the rep and warranty survival period's done before I start beating my chest and saying, yay, that deal closed.

Just to make sure everything's fine.

Kison: That's a good way to do it. You still go to the closing table? The closing [00:31:00] party?

Tina: Yes. Yes. We still do sometimes. Although with the pandemic, I missed out on a lot of like the deal toys. A lot of the, the deal dinners, the $5,000 dinners, whatever. Occasionally I'll be invited out, but I feel like I missed out on that really big era of closing dinners and toys and trinkets.

Kison: Yeah, that's true. Come on. So let's bring

Tina: that back

Kison: essentially. I know. Do they cut it out? I feel like they, I haven't seen as many deal. I didn't look in your office. There's not With all the deal toys. Yeah, you gotta go to the banker's office. They always have a big showcase as soon as you walk in. And

Tina: honestly, [00:31:30] that's right because every time I go to the bankers or I, or like we're on a WebEx call with them, I definitely see their deal toys.

It's stopping there. We gotta bring it back down to the lawyers. Yeah, there you go.

Kison: Force majeure and contingency clauses. How are they evolving? How are they used? Always evolving.

Tina: The problem with force majeure, it tries to mitigate what it thinks it's going to see. So you think hypothetically speaking, what could happen that's gonna stop this contract that will stop me from performing?

[00:32:00] Oh, a global pandemic or you know, but you're also at the mercy of the courts who will interpret this clause to say, is a pandemic the same thing as an epidemic? The thing with force majeure and the legal doctrine is you have to be explicit in what it is that you're carving out. So force majeure is fighting this tension of I want to be as broad as possible, but legally I also need to be as specific as possible.

But currently we have trade restrictions that may be coming up, so we'll have [00:32:30] contingency that actually comes up with that. Where if post closed, there's something that happens. I'm going to speak very vaguely. There's an adjustment possibly to the purchase price. A lot of cybersecurity.

Kison: So that's different.

So force majeure and contingencies. If force majeure is lower, hey, you can get outta the deal. Yep. If, if something happens Yep. That's gonna be in the purchase agreement. And then it's, you're, you're gonna get out after you close.

Tina: After you close it potentially. Yeah. So it's supposed to be like a, if there's a deal, I'm trying to think of if there's a deal that you [00:33:00] cannot complete, like you paid X amount of money for it to close and for some force majeure reason you cannot perform, the parties should be able to say, I can't perform this.

It's done. I typically don't see it in a lot of purchase agreements unless it's in a highly regulated or currently litigated sector. So you'll see a lot of cyber AI tech that usually comes up at that point.

Kison: And then the contingency clause, it's a little different. Yeah. It's, Hey, I, [00:33:30] I can almost a little bit of a claw back on some of the terms mm-hmm.

If this variable occurs.

Tina: Correct. And or if sometimes, as. I'm sorry, I have to put my seller's council hat on. You don't wanna deal with that. You don't. You just wanna say, okay, what's the possible issue? So to give a concrete example, independent contractors classifying them, that could change wages, finances, all of the financial flow of a company, right?

And there's also, depending on what are the penalties? How far back do [00:34:00] they go? Who owes the penalties? As seller, I would tell them, take X amount outta that purchase price. Set it aside. How long do we think it's gonna be able to resolve? Two years. Two years. That's all we're giving you. If anything pops up after two years, that's not our problem.

But as buyer, I don't want that. I want a contingency clause that's gonna stay as long as the statute of limitations allows me to keep it in place. Because if it's year three and I can still bring in a claim, you better believe I'm bringing in that claim

Kison: besides the table. Yeah. You ever feel, you're like developing a Jacko [00:34:30] Hyde personas when you sort of see it on both sides and you're like, uh duh.

Tina: Yeah. Yeah. That's a mock trial in me. And if there are any astrology people, I'd say that's also my Libra moon. Being able to just see both sides, it's exhausting.

Kison: How can teams prevent conflicting clauses and deals with multiple agreements? What does that mean actually? What's that question? Trying to, so this

Tina: is a very important topic.

When you deal with rollover equity, for example,

Kison: you'd have like an agreement on the role over equity uhhuh, let me frame it a little different. In [00:35:00] deals that have multiple agreements, conflicts can come up. Do you have examples or how do you address those things?

Tina: You have to create a hierarchy of documents.

Who's gonna talk about some main provisions? Dispute resolution, indemnification, governing law, that's probably gonna go in the purchase agreement. In the other agreements, employment agreements or anything else, you're gonna refer back to the purchase agreement. That's the simplest way to do it. But not everyone does it that way.

And there are other terms that need to be adjusted in an [00:35:30] employment agreement. Indemnification, if it comes up, it's gonna be tweaked specifically for that. The issue that tends to come up is with rollover equity, because you have these documents that they're not going to change them for a specific. And as buyer council, I'm not gonna have 10 different equity documents that I need to track.

There's gonna be one, and you need to figure out how to fit into this one document. Now, counsel, buyer's counsel, I'm trying to figure out how to bring that document into every transaction, and there may be [00:36:00] conflicting terms. So let's say an employee, a key employee, has rollover equity, there's a clause for termination for cause.

He gets terminated for cause. That then ties usually to rollover equity. Rollover equity may have some notice provision of triggering default, whatever we need to make sure. Is there a notice provision in the employment agreement? Is there a notice provision in the equity docs? There's actually an example where it was the reverse.

The key [00:36:30] employee wanted to leave and they had an agreement in their employment of this is how you need to leave. Here's a calculation, notice provisions, et cetera. Up to the point of it needs to be FedEx mailed, blah, blah, blah, blah, blah. Now as lawyers, we also have to look at the actual like governing documents, so that's the operating agreement or whatever, and it will have his own set of rules.

If the lawyer who negotiated was really on their stuff, they're going to say that [00:37:00] the employment agreement supersedes any conflicting terms in that LLC agreement. So if that LLC agreement, I'm just gonna say LLC has a conflicting term, we're not gonna go by it because then if we breach something,

yeah.

Tina: Because now we don't know which one to follow, that's gonna mess up my client even more. Then you run into, we need to draft a letter, get them to release and waive that. If we do it this way, it's not a breach and that we're not in default. And that they then can't take X amount of money out of the purchase agreement [00:37:30] because of whatever.

They can't touch escrow. Everything plays together and you have to be mindful of that.

Kison: So if both agreements say that our agreement supersedes everything else and you still gotta this case, you gotta negotiate it,

Tina: that's when you pick up the phone and you call the other council and say, Hey, we both know that we negotiated this.

That's your equity doc. This should probably be the one that actually governs. What's your risk for me not following that?

Kison: That's the question. Good to common sense?

Tina: Yeah. [00:38:00] Which that's sometimes it's hard to come by in deals.

Kison: You gotta go meet for a beer and Yeah. Hash it out. Yeah, exactly. So we have examples of the multiple agreements, which is a whole other dynamic.

I'm thinking back to just things that pop up after the deal.

Tina: A lot of it centers

Kison: around rep and warranty

Tina: or financial covenants or now it's are always, that's the big one.

Kison: Earn outs and then equity agreements with employees. Yep. The jurisdiction and governance part of it that I was curious [00:38:30] about because like we're looking at a company outta the country.

Mm-hmm.

Kison: Right. When it wire comes to all this stuff that we're negotiating, we just talked about a lot.

Yeah.

Kison: Where, what restriction do you end up with? Because I obviously want it here in the us. They're gonna want it in their doil.

Tina: My hat on right now is as your counsel, as buyer. They're coming here.

Kison: They're coming here.

Tina: Yeah, they're coming here. That's where we're gonna start. And if there's a reasoned argument, that's why they can't, for example, let's say that they're in some remote country, I don't know, travel [00:39:00] restrictions, for example, that could also be a thing that you do. Is that common? No. A lot of times in the US it's always Delaware.

Kison: Yeah. Yeah. The US is simple. Yeah. I'm just, as a buyer, I feel like I'm the one taking the risk. But the seller is like, well, it's my house

Tina: now. I'm gonna Jekyll and hide it as seller's counsel. I'm gonna say, if you're coming to me and telling me that I have an issue, the least you could do is come to my backyard so that I could have my resources and let's hash this out.

If you have an issue, come here, let's hash it out. Don't also give me the expense to [00:39:30] then come to Arkansas, which has come

Kison: up sometimes

Tina: random states,

Kison: international arbitration court in The Bahamas.

Tina: Okay, so who's paying the flights

Kison: over Zoom?

Tina: So it could also be a thing like that, whereas sometimes you have to figure out how to make it equal for both sides.

So let's say you really wanna do commercial arbitration in Bahamas. For some reason, seller is like, I absolutely not, I'm not gonna do that. They might say, let's do a prevailing party cost, like type of thing. Where if I come down there, you're not only [00:40:00] paying me what the judgment is, you're also paying my airfare.

That could be something that's negotiated, or you could say upfront, Hey, I know that this is a crazy request to you, but it's really important to me. If something happens, like I'm gonna pay upfront the expense for one person. Now see, when you start making offers like this, you have to be specific. One person comfort plus not first class, things like that.

What are you willing to give to get that thing that you really want?

Kison: It's a lot to negotiations,

Tina: [00:40:30] honestly. It sounds like a lot, but when we really speak with clients, we figure out there's usually like three key core things where I know that at the end of the day, I can't deviate from these three things.

And then there are other things that you may be willing to move the goalposts a little bit. I might use that in order to get you your hard three. We'll talk about it. And it may seem like a lot, like in that scenario, the comfort plus whatever Bahamas thing, but is it more important to you, The Bahamas [00:41:00] versus the indemnification survival period?

And if the conversation that we had is the survival period, I'm gonna tell you, give up The Bahamas and we're gonna fight for a longer survival period. 'cause that's what you actually want at the end of the day.

Kison: Sounds like good guidance. Going back to the earnouts and just equity agreements, what are the things that come up or the risks post close on those?

I hear about all the time, I hear, especially earn notes, how often they end up in litigation. They didn't put the right things on it, or integration sort of skews things. Yeah, [00:41:30] somebody gets pissed off and lawsuits get filed

Tina: that then goes to litigation. But it's funny because we get looped back in because the litigators then ask us to translate the documents for them.

What is this? What's ebitda? And we have to now explain that per the agreement they were supposed to do this and they actually did this. So the thing about mitigating risks with respect to earn out, it's again, being really specific at the start. How are we calculating it? What is the actual metric that we are looking at?

I mentioned [00:42:00] a little bit earlier, but profitability. Top three customers, if that's what we're actually looking for. Who controls during the earnout period? How long is the earnout period seller is going to want as much control over that. But as buyer, this is your business. Now you wanna take control of it, but you also wanna be mindful of you don't wanna make expenditures that are gonna screw the earnout over 'cause you also wanna keep that relationship going great or going [00:42:30] well at least because they're probably employed with you.

The key principle and you wanna keep everyone happy as much as you can. Another thing about risks mitigating and earnouts, you can't go all or nothing. A sliding scale is your best friend and it makes it a lot more palatable to, you know, I missed the top metric by $500,000, but I'm still gonna get X amount of money.

Dang. Even though I didn't max out my earnout, I still walked away with some cash. All or nothing is where it really gets [00:43:00] nasty and they're gonna look at every single dollar that was spent to say, you did X, Y, and Z to make me miss that 500 K.

Kison: And kind of like bouncing between doing earnouts and seller financing.

Earnouts are typically paid out like annually. It's not years. Like it seems like a typical term, right?

Tina: One year, two years. Yeah. Okay. It's usually tied with employment.

Kison: It's like a chunk at the end of the year, basically. Mm-hmm. Give this versus seller financing. It's like a loan term. Yeah. I'm gonna pay you monthly with this much interest.

Part of me is it makes sense, but then the other part's like, well, I can buy more time if I just [00:43:30] gotta wait to pay the chunk out.

Tina: Yeah. I think with the seller note also is, do you have any other debt? How does it play in your financing universe? Now I'm putting my seller hat on. I don't want a seller note because if you are a private equity fund, you probably have other debt.

My debt's gonna be subordinated. I'm gonna be last in line. That's money I'm probably not gonna get Get something goes

Kison: wrong. Yeah. Yeah. You got a chance of not getting that money. Yeah.

Tina: But as buyer, of course I'm gonna want that. You're giving me a seller note. How sweet of you, how kind. But I got maybe three other lenders that need to get [00:44:00] past you first.

And it takes me a little bit more time to pay X amount.

Kison: I don't have any other lenders. I can almost let you know like you'd have personally, basically. Exactly.

Tina: And that'll make it much more attractive. And then based on your cash flow, you can figure out how long you kind of need. For the seller note, a good seller is going to probably ask for a guarantee.

Seller notes can be used well, but it can get a little dicey. And also remember that relationship is now being prolonged. Even further. Employment agreements are now what, two, three years or five, maybe [00:44:30] a seller note can go even longer than that.

Kison: What are terms you typically see on seller note?

Tina: I've seen five years.

Yeah, five years. Five years is pretty common. Is, yeah. It's probably your standard. You could push to seven. A lot of the sellers that we represent, they've built this business, they're selling it and they wanna retire in two years.

Kison: Yeah. It's stick annuity out of it.

Tina: Yeah. Also, because of that, we need to be really mindful of making sure that backend money is available.

Kison: Makes total sense. Anything around the employment equity agreements that [00:45:00] pops back up? I guess it's more around what we talked about earlier. Somebody gets laid off. What were the terms around that?

Tina: Yeah. If someone gets terminated for cause, if the other party wants to terminate for, they just want to terminate, what are the implications for that?

There's a lot of negotiations with perks, especially with sellers or key employees. As a buyer, you may say, Hey, in our company we have X amount of holidays, et cetera, and I need to keep it uniform. So no, you can't have 40 days off. I also need you here. That's more cultural risk [00:45:30] and employment agreement risks that kind of ties hand in hand.

And the employment agreement risk, along with the equity risk that we touched a little bit earlier, is what happens when this relationship ends? Do they keep their equity in the company? Can they be redeemed? Do they have to force you buyer to pay it back or to buy those shares back? And what's the valuation at that point?

And again, that's something that we need to talk about now and not later

Kison: covered a lot. I liked how we went back and forth, both sides of the table, Jack Hyde, if we [00:46:00] weren't going back and putting more of that seller cap on. Mm-hmm. What are some of the key things that you would highlight in terms of things that you would really hone in on?

If I was gonna sell a business, and I'm creating a scenario here, we had a big corporation that wants to acquire us, which is like flattered the big check in front of us. Hey, we're gonna give you this amount. It's like, whoa. Hard to say no to that. What are some of those things? 'cause a lot, I could see that you getting glossy eyed over just getting the check, but then.

All of a sudden it's like tied to this, her now tied to this, this. It's like, [00:46:30] you're actually only getting this little check at closing. And I'm like, well, what the fuck? You know,

Tina: putting this seller hat on. It's at the beginning. We often just tell them like, please don't give up. Like, especially at the end, deal fatigue is a real thing.

Kison: That's a big thing that does not get talked about, like when you sell a business. Oh wow. Yeah. Yeah.

Tina: You are exhausted. You've been pouring through diligence, you've been negotiating the business teams, you've been paying your legal team and the closings that in sight, you start feeling like is it's ever gonna happen?

My [00:47:00] wife wants a vacation, you

Kison: know,

Tina: like,

Kison: I need this to close. We should start like a therapy consulting company just for that. Yeah. Like people going through the sell side process because it is, you're paying all this money out and sometimes you know, bankers gonna want you to do like a seller Q of E and you're just like, you got them on a retainer, you're just like paying a lot of money out.

Yeah. And then the fact is the buyer's got a whole army of people running due diligence and it's just you and the CFO and maybe one or two other people. Yeah. It's intense.

Tina: Yeah. Or asking for a document that you're like, [00:47:30] what is that? I don't even know what you're asking me for. Or. Audited financials. I didn't audit my finances.

More smaller mom and pop companies, kind of things like that. But I would advise the one thing is that deal fatigue is to just be mindful of that diligence. It's going to piss you off

Kison: when you get involved. On the sell side, if I, I got the company approached, we got NDA, all of a sudden they got this LOI they sent.

If I call you and say, Hey, I got this LOI, we should review it together or do I just sign it, then call you? So what should they do versus what they actually

Tina: do? They should [00:48:00] call us once they get the LOI not signed, because we can still negotiate certain things at that point for you and already set the table of.

This is not gonna be a walk in the park. I don't care how big the check is. I understand you guys want X, Y, and Z, but we need to protect our client, an LOI that comes already signed. Our hands are kind of tied and at that point, again, we're gonna ask for that second NDA to make sure if they get any confidential information from you and this deal does not close that they can use it.

I cannot tell you [00:48:30] recently how many times it's happened. A buyer has contacted a customer or a vendor before the deal closed, before the seller even told the network that they're planning on selling and it ruins everything.

Kison: That's something I would do. I would like, Hey, I wanna do some customer diligence.

I wanna know like how happy of a customer they are, how likely they're to stay.

Tina: So you can do that, but you have to do it with seller's consent. You can,

Kison: okay, I gotta let you know. But the seller is probably gonna be like, no way, dude.

Tina: No. Plus sellers, I mean, [00:49:00] they will figure out a way like this is your first opportunity to work really together business wise.

How are we going to approach this? You're probably gonna have to make it nice and sweet of, Hey, you're gonna be working with me now. Oh, it's a good thing. And then seller is going to emphasize, we've had a great relationship. Trust this guy probably also gonna work a little bit for this guy, so we're not gonna be completely detached.

So you want to actually communicate with seller

Kison: and then you may even find like a third party that does a lot of [00:49:30] this stuff these days. Yep. So cool. But we got that, we got there. Our second NDA as a seller, I like we talked a lot of the counterpoints that the buyers present. Mm-hmm. That you have to represent and hey, protect the seller's interest.

Any other key things that are unique outside of what we just discussed?

Tina: The diligence process I would say is different between buyer and sell side buyer diligence. Like you mentioned, we're gonna be communicating, I'm communicating with your business team. I need to have a more aggressive. I would probably say [00:50:00] analytical view of the diligence and how it works with your business and the purchase agreement.

As seller, we're being responsive to you, so you're okay. You asked me for this, I'll give you that. If you don't ask that follow-up question, I'm not gonna give you the answer. And that's that. So that's the difference already in the diligence. The problem is sometimes sellers just don't wanna give any diligence or they just don't have it.

You have to then figure out, how can I get a responsive answer to this? So you'll have to have narratives or you'll have to have, for example, sometimes they don't have customer agreements, so [00:50:30] they'll just have purchase orders or something, or a handshake. And I need to figure out how long has this handshake been going on?

How often do you pay this person? What exactly do they do? So we have to figure out that on seller side diligence as well. I need to understand how your business operates completely. Buyer side. I need to understand how your business is going to operate in mine. If I'm sell side, I don't really care about how it's gonna operate in yours.

You need to figure that out. I need to figure out how this thing operates to get it legally ready to [00:51:00] sell.

Kison: It represents the seller's interest. Yeah. Those are the main things. We talked through a lot of the other clauses that come up and they ultimately just get negotiated.

Tina: Yeah. As seller's counsel, we can go a little bit more working.

Capital adjustment, for example. Yeah. I'm gonna fight as seller's council that the way how we have done the accounting is the way it's gonna be done at that point. It's the way how an earn out's gonna be calculated. We need all the numbers to match the same calculations because we can't do working [00:51:30] capital this way.

Kison: That's how we do it.

Tina: You can't do it in the earnout, the way how you calculate

Kison: things. We're a big corporation and like we know better, we follow all the gap accounting rules unlike you.

Tina: But then we're comparing apples and oranges and it's not an accurate representation.

Kison: That's why you gotta listen to what we tell you

Tina: because you're not actually, we're not gonna get the full actual picture and we don't know how it's gonna swing.

So you may actually want it to be the way how I've been accounting,

Kison: what's market Depends. This is a really [00:52:00] interesting thing 'cause I feel like it depends. It depends because how, what's based on, is it like Alexis Nexus database that we say, okay, according to Lexis, this is market. Or Hey, we've done this a million times and this is market.

Yeah. What? What is market?

Tina: So you can find Mar, and it's great that you asked that because as a, it was a third year associate, I asked myself, how do I figure out what's market? People are talking about market trends. How do I keep track of this? Do I look at like Bloomberg or things like [00:52:30] that? There are databases online where you could look at trends, where caps are going up to X amount.

Holdbacks are going up to X amount, for example. However, you don't want to just go off of external numbers, though. They can be guideposts. I'm really big on data. I am probably one of the rare attorneys, even though we exist. I love Excel, so I have my own personal tracker of deal sizes and different percentages and like how did we negotiate reps and warranties?

How did we negotiate survival periods? If we have rep and warranty insurance, [00:53:00] did we change anything else that maybe in another deal we wouldn't have? Deviated market. It depends. Depends on in the business sector, it depends on the size of the deal, right? Because some deals I've actually seen escrows go up to 20%, 30%, but again, it depends on the size of the deal.

Kison: Have you used any AI on deals you've worked on?

Tina: So I have not.

Kison: Personally. I was ask, is AI gonna figure out what's market?

Tina: Here's the thing about ai. What is the data set? It's passed. [00:53:30] It's relying on that. If no one's gonna update that knowledge bank AI's not gonna know what's market either. AI's gonna know market at a certain time.

Based off of whatever the model learned at that point. And things can shift and maybe the model doesn't update. Next thing you know,

Kison: somebody's gonna market it though, is that we keep our model real time updated. Real time. Real time. As soon as like deals close, somehow we get that info and update our,

Tina: I mean, I think you've just thought about something with SEC Edgar, if you keep a tracker on that.

Kison: Yeah.

Tina: Because

Kison: it, it is [00:54:00] all public on those agreements.

Tina: Yep,

Kison: yep. Would you correlate it to private? 'cause again, like those little deals, all these things are very different and

Tina: you could probably find certain terms. Certain terms, yeah. That you could match with, but Yeah, no, because sometimes with those public deals, it's just the disclosures that and the like financial requirements, reporting requirements, regulatory compliance, that changes.

Maybe they'll have an extra escrow for that. And you don't have to account for that. So then you'll be like, okay, in my agreement I don't have to take care of that. But at the baseline, what was the purchase price? What were the [00:54:30] percentages? Did they get rep and warranty insurance, et cetera. Yeah.

Kison: To be continuous.

We'll see what happens. The contract analysis is the other big one that we're seeing bubble up more. So generative AI is really made that effective. I got personally involved in developing that last year and I don't, do you see that sort of coming in the field? And

Tina: I've seen it come in the field in the sense of a lot of panels talking about how AI is going to get rid of junior associates.

You're gonna

Kison: get rid of the first and second year.

Tina: I just don't buy that

Kison: because then you'll be able to, because there [00:55:00] won't be any crop of future attorneys, but you'll be able to keep decreasing your fees infinitely for paying like 50,000 plus an hour. I'd like to retire at some point. That'll be it.

Wake up an.

Tina: With ai in particular in contract analysis, it's good for those specific targets of change in control or assignments. Yep. Insurance requirements, things like that. Very targeted, but let's go back to the mock trial analysis of understanding the entire [00:55:30] universe of the deal. AI struggles with contextualizing like some of the nuances of some of these contracts and how they play a role with the acquisition or the sale.

That's where things get a little bit dicey and that you need that human touch of, okay, yeah, this contract has a change in control provision. Yeah, we need to flag it, but there may be other things in the agreement that's implicating an indemnification obligation or something. It can help. I think it's a good compliment.

I don't think it's a replacement.

Kison: Other thing with ai, I was thinking [00:56:00] of just the regulations around ai. I feel like it's still pretty undefined and they're starting to define it, especially like in Europe. We didn't talk about the regulation changes in general, but like how do you sort of address that when you're thinking about.

Risks that come about, potential changes in regulation, potential changes with just the way you reference AI usage.

Tina: So that's contingency clauses.

Kison: Okay. So we fit that in the contingency clause we talked about. Yep.

Tina: Yep. And survival periods for indemnification if something changes.

Kison: Okay. [00:56:30] So we talked through ai, we talked through managing the risk, managing just the contract analysis.

That's gonna be interesting just to see what happens because things are changing pretty quick.

Tina: The way for ai, at least the way how I envision it. I know that there's some attorneys who are just anti ai, but I have touch a BT on my iPad. Like

Kison: I was gonna say, you gotta be using it personally. Like I pretty everybody is.

I saw my 11 year old's son using it to use homework. Do homework, taking his picture and put it in chat. It gives an answer like, oh [00:57:00] no, I had such a confused moment because I, I didn't know to be mad or proud of him. It was like both at the same time.

Tina: Yeah, yeah. I'm like, it's really efficient, but you're missing the point.

Right? And I'm like, like,

Kison: maybe you're odd to something. Maybe you should just learn how to use AI better than everybody else, and you'll be better off that way.

Tina: There's this weird adjustment period of figuring how AI is in our lives because it can do so much that it's overbearing. It's like, well, what can I do then as a human?

But then the more we use ai, the [00:57:30] hallucinations, for example, it's like, wait, what's this? We're figuring out that there are limitations to it. Once we get some more of those regulations, more of the tech actually behind it, then we'll be able to figure it out, how does this actually fit into my life? Travel itineraries.

10 outta 10.

Kison: I agree. I love doing road trips and especially when like just gimme the unique stops in between these cities.

Tina: Yeah. Yeah. I recently did it because we're, I'm my best friend and I, were gonna do a quick little trip in Europe and I said, here are the main cities, here [00:58:00] are our main interests. I want cost efficient and I want fun.

Gimme an itinerary. And it gave me the best itinerary that I could not have come up with.

Yeah.

Tina: AI has its place in m and a for sure. We just need to figure out what it is. And there's also confidentiality. It's the name of the game.

Kison: Yeah. We're gonna get to the point where we actually trust it, but it seems like we are in the big hype cycle.

And the dust settles, there is gonna be some significant changes in failures that stand out.

Tina: Yeah. And sometimes you just need to run that [00:58:30] specific analysis of, give me all of the contracts. For example, I need every single contract. That buyer in the future will have an obligation to spend more than $10,000 or something.

You give AI that prompt. You give it the universe of contracts, it's gonna shoot it out. But also, you have to be very specific because AI may be like, there's an insurance requirement. It's going to require X amount, so that'll get it above the 10 K and you're like, no, I just want it under this contract.

So there may be some refining, but if very [00:59:00] specified tasks, probably material contracts. That's where I'm seeing it. Like really pop up.

Kison: You wanna come test our contract analysis ai

Tina: 1000%.

Kison: Let's do it. Tina, I gotta ask, what's the craziest thing you've seen in m and a?

Tina: I tried to think about like clients and I'm like, nothing's really popping up.

And also out of the sake confidentiality, uh, whatever. But the craziest thing is always the attorneys on the other side who don't wanna negotiate. We'll be on a call. Yeah, yeah, yeah, yeah. We'll do that. Yeah. We send the purchase agreement [00:59:30] over with the things that we talked about and they all get rejected and it's like we just sat on a call that that was okay.

We talked

Kison: about it. Yeah.

Tina: I've had a deal before where, I don't know if the attorney wasn't talking to the client like their own client, but their client was talking to our client and funneling terms up to us and we're like, are you sure? And then they're telling us, no, that's the deal. And then we go back to opposing counsel and they're like, that's not the deal.

We're like, wait, wait, who lied to who? And now we're [01:00:00] trying to figure out what's going on. And that's when you get the 15 people on a call, legal's on finances, on business teams on, just so that we hash out what's the actual deal point.

Kison: That is wild. I've heard variations of that happen quite often. I know you gave an example, but now I'm pushing for crazier.

Tina: Sometimes it's just things don't add up. Okay. Okay. And I don't just mean financially, you know that someone's married, but someone may have someone else at work and that somehow pops up in [01:00:30] diligence. Now you're trying to figure out how are we dealing with this Exactly. Are they're an employee. Wow. So there's that hypothetical.

There's also cash sweeps where you try to explain when you sell asset, like an asset sale or not just asset sale, equity sale, you're not selling cash and accountants, attorneys sometimes struggle with understanding working capital and the fact that you're not actually leaving cash. Right. It's accounts receivable, accounts payable.

It needs to, things need to balance out. And then you will do a [01:01:00] cash sweep, but sometimes, not sometimes, but there was a scenario where someone swept twice and so now they owed the other party X amount of money. It became this whole litigation thing. Wow. Where it was like you knew you weren't supposed to take that money.

What do you mean you didn't know that you weren't supposed to take that money?

Kison: Ooh, getting greedy in the wire. Woo.

Tina: Oh yeah. That buying a business but not having the requisite permit. Okay. To actually conduct the business. And then the person that has the permit wants to retire. What do you do then? And it's, did you not do your [01:01:30] diligence before?

But yeah, there's that I can share with you my craziest closing story. Let's hear it. Actually, this was actually the rep and warranty insurance deal buy side. And there's a certain point in a deal where it does not matter how thorough your memo is, you can't step away because you have so much knowledge with respect to this deal that you can't have someone kind of like step in if you need to go away for a vacation or something.

I had a wedding in Mexico City that I just could not, [01:02:00] I couldn't miss the closing. Kept getting pushed back and pushed back. And I'm looking at the calendar and I'm like, this is gonna hit in Mexico City. I just, I know it. Of course it's the third dam in Mexico City. We have to close the deal. Now I'm on my way to the pyramids, a UNESCO world site, and I am in the back of a Uber on a Mexican highway closing a deal.

And I

Tina: like, I just, I have a picture of me, like with my laptop in the Uber and I just remembered [01:02:30] closing the deal, releasing the signatures, the wires get funded. And my boss was like, please drink all the tequila for me. 'cause it was a long deal. I'm looking at the pyramids, not the pyramids, the temples, and I'm like, I bet you they were not thinking that someone's gonna be here.

That just closed the m and a deal with a laptop in the back, like, you know, and just doing some follow up post-closing. Let's make sure we send the closing binder, stuff like that. But. Yeah, that's the craziest one. The back of an Uber on a Mexican highway.

Kison: Just [01:03:00] transport right into ancient history.

Tina: Of course.

Yeah. Yeah. It gave me a really nice perspective on life.

Kison: Tina, this has been an awesome conversation. I really enjoyed it. You've helped me become a better m and a scientist.

Tina: Oh, I appreciate

Kison: that.

Tina: You've helped me as well. I shared this with you when we first connected. I heard about your podcast on the Netflix show, partner Track, and that was also at the time where I was looking like, what's market?

I don't know what these things are, and you had a bunch of these like senior practitioners and even still now speaking about these [01:03:30] topics that I'm like, wait, I don't know what that is. And wow. Years later, look at me now.

Kison: I love that. Came full circle. For those of you who don't know, we had a cameo in a Netflix series called Partner Track, which is like a romcom that takes an MA law firm.

Highly recommend. Check out episode one and pay attention 20 minutes in the first episode. Yep. We're plugged in there nicely. And then from that we've had a lot of attorneys I've noticed. I was like, well, I gotta make a point to interview attorneys and full circle you follow circle podcast interview. It was a phenomenal interview and you're like, appreciate it.

Recognized recently as one of the up and coming rising [01:04:00] stars for NYC attorneys.