Don’t Forget the Laws of Human Nature

It strikes me that both lawyers and clients get so wrapped up in the business, legal and technical issues of a deal or situation that they often forget what I will refer to as “the laws of human nature.” True, these are not the laws I studied in law school, but I can tell you this – failure to understand these laws can often result in the failure of a deal. And what’s so sad about that is it’s completely avoidable in most circumstances.

So what do I mean when I talk about the laws of human nature? Obviously, I’m not talking about statutes or regulations. Simply put, I mean those aspects of the deal-making process that have more to do with human behavior, values, interaction and communication than with the specific parameters of the deal. Failure to understand these “laws” and acknowledge the fact that they fundamentally affect business transactions is just as often the cause of a failed deal as the laws on the books.

So, here are 10 lessons I’ve learned as to these laws:

1. It’s important to know what you AND the other party to the negotiations need, what you want, and what you’ll accept – and how these may change during the course of negotiations.
2. Nobody needs to “win” a negotiation – the best deals are win-win.
3. It’s ok (and in fact, it’s often productive) for the other side to like you.
4. It is imperative that the other side respect and trust you.
5. Emotion is rarely productive in a business discussion.
6. Professionalism enhances the likelihood of success.
7. There’s no value in frustrating or embarrassing the other party or wasting their time.
8. It’s important to know when you’ve pushed far enough.
9. Miscommunication leads to failure just as often as disagreement.
10. The deal is never final until it’s signed.

Consider the laws of human nature the next time you negotiate a business deal, and I’m confident you will enhance your prospects for success.

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Transactions From the Litigation Perspective

The law, like most disciplines, has very few absolute truths.  However, it is my firm opinion that a good business transaction is always better than a lawsuit.  Therefore, it’s critical that business transactions and the underlying contracts be structured to maximize value, reduce risk and avoid uncertainty.  After all, risk and uncertainty often lead to disagreement and sometimes litigation.  Therefore, I recommend that parties approach business transactions and contracts with the mindset (but not necessarily the goals) of a litigator – and then use that mindset to avoid litigation.

I do not mean that parties should be argumentative or take one-sided positions.  Rather, what I mean is the deals should be structured and contracts should be drafted as simply, clearly, consistently and comprehensively as possible.  And once you’ve done that, they should be re-examined, and the following question should be asked:

• Is this the right deal, at the right time, with the right party?
• Is the deal structured as simply as possible?
• Is the contract drafted as clearly and simply as possible?  Is it consistent?
• Which provisions invite differing interpretations?
• Have you covered as many variables/contingencies as possible (you generally can’t cover them all)?
• Have you allocated between the parties as many of the risks/responsibilities as possible (again, you may not be able to cover them all)?
• Have you included appropriate insurance, indemnity and escrow provisions?
• Have you allowed for termination or some other type of walk-away if the deal doesn’t work out?  If so, have you anticipated the likely issues, disagreements and entanglements that can arise at this stage (they can be much different than those at the outset)?
• Have you considered how disputes will be resolved?  Mediation?  Arbitration?  Litigation?  Appraisal?  By whom?  Where?  Who pays?  What law/rules govern?  Etc.
• In light of all of these questions, and even assuming you’re comfortable with all of the answers, is this a deal that should be done?

Thinking like a litigator may be the best way to avoid litigation over your business deals.

So You Think You Want to Work with a “Big City Law Firm”

Having just completed a very successful closing in which we helped an Iowa-based company and its owners sell for a number that represents a HUGE return on investment, I’m feeling pretty good about the practice of law. After all, there’s nothing more satisfying to me than working with Iowa business people who have done it right and are getting their reward for doing so. These are people who recognize the value of a dollar and the importance of setting goals, evaluating risks/benefits, prioritizing tasks, allocating resources, and then executing.

I cannot, however, say the same for the “big city” law firm that represented the buyer in this transaction. That firm – whose website boasts that they are an international firm with nearly 1,000 lawyers located in multiple offices around the world – and its approach to the deal, represented precisely what many business people dislike about lawyers and what this blog preaches against – an overly technical approach that complicates rather than simplifies business deals and leads to countless hours and thousands of dollars in unnecessary legal fees (and lost business revenues) protecting against contingencies that are so remote and unlikely that no party to the deal really believes they need to be addressed, except for one side’s lawyers. In this deal, in fact, there were at least a half dozen times where the buyer said the equivalent of “we’re fine with that from a business perspective, but we’ll have to run it past our lawyers” – only to result in the buyer’s lawyers saying it couldn’t be done – generally for one of the following less than compelling reasons:

• “We’ve never seen it done that way.”

• “That’s not industry standard.”

• “We haven’t given that right to any of the other parties we’ve worked with.”

I’m not suggesting that the buyer’s lawyers in this deal are not good lawyers – especially if the sole measure is legal expertise and the analytical ability to identify every potential issue (no matter how peripheral) or contingency (no matter how unlikely), and every risk (no matter how small), and arrive at a legal strategy to address it (no matter how impractical or costly from a business perspective). By this measure, they are outstanding lawyers. So, if that’s what you’re looking for, go to the big firms in the big cities. But if you’re looking for a firm that views a business deal like you do – from a business/value perspective – you might start with a firm that’s a little closer to home and a little smaller.

Avoiding Surprises in Transactions – Part 1

Surprises may be great for birthdays and holidays, but they have no place in business deals, where they generally cost time, money, and sometimes even the deal.  That’s why there’s such value in predictability, certainty, process and control.  Lawyers and clients are a team and as such, should work together as closely as quarterback and wide receiver or pitcher and catcher to understand each other’s preferences, tendencies, strengths and weaknesses, and to “game plan” a particular legal situation or transaction so that, come “game day,” there are no surprises.

While complete control and absolute certainty are generally impossible – whether you’re forming a business entity, negotiating a merger or acquisition, conducting a securities offering or even litigating a case, the more certainty attorney and client can have, the better. 

I’ve found the most effective way to avoid surprises is effective and clear communication between attorney and client from the outset, so that the attorney clearly and fully understands the client’s expectations as to:

  • Timing – including deal timing and response times;
  • Communications – who should the attorney communicate with at the client’s organization, and how (e-mail, telephone (are voicemail messages ok?), fax, letter)?  Can the attorney communicate directly with the other side, and if so, do all communications need to be cleared with the client first?
  • Work Product – does the client prefer detailed legal memoranda or a simple phone call with the attorney’s thoughts/recommendations?
  • Scope and Responsibility – who will handle what issues/tasks?
  • Urgency – how important is this deal to the client?  Are there any “deal-killer” issues that would cause the client to walk away? 

The other thing I’ve discovered is it is almost always beneficial to lay out at the very beginning the likely course that a transaction will follow, including stages, structure, timing, transaction documents, pre-closing conditions, closing, post-closing follow-up, etc.  Equally important is to communicate and modify the plan as necessary throughout the transaction as things change.

In Part 2 of this post, we’ll apply these principles to a hypothetical acquisition.

It’s All About Risk-Reward

Anyone who owns or operates a business understands it’s all about risk-reward.  The old adage, “nothing ventured, nothing gained,” is true in business and in life.   The risk-reward analysis also applies to business deals and the underlying contracts – and if your business attorney doesn’t recognize this, you’d better make a change now.

Business transactions, by their nature, involve risk – after all, the safest course of action is almost always to do nothing, or perhaps, to simply do what you’ve always done or what everyone else is doing.  However, while those might be the safest alternatives, they’re rarely the most profitable and are never game-changers for your company.

So, how do businesses and lawyers work together to evaluate potential risks and rewards and reach that delicate balance where the risk level is acceptable and warranted in light of the reward?  I think it comes down to a few key principles:

First, the client identifies and communicates the ultimate objective and how critical it is to achieve that objective – is it “bet the company” important or essential to the company’s survival; or is it simply something you’d like to achieve, but only if the risk is minimal?

  • Next, the client determines and communicates what level of risk is acceptable (this can be measured in dollars, timing, opportunity cost, reputation, etc.).
  • Third, initially and throughout the process, the lawyer informs the client of legal risks of various decisions and courses of action, and the client makes informed decisions.
  • Finally, the client and lawyer work together to achieve the business objective,  seeking to maximize the upside reward and minimize the risk at all stages – from initial discussions with the other party and their counsel, to preliminary negotiations, to drafting the term sheet or letter of intent, to conducting and evaluating due diligence, to executing definitive transaction documents and ultimately closing (or not closing) the deal.

There will be many times in a business deal where the question has to be asked – what is the risk of this approach, and does the potential reward of the deal justify that risk?  These determinations can only be made effectively when there is close communication and a clear meeting of the minds between client and attorney.