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.

Avoiding Surprises in Transactions – Part 2

Part 1 discussed some general ways to avoid surprises in business transactions.  Here, I’ll apply some of those principles to a hypothetical transaction.

Assume a longstanding attorney-client relationship – communication and trust are well established.  Client plans an acquisition of a competitor.  Here are some key steps to avoid surprises:

  • First – an initial discussion between attorney and client so that the attorney knows as much as possible about the target company and the desired deal terms.  If there are other consultants involved (e.g., accountants, investment bankers, lenders, valuation experts, etc.), they may also participate, since communication among consultants may be just as important as communication between attorney and client. 

This may be the most important step to avoid surprises – every deal is not the same, and all parties must understand this specific deal!  Of course, this will be the attorney’s first opportunity to advise the client as to, e.g., recommended deal structure, risks, potential challenges, etc. – this type of advice should be ongoing throughout the deal.

  • Second – a discussion as to the likely stages and desired timing of the deal, which would typically (but not always) include:
    • NDA;
    • Preliminary Due Diligence;
    • Initial discussions/negotiations between parties as to deal terms (will/should the attorney participate?);
    • Term Sheet or Letter of Intent;
    • In Depth Due Diligence (again, will/should the attorney participate?);
    • Negotiate/Execute Detailed Transaction Documents (attorney and client (other consultants?) should work closely here);
    • Pre-Closing Conditions and Contingencies;
    • Closing; and
    • Post-Closing Conditions and Follow-Up.

This discussion may be initiated by the attorney, but it must be interactive, and tailored to this specific deal.  The key is for attorney and client to understand and expect these stages and to communicate any specific issues or concerns early in the process.

  • Third – the attorney should prepare a transaction outline or checklist, including responsible party, deadlines, status, etc.  This should be continually updated by attorney, client and any other consultants to ensure that everyone knows where the deal is and who’s doing what at any given time.
  • Fourth – throughout the process any challenges, delays, unforeseen developments, etc. must be immediately communicated to the entire team, with an assessment of how they will affect the deal, and hopefully with a plan as to how they will be addressed.

While it may be obvious, the keys to avoiding surprises (and the related costs and consequences) in business transactions are planning and communication from the very beginning and throughout the process.  Challenges will arise, but they should not be unforeseen.

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.

Not Just Another Legal Blog

As I write my first ever blog post, and perhaps as you begin reading it, we may both wonder:

  • “Why another legal blog?”; and
  • Aren’t there enough lawyers using big words to explain simple concepts, or even bigger words to explain more complex concepts in a seeming effort to write and speak in a way that complicates rather than simplifies the topic or transaction?

The answer to the second question is “yes” – there are enough of those blogs. The answer to the first question is, I hope I can present something different – a business blog written from a business perspective that happens to address the legal issues that arise in businesses and business transactions – hence the name, “BizB4Law.”

BizB4Law will follow a consistent theme – that the business aspects are ALWAYS more important than the legal aspects. Therefore, I will focus on business issues before legal issues and try and explain how the legal strategy and approach must always follow from the business objectives and realities.

With that introduction, let me make my first substantive point – it is critical in any business or transaction that from the outset the lawyer fully knows and understands:

  • the client, whether individual or corporate, and if corporate, the individuals who the lawyer is working with;
  • the business/industry that the client is in and the most important business and legal issues for that business/industry;
  • the client’s objectives for the particular situation and the risk/benefit to the client of achieving or failing to achieve those objectives;
  • the leverage and positioning of the various parties; and
  • the value that the client places on the lawyer’s role in the transaction, and the importance of the lawyer in achieving the client’s objectives.

In other words, the lawyer needs to know his or her stuff from a business perspective before the legal strategy can be defined – BizB4Law.