Some Problems Can't Be Fixed. They Can Only Be Priced.
C went to Hawaii, anyways.
C came to me ready to retire.
Thirty-five years building a specialized testing laboratory. A national buyer was motivated to close. C was 88 years old and wanted to go to Hawaii. The finish line was in sight.
My job: get C to Hawaii.
The first thing I do in any M&A situation is ask for the corporate formation documents. It’s standard diligence, the buyer’s lawyers will get there eventually, so I want to see it first.
C handed me a pleather-bound binder.
Inside: bylaws, assorted documents hinting at various shareholders, transfers, buybacks, releases. Evidence of a lawsuit and its resolution. A handful of signatures. About sixty percent of what should have been there wasn’t. No minutes except for a couple of years. No amendments. No employment agreements. No IP agreements. Thirty-five years of a company’s life, and the gaps in the paper trail that create unfixable liabilities, designed to make buyers walk away.
C and I went through each document, each share transaction, and built a list of what was missing. To each missing item, C had the same answer.
“I ran this business like a family business.” “I have no idea where that person is.”
I tried to explain the gravity of what I was looking at. It seemed to slide right off. Naturally it would. For C, this business was a life’s work. C had lived it. C didn’t need paperwork to prove what C had built. Thirty-five years of treating customers right and employees right, the business was real. The binder just didn’t record it.
Months of fielding questions, reviewing and editing an asset agreement and ultimately the first buyer walked away. Too many questions. Too many unknowns. Too much to indemnify and not enough desire to close.
C still wanted to go to Hawaii.
Three months later, a second buyer emerged, an international buyer, even more motivated than the first. We had learned something from the first deal falling apart. This time we weren’t going to let diligence find the problem. We were going to lead with it.
Before the term sheet. Before the lawyers got involved. C’s team sat down with the buyer’s business team and opened with the gap.
Here’s what we have. Here’s what we don’t have. Here’s what thirty-five years of running a family business looks like on paper. We’re not going to wait until you find it, we’re going to lead with it, offer to price it. If you’re willing to work with us, we’re willing to work with you.
The buyer’s team leaned in. I knew we had a chance.
The argument was real, if the Buyer was motivated enough.
C is 88 years old. The people named in those missing documents: the former shareholders, the parties to agreements that were never signed, the names attached to the gaps, are C’s contemporaries. They would be in their eighties or nineties too, if they’re alive at all. If none of them had surfaced in at least the last twenty-five years of active business, the probability of a claim emerging at all, let alone in the next two years, is low enough to price. Because there really isn’t a way to fix it.
The buyer wanted a twenty percent holdback for five years. We countered: ten percent for two. The shorter window mattered. Five years of exposure on an 88-year-old seller’s balance sheet is a different conversation than two. Two years was a reasonable period during which any motivated claimant would realistically surface. Two years was also a period of time that we could reasonably expect C to stay in charge of the remaining company. Beyond that, we were just paying for anxiety.
They accepted.
Some problems can’t be fixed. Not when the documents have been missing for thirty years. Not when the people who could have filled the gaps are beyond reach, reasonably or actually. Definitely not mid-deal.
What you can do is be upfront about what exists, put a number on the liability, and find a buyer motivated enough to accept the terms. The first buyer wasn’t. The second one was.
The paperwork was a mess, often it is. The business was real. In the end, the business was what the buyer was buying.
C went to Hawaii.
Eugene is a transactional & corporate attorney + operator in San Francisco. This is Eugene, Unplugged, the Substack where he writes about it.
Attorney Advertisement. Eugene Kim, Esq., CA Bar No. 276271. Content is for informational purposes only, does not constitute legal advice, and does not create an attorney-client relationship. Ready Legal Group, 77 Van Ness Avenue, Suite 101-1826, San Francisco, CA 94102.
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