At the Center of the Transaction: Coordinating Business Deals from Start to Finish

Kyle McEntee:

We're joined today by Michael Kohagen, an M&A lawyer who works with clients of all sizes. I think when people typically think of mergers and acquisitions work, that's what the M&A stands for, they're thinking of big deals, since those are the deals that are typically what makes for news. So for example, Amazon acquiring MGM Studios to strengthen Prime Video's content library and gain valuable IP to expand existing popular franchises. But in your practice, you work a lot with smaller clients doing important deals, but at a much smaller scale. What are some of the ways that working through a deal with smaller clients differs from the larger ones that you work on?

Michael Kohagen:

I think there's a lot of differences. You know, one of the main ones that I see is just sort of the close contact that we have with folks at the businesses we represent. There being a lot fewer people at a client who's going to sell their business for, you know, $5 or $10 million than a billion-dollar company; you end up in pretty close contact with sort of the C-suite or the executive level folks. And that can be sort of a nice relationship building experience.

Kyle McEntee:

Do the leaders of those smaller companies seem to have as good of a handle on the process compared to say the executives at those larger organizations?

Michael Kohagen:

So there's definitely a difference in the experience level in terms of, you know, at the larger levels, you can often expect that folks who've either been part of an M&A process or seen it happening. So they at least have exposure to it. But oftentimes the smaller teams don't have that exposure.

But if you're talking to the, you know, one or two people who know just about everything about the business, they can be a really efficient source for getting through a lot of the steps in deal making, like getting through the diligence.

Kyle McEntee:

So you do somewhere in the neighborhood of 12 to 20 deals per year. For those smaller deals, what are the kind of deals we're looking at? Is it the mom and pop who is trying to retire and they're selling their gas station? Is it franchisee? Who are you helping?

Michael Kohagen:

It definitely varies pretty widely. Every once in a while we have just a one man stand kind of deal where someone started a business 20 years ago and now they're looking to exit, oftentimes for retirement planning. So that happens from time to time. But a lot of times it'll be family businesses and a business that was started 70 years ago or something like that. And it's just time to move on from it. So that's fairly typical.

But on the other side, a lot of the smaller deals can just be someone started a business five to 10 years ago and they did fairly well with it. It was never their intent to continue it as their life's work. And this is their exit point. So it can really vary between those.

Kyle McEntee:

Let's say the owners of a small family business come to you and they're looking to sell their business. At what point are you entering the process with them? Is it when they're just dreaming up like, it's time for me to sell? Or is it they've already come to some terms where they have a very clear idea of how much they're going to try to sell for?

Michael Kohagen:

Hopefully it's pretty early in the process. Oftentimes the earlier the better. A lot of times there'll be some sort of banker involved. Typically that happens more with larger deals. The smaller deals tend to form more organically or through personal connections, business connections and things like that. We want to be involved from the time that the buyer and seller first start really talking about the business and they need to put a confidentiality agreement in place.

Or the next step usually being negotiation of a letter of intent or something like that to sort of put the business terms down. It'll be helpful to have us involved then, especially at the letter of intent stage, because while letters of intent are generally non-binding, they really do guide the conversation throughout the full transaction.

Kyle McEntee:

Can you explain why that is? What is it about the letter of intent that is not binding and still really helpful?

Michael Kohagen:

It's based on the idea that the parties are going to put down what they've agreed to thus far knowing full well that they haven't negotiated every aspect of the deal. A lot of times the buyer and seller will start with what they agree the purchase price is going to be. That'll be one of the primary things that they're discussing at that stage.

But there's a lot more obviously that goes into a deal from how our employee is going to be treated and what benefits are they going to be provided on transition and all sorts of things that go into it. And it can be helpful to have attorneys up front to negotiate those items into a letter of intent so that down the road there's no surprises. But that doesn't always happen, I guess.

Kyle McEntee:

We're talking letter of intent and I want to focus on the word intent. What we are intending to do. Do you care much about the motivations for someone selling or buying or is that just kind of an irrelevant fact?

Michael Kohagen:

It certainly can be relevant. In most cases I would say it's not. But there's cases where, for instance, I represent a buyer and the seller is interested in the transaction because they're in forbearance with their lender. That can have a substantial effect on how the transaction plays out and what each party is looking to get out of it. Because oftentimes the seller then is looking to get whatever money they can get out of the transaction and the lenders are going to be behind them trying to limit their risk exposure as much as possible. As the buyer, you may know that you'll have to take on a little more risk, but you will hopefully get a better economic deal for opening yourself up to that risk.

So sometimes the motivation for selling comes into play, but I would say most of the time it's fairly irrelevant.

Kyle McEntee:

Are you mostly buy-side or sell-side with your clients?

Michael Kohagen:

I would say I'm probably 60-40 sell-side.

Kyle McEntee:

So are these people who are coming to you, you said generally it's better earlier. What do those conversations look like when they are engaging you very, very early, say before there's a buyer?

Michael Kohagen:

Oftentimes we would be introduced by, say, a financial advisor of theirs or something like that, just to have us in the background and waiting to help them when they need it. And again, I think usually the first step is a confidentiality agreement because a lot of times these sales can be to maybe not a direct competitor, but to someone certainly in the same industry. That's why they're interested in buying it.

So you don't necessarily want to send your confidential information to them. So it's good to have an attorney on board to help with negotiation of that NDA or non-disclosure agreement.

Kyle McEntee:

So what does negotiation look like for you then as the lawyer in the room, starting at the LOI, letter of intent stage?

Michael Kohagen:

So at the LOI stage, generally the buyer is going to be the one to propose first drafts of pretty much every document, throwing out the first number. They're going to be the one that's starting to put together what they think the terms of the deal look like and anything from the actual dollar amount to whether there's any earnouts or whether there's any rollover so that the seller receives some equity in the buyer entity or really any terms like that, or could be things like, is the seller principal team going to have their employment continued?

Kyle McEntee:

Yeah, I'd imagine that's especially important when we're talking about small companies.

Michael Kohagen:

Definitely can be. And that goes back a little bit to seller motivation. I mean, if you're representing a seller who's motivated to sell because they're trying to retire, that doesn't come into play. But a lot of time, you're right. They're looking to sell and continue working for the business, at least for some period of time. And oftentimes, the buyer just wants them to continue working for the business because it sort of provides that continuity of relationship with the business's contacts. So that's sort of how the LOI plays out. And from there, once the parties are able to nail down the terms of the LOI, generally the buyer is going to just come first with a draft of the purchase agreement. And that can be set up as an asset purchase agreement or a stock or unit purchase agreement, some sort of equity purchase agreement, or it could be a merger agreement. Those are at least the most common types.

As a seller's counsel, you get that first draft. Your job is really to help your client understand what the draft says, to ensure that the draft matches up to the LOI, and then to get your client's input. We really just walk them through what it means and what their risk exposure is and try and work with them to find what they're comfortable with.

Kyle McEntee:

So as the negotiations continue between your client and the other side, are you in the room with them when they're doing the negotiating? Or are you spending most of the time preparing them, helping them understand, here's what the terms mean, here's where you might want to push back, here's how you might want to push back?

Michael Kohagen:

Yeah, it's definitely more of the latter, but I think it may be different than folks envision because we're not necessarily just prepping our client and having our client make their own little spiel to the buyer or to the seller. There certainly are items where that is the case, and those are generally what we would call business items, where something like what purchase price you're willing to accept or what the structure of an earn out is, I would call those business items because those are things that I can't advise the client on what the right approach is. It really depends on what type of risk they're open to and their sort of goals for the transaction.

But for any of the legal terms, generally what happens is the attorney educates the client and gets their input on what they think is the right path, and the attorney sort of trade drafts of the document back and forth. The buyer will prepare the first draft, and then if you're a seller's counsel, again, you just kind of go over it with your client, and you work their input and your own input into the draft, and then you turn it back to the buyer's attorneys. So at that point, you just start a sort of communication between the lawyers, and oftentimes the business folks will stay out of it unless there's a business issue or a high-level issue that the lawyers aren't going to be able to work out on their own.

Kyle McEntee:

The letter of intent process, it can take quite a while. The purchase agreement negotiation from the review to finalization can take a while. What are the proportions? Is it roughly equal time, or is one period generally a lot longer than the other?

Michael Kohagen:

Oftentimes the purchase agreement is a far longer period. A lot of that has to do with the general process, too. I mean, the LOI, oftentimes the parties get together, they find agreement on a purchase price, and they're really excited to go forward with the deal.

So the period after the LOI is definitely the longer pull in the tent. You go through a lot of due diligence and just producing the volume of documents and the sort of breadth of documents that any M&A process requires takes a fair amount of time, even if you are a seller with a lot of resources to throw at it.

Kyle McEntee:

That documentation for due diligence includes things like existing contracts, anything related to intellectual property, employee information, documents from any pending lawsuits or recently settled lawsuits. Am I missing anything kind of key that goes into this data room that y'all are building together?

Michael Kohagen:

No, that's right. I mean, it includes all those things. It includes any of your corporate records, all your capitalization records, all of your environmental records.

I mean, it includes really everything about the entity. And the idea is for the buyer to get sort of a fulsome picture of the operation of the seller business so that they can make a determination as to what risk exposure they'll have after closing and what their sort of day-to-day obligations are going to look like running the business. And, you know, the M&A attorney is really just the hub of the wheel.

Our job is to get that information to the folks that do know how to deal with it, that are kind of reviewing that type of information on a daily basis so that they can flag any issues that they see and we can track those issues down with the client and make sure that we limit their risk exposure where we can.

Kyle McEntee:

All right. So this data room, it's not like a physical place. You're not bringing a truck full of banker boxes to share this information, right? Is it all virtual at this point?

Michael Kohagen:

Yeah. Thank god for that. Oftentimes they're just referred to now as VDRs, so virtual data room. But I think back in the day, yeah, they pretty much got everyone in the same room together with a lot of boxes and a lot of paper.

Kyle McEntee:

Before your time?

Michael Kohagen:

Yeah, luckily.

Kyle McEntee:

So when you're looking through that information, what are you looking for?

Michael Kohagen:

It really depends on what the sort of subset of information we're talking about is. But it could be any sort of noncompliance or a lot of it really comes down to any risk exposure. So as a buyer, you go into a negotiation expecting some level of risk, but often you don't want to take risks of liability exposure related to the seller's past performance or past operation of its business because you didn't do that.

So you don't want to be on the hook for it. So a lot of the diligence process is to figure out what that past exposure might be and to find ways to limit it. How did you get to a point where you're comfortable doing that?

It takes a long time. I mean, it takes a number of years. And as a junior in the M&A practice, a lot of what you're doing is diligence.

And you're looking through all of the records of a company and through its, again, its corporate records, its contracts, its benefits info, its employee info. And you're getting that information again to your specialists and you're getting their input and you're relaying that to the client. And after some period of time or years going through that process, you start to know what the ordinary kind of red flags are or the standard traps to look out for are.

And that's something that sort of interestingly may be changing a little bit as AI comes into play and as juniors are able to use AI to sift through contracts rather than looking through it themselves. And I guess the effect of that is kind of to be seen.

Kyle McEntee:

I want to get into the AI bit in a second. But when you're looking at these files, when a junior brings something to you and they're like, this seems like this is a lot of exposure given our client's goals. Are you looking at it with a skeptical lens?

Michael Kohagen:

I think there's a collaborative element to M&A in a lot of ways because the attorneys are both there to help their client get done a deal that that client wants to get done. And oftentimes you'll run into issues and obviously there is an adversarial aspect. But at the end of the day, you both are looking for ways to get to a yes and get to a, this works for my client and your client. Let's take that route.

Kyle McEntee:

Are there any obligations for honesty? And does honesty include sharing what you think would be valuable and not just what you're asked for?

Michael Kohagen:

As the attorney, you obviously are under state ethical rules. And I guess the question would be, what sort of disclosures would you be required to make if say there was something that you were asked to disclose but would be material to the buyer's determination of whether to close the deal? I think honestly that gets sort of hairy.

There are some obligations, but a lot of times the way that that's covered is through reps and warranties. And that's sort of more of a securities law concept where there's something called a 10b5 rep that we use often that says effectively that they have provided all material information and they haven't omitted to provide anything without the provision of which the materials they did provide would be misleading. So there are sort of standard ways to address that concern, but it just sort of depends on the deal context as to how worried you have to be.

Kyle McEntee:

These reps and warranties or representations and warranties, typically you find it at the beginning of a purchase agreement. And so that means that those obligations don't actually attach until it's signed. And so it's kind of like a cover afterwards. Am I getting that right?

Michael Kohagen:

That's more or less right. I mean, oftentimes they're in the middle of the agreement, I guess. But they're effectively, I like to look at them as just the promises that are being made about the business. They're going to say things like, for the last six years the seller has complied in all material respects with applicable laws. Or the seller hasn't released any toxic sludge in violation of environmental laws. Things like that. And those are basically promises about the business and its operation. And if any of those is breached, the buyer has recourse.

Kyle McEntee:

So you mentioned before that AI can be quite helpful in reviewing documents, finding patterns or maybe even suggesting what's missing. Can you talk about how AI has changed the process of due diligence? In the fairly short time that generative AI has been around and maybe the little bit longer time when we used to call it machine learning.

Michael Kohagen:

It definitely is starting to have an effect on the process. And the main area is on that front end diligence. And the reason is just because of AI's ability to take a huge quantity of information, sift through it really quickly and pull out what you specify as relevant. That's the biggest use case for it right now.

Kyle McEntee:

Basically an extra set of fake eyes.

Michael Kohagen:

Yeah, that's right. Well, it's an interesting kind of paradigm because we aren't at a point yet where we can really trust the AI fully. And so you have to still do the same work in many respects. If you're asking it to go through 10,000 contracts and pull out X, Y, Z provisions from them, a lot of times you're going to have to double check it.

And so you're not saving a ton of time. You're just maybe saving some time on compiling your thoughts rather than going through the documents themselves.

Kyle McEntee:

So as you're working through these documents, you're going to encounter all different areas of law, everything from contracts with vendors, tax issues. You mentioned employee benefits and more. Did you have to learn all these areas of law to do the work you're doing?

Michael Kohagen:

You have to be a little bit of a jack of all trades. You have to know enough to sort of issue spot, I guess, as we would say. See where those traps could be because you have to know when you need to ask the experts.

You definitely don't have to be an expert, but the longer you do it, the more used to each one of the common pitfalls you get and the easier it is to raise those issues for your team and get them resolved.

Kyle McEntee:

So you're not at a small firm. I wouldn't call it a large firm, either kind of midsize. Do you ever have to engage other firms for deals if there's an area that there's just no one in-house that knows about?

Michael Kohagen:

It happens occasionally. There are sometimes state-specific laws where we'll want to engage another firm on a particular aspect of, we'll bring in a specialist from another firm to help us with those questions. And then there can be things that your firm just doesn't have high level competency in or your firm just doesn't have the particular expertise in, like bankruptcy counsel will need to weigh in every once in a while or things like that.

Kyle McEntee:

Are you ever asked to weigh in after the fact? Say you close a deal and then afterwards, it turns out that something that the seller had warranted actually wasn't true. Are the litigators coming back to you and saying, hey, help me understand what was behind this provision?

Michael Kohagen:

That definitely can happen, yeah. The hope is that it doesn't happen very often. If we do our jobs right, I mean, the likelihood of a claim should be fairly low.

But yes, when there is a claim or a breach of a rep or warranty, the litigator is pretty much always going to rely on the deal counsel to let them know what the context surrounding negotiation of that rep was and oftentimes what the actual backdrop of the breach is, you know, the factual underpinnings of the breach.

Kyle McEntee:

So you mentioned that you're kind of a jack of all trades, maybe just a master of some. There's a lot of project management that goes on. You're like the quarterback. Do you enjoy that aspect or are there times where you're like, I really wish I could just sink my teeth into this one area of law and develop a high-level expertise that everyone needs me for?

Michael Kohagen:

There's sort of both sides of that coin because as the M&A attorney, your primary strength in a lot of ways is going to be your drafting and none of the other attorneys are going to be able to do that. They're not going to have familiarity with how purchase agreements are structured and how the indemnification terms of an agreement generally function. They're not going to have a feel for what terms are or are not market, what would generally be acceptable to a seller in a similar position.

So you definitely have a certain set of expertise, but I do enjoy the aspect of being sort of in the middle. And part of that is it's nice to work on a team, but also you get to be the person that's in contact with the client and you're not just sitting behind a desk and behind a screen all day analyzing issues and running those up a chain of other lawyers. You're actually making changes to documents, talking to your specialists, and then relaying that information directly to the client, getting sort of both sides of exposure where you've got your firm and the legal expertise backing you on one side, and you've got the client and their business expertise backing you on the other side, and you get to represent sort of both of those sides to opposing counsel and to the other side, which is a nice place to be in. And I sort of enjoy that relationship building aspect with the client where you get to be their point person, the person they come to with questions, the person they trust, and it's just sort of a nice spot to be in from my perspective.

Kyle McEntee:

So mergers and acquisitions can sometimes get messy. The vast majority of mergers and acquisitions actually fail. So without naming names, what makes deals go sideways?

Michael Kohagen:

I guess there's a couple of things. Really it's not having enough business alignment upfront and things dragging on are the two biggest deal killers in my opinion. But I guess I'll start with time, which is I've seen sort of a trend and I think a lot of M&A lawyers have seen the trend that deals are just taking longer to get closed for whatever reason over the past year or maybe two that that window has been sort of expanding a little bit.

And I've personally seen a slight uptick in deals dying. And I think the reason is the M&A process is really difficult and it takes a lot of resources from both business teams. And especially for some of these smaller family owned businesses or mom and pop businesses where they don't have a full team of resources to throw at the process.

This is just something they have to take on in addition to running the business and trying to live their lives like they normally do. And if the process goes on for six months, there's definitely a lot of deal fatigue and folks can end up a little bit jaded. Or, you know, they run into an issue and they think, you know what, we've run into one too many issues and this is the last one.

So I think time can definitely be a big factor. But then the other one I mentioned is just not being aligned at the outset on what the terms of the deal. And as a result, when the lawyers start trading drafts of the documents, sometimes the parties can feel surprised and that's never a good thing.

Kyle McEntee:

Does knowing that affect how you talk to clients at the outset?

Michael Kohagen:

It can definitely affect how you talk to them at the outset and throughout the process. So it definitely, in terms of getting business alignment, that definitely plays into negotiation of a letter of intent because you want to make sure that whatever is really important to your client is going to make it down on the page because this is going to sort of set the stage for the parties going forward. And then in terms of, you know, things dragging on, that can definitely affect how we counsel clients in terms of helping them to understand what's normal for how long something takes and when we think they need to try to get to the bottom of something, you know, and not let a particular issue just sort of linger.

Kyle McEntee:

And they're paying you, I'm guessing, on an hourly basis. So they really don't want it to drag on so long that all the work you did, they still got to pay for, but then there's, you know, no pot of money at the end.

Michael Kohagen:

That's definitely right. The longer a deal drags on, it definitely costs more, not just because we're putting in more hours overall, but, you know, if I haven't looked at something in four weeks because the opposing counsel has been sitting on it, then I may not have as fresh of a recollection and it takes me an extra half hour every time to get back up to speed on that particular document or, you know, on a purchase agreement or a complex LLC agreement or operating agreement, it could take quite a bit of time to get yourself back up to speed. So I think clients are generally aware of that. We try to keep that, you know, top of mind for them that efficiency can be important.

Kyle McEntee:

How does that pressure affect your work-life balance, given that you know that you don't want to cause your clients to keep paying more and more money, despite what people might think? Your incentives are not aligned to just maximize your billable hours. How does that affect how often you're looking at your phone or what your weekends look like?

Michael Kohagen:

We always want to be there for our clients and we want to be really as responsive as we can be. There's obviously limits to it and it varies by client. Some clients are going to expect you to be available and accessible to them really at all times and there's plenty of other clients that have a much more hands-off approach.

So I do think that, you know, a big part of M&A, you are that hub of the wheel, like you are in the middle of it and not a whole lot can get done without you. So I think that it does impact your work-life balance in that a lot of times you have to be there at least to quarterback issues to the folks that can resolve them. But it also makes it exciting.

Yeah, I mean it definitely, it makes it feel like you're actually doing something. You're actually helping the client very directly and it's a more tangible feeling than if you're not in direct contact with them.