Is it all over? | Behind the Buy [7/8] [308]

Full Podcast Transcript

NASIR: All right, welcome to episode 7 of our Behind the Buy series of Legally Sound Smart Business. My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: And this is closing day. Probably the most not exciting part of buying a business or this process, at least from an attorney’s perspective because even though there’s a lot in this episode, it’s kind of underwhelming because if we did our jobs correctly, it’s a non-event.

MATT: Right, honestly, if it is exciting, then that means something bad has happened. When everything’s closed, you want to make sure that there’s no fireworks that day because we’ve seen it before, something could happen at the last minute. There’s a contingency that needs to be satisfied still and there’s a question of that again, if something’s blowing up that day, it’s not good.

NASIR: Correct, and I do enjoy that kind of last-minute shuffle and trying to figure things out, usually like you said, there’s problems, there’s other people involved trying to figure that out, but in this case, it turned out well. I don’t think I’m giving too much away because the transaction itself, even though there’s been a few bumps in the road has been relatively smooth and I think that is hopefully some credence to our ability to make it smooth even with the bumps in the road, but I think also the main component was the time. This wasn’t a close that we had to do in a week. I think this was a course of a couple months or so, and that gives us quite a bit of leeway to actually deal with some of these issues.

MATT: Sure, I mean that certainly helps, but like you said too, on our end, it’s problem-solving so the listeners have heard the various problems that arose throughout the escrow period and it’s really looking at those face on, addressing them and then strategizing to what’s the best way to approach it because oftentimes nothing’s going to be perfect if a problem arises, but it’s really trying to mitigate the risk and find something that’s going to be as seamless as possible. Preferably for our client, but ideally, I guess for both just to keep things going.

NASIR: Right, so we’re going to play this call. It’s actually pretty short, but there’s actually quite a bit in there, so listen carefully because we’re going to break it down in detail especially what’s going on before and after this particular call is going to be a big focus for us, so let’s listen in.

MATT: All right.

MATT: Hello.

NASIR: Happy closing day.

BUYER: Yes, very glad to be through this and finally get started on the actual business.

NASIR: We thought we’d just have a quick call on what you can expect today, and also catch you up on our recording a little. I know we’ve been talking about a lot of this stuff offline through email, but let me review it again. Typically, closings are not much of an event as you may think, but they actually are typical — they used to sit in an office and exchange signatures and kind of a formality or some formalness to it, but that’s rarely done now in our experience. In fact, just yesterday, you gave us the signature pages which today, we’ll actually exchange those signatures with the seller. Matt, do you mind going over the closing package just to make sure she knows what’s in there?

MATT: Yeah, sure. The main thing is finalizing the exhibits of the listed assets. We’re not excluding any assets of business except accounts receivable and cash on hand. The main thing I do want to confirm is that we have the lease agreement consent signed by the landlord for the assignment and an amendment to the lease that will become effective on notice of the closing to the landlord, which we’ll do today as well, though it was a contingency to close, we haven’t received counter signatures for all the payer contracts, but you’re okay with moving forward, right?

BUYER: Yeah, they just take forever, but I’ve got the green lights that our rates will be effective the day we start billing, but they need to load up the contracted rates into the system so that we may have a delay on our billing just a little bit, but I’m really not too worried about that.

NASIR: Perfect, and we have our MSO structure set up. We kind of handle that off our recordings, and we should be able to operate without a hitch overnight, I think. What’s your plan with the staff?

BUYER: The buyer and I are gonna go and meet in person with the entire staff, and we’re gonna announce the acquisition and go over some questions on the whole transition process, but at this point, I think we’ll be able to keep everyone aboard for now at least, just so the transition is not as abrupt.

MATT: Great. We should also go over the post escrow and the disbursement of funds process.

NASIR: Yeah, Matt. Please let’s go through that.

MATT: There’s a small payoff for the x-ray machine that will be made at closing, then everything except the holdback amount to deal with the trademark issue will be distributed to the seller so we’ll have three months to either keep the brand and release the funds or forgo using the brand and get the holdback amount back.

BUYER: When do you think we’ll know if we can use the name?

MATT: I’ll reach out to that company first thing on Monday after we close.

BUYER: Okay, thanks.

NASIR: Okay, I think that’s it. Matt has already sent the closing package to the seller via DocuSign, so we’re just waiting for that. Once that’s done, we’ll release your signatures as well and provide joint escrow instructions to get the deposit released. I forgot to mention you’ve already deposited the remaining funds yesterday, so that’s good to go as well.

BUYER: I did, and thank you both again. I know this probably ended up being more time than you guys expected, but I really appreciate it.

NASIR: No, not at all, and believe it or not, this has been pretty typical.

MATT: Yeah.

NASIR: There’s always something that comes up and though we got some small hiccups here and there, no huge detours, I would say.

BUYER: Well either way, I really do appreciate it.

MATT: Yeah, no problem.

NASIR: And now we have a business to run!

BUYER: That’s right.

NASIR: Of course, thank you again for being part of the recording, it frankly was a good experience for us too because I think it really showed some of the conversations that we have with our clients that a lot of people just don’t see, but we’ll wait at least six months or so and we’ll talk about it before we publish it, that way we give time to edit it, make sure we have a good idea of what we want to edit out. I know there are a couple parts in some calls that I think we should just leave out all together, it may not be relevant but we can decide that later.

BUYER: Actually, it was really fun and I’m really glad you guys asked me to do it.

NASIR: Cool, thank you. We’ll talk to you soon. I guess from now on, we’ll be offline, but appreciate it again.

MATT: Definitely, thank you again.

BUYER: Okay, thanks so much guys and see you guys both later.

NASIR: See you later, bye.

NASIR: All right, well the transaction is done, and now we’re ready to talk about that very condensed version of what happened on that closing day. But first, before we talk about that, let’s, of course, thank our sponsor. We’re coming to the end of this Behind the Buy series and I’m not sure, there’s not enough I can say about how thankful I am about this particular sponsor throughout this series. It’s been an incredible experience for us and thank you. I should probably mention the sponsor. Matt, why don’t you do that?

MATT: Sure, the sponsor is Pasha Law PC, a law firm practicing in California, Texas, New York and Illinois. I think you’re exactly right. What’s the phrase, if it’s not broke or if it ain’t broke, don’t fix it. They’ve been a great sponsor from beginning to end and we couldn’t have asked for anything better.

NASIR: All right, let’s break this down. The closing as we mentioned is somewhat of a non-event this time around. We’ve had experiences where that’s not the case. Thankfully in this case it was, but it’s not to say that there are still a lot of details to deal with. We mentioned how the actual closing used to be more of an event because you had to meet in person, you had to actually exchange original signatures. A lot of times, you would do it at an attorney’s office or in an escrow office of some sort, but nowadays, especially when you’re buying businesses, in this case like the buyer and seller weren’t even in the same state on that day, and so what we did is we actually had our client sign first and so we had it in our possession and we just waited for the other party to sign their copy, and then we just exchanged documents and literally that’s what it was. This is kind of related, but it reminded me when in properties class in law school, they talked about how when they used to actually do exchange a property or land between parties, they would literally meet at the land, take a piece of the dirt in front of witnesses and place the dirt, and the seller would place the dirt in the buyer’s hands and it would be symbolic, but it would, of course, be memorable because, “Yeah, I remember that time that Joe transferred that dirt to so and so.” It was like that. Nowadays, it’s not more simple.

MATT: First of all, I don’t think I ever learned that in my properties class, but yeah that would have been interesting if they tried to do that here. I’m not really sure how it would have worked. I guess they want to do the dirt part. Well, they don’t even own the land here as you heard on the call there’s a thing of the lease anyways. I don’t know what they could have done for this. We’d have to come up with some sort of alternative way to do the symbolic transfer.

NASIR: Maybe a ribbon-cutting or some sort. But you mentioned the lease right. There’s quite a few things being signed at closing other than just hey here’s the bill of sale. Throughout this process, we talked about different agreements and contingencies and what needs to happen with the employees and things like that. All that preparation comes down to this closing day, and one of the many documents that are signed is actually a lease assignment and consent. If you guys recall, there was this big problem where there was like three or four months left in the lease, the seller did not exercise their renewal, but there was a silver lining to it because the buyer was able to negotiate with the landlord at a more favorable rate. It was a little bit more favorable, but the market dictated that and so in connection with that, we also signed an amendment to the lease. Here, you have the original lease being assigned to the buyer with an amendment on the rate basically.

MATT: Yeah, and that’s pretty common to do that all in one kind of transaction, just handle it all at once instead of piecemealing it, but something I thought of when you were talking about that is oftentimes, we obviously addressed this in the purchase agreement that this needed to be done, but I think sometimes the parties look at that and they see it in the purchase agreement like all right well we got that out of the way, but I don’t think I’m stating anything that’s not obvious here. People have to take actions after that to make sure that those things get done. I think sometimes it’s situations where people see it on the paper and they just feel like that’s done, people have to take other steps to make sure those contingencies are met. I’m not breaking any ground here but I think that just warrants mentioning just because you’ve agreed to something and maybe even discussed with the landlord in this case, you still need to actually see it through which sometimes gets overloaded. That’s one of the reasons the closing, there could be some fireworks at the end or towards the end just because you’re like oh yeah I forgot we had to do this.

NASIR: Yeah, we’ve seen instances especially where there’s a lease involved, they forget that they need the consent of the landlord and they don’t ask for the consent until towards the end where they’re about to close and of course the landlord is like well you know you can’t just sign this lease, I don’t even know who this buyer is. We need to look for financial records or we need a personal guarantee and then all of a sudden, the landlord is the one holding up the lease or we’ve seen it where they didn’t even get the consent until after closing too and then of course that could cause problems as well because now the landlord knows that they have some negotiating power because they can basically hold up this transaction.

MATT: Unless you have an old school landlord in a beach town, that’s probably not going to fly so. The reason I even bring it up is because like I said, it can take time. Like you said, you can’t just go to the landlord and say all right I’m going to buy this and we’re just going to get transferred over, no problem. They’re going to want to vet the new tenant and you know in this case possibly renegotiate terms and all that. As soon as a purchase agreement gets signed, probably even before, just to kind of get things rolling, I would tackle that as soon as possible so you don’t have any of these issues when trying to close.

NASIR: But not all contingencies necessarily need to be met in order to close, so long as there’s a conscious decision to do so. That’s what happened here, if everyone recalls, one of the contingencies of closing on this particular transaction was being able to obtain payer contracts for this particular location. This is a little more complicated aspect of this transaction because I know a lot of people aren’t familiar with these types of agreements, but what you need to understand is a payer contract, you can just look at another vendor. And the idea was that okay, they need to get this vendor signed up to make sure that they can run their business because this is part of how they get reimbursed and they take an incredible long amount of time, but this particular buyer, because they’ve gone through this process before in their previous businesses, etc, that they felt comfortable that, “I’m okay, I’m free to go ahead and close because I’ve already gotten assurances I need in order to do that and it’s not worth it for me to hold up closing based upon this.” And it’s probably not going to be flying too far with the seller if they held up closing on that either. In this case, the buyer waived that contingency and that’s not uncommon.

MATT: What you’ll see in purchase agreements a lot of times with contingencies are there’s two options it’s these need to be satisfied or either one party can waive satisfaction of it, so that’s what happened in this instance and there’s obviously a lot of considerations that go into whether to waive one of these contingencies or not, but sometimes, it just needs to be done in order to close the deal and move on obviously, just depends on the amount of risk someone might feel like taking on or the amount of confidence that they can satisfy something after closing, but yeah it’s just something to keep in mind and that should be in the purchase agreements as well, just to make sure things don’t get held up for a long time.

NASIR: In the last episode, we actually had two problems that came up. They were relatively big problems in the scheme of the entire transaction. The first was the fact that a lot of the staff were probably misclassified. They were all classified as 1099 and maybe Matt, you can speak a little bit about the classification laws that came out in California that pretty much made it pretty clear that these people had to be employees and that was one problem, and the second problem was this whole trademark issue that came up last minute and in both those cases, we were able to resolve, but not with some certain steps between then and closing and even after closing right.

MATT: For those of you not in California or with businesses in California, starting at the beginning of 2020, the law has shifted pretty dramatic, but not as dramatic as maybe people think, but essentially makes it so that a lot of people that could have possibly been classified as independent contractors and were so classified as independent contractors in the past are now is pretty much an impossible argument that they’re not employees now and there are certain carve-outs for certain jobs and roles that people do, but for the most part, if you’re providing a service that is basically in line with the service that the business is providing, you’re going to be considered an employee. That’s what we did here or we got our client to do here is once it closed, we terminated all the relationships or all the agreements with the personnel, the contractors and then just converted them, made them all employees day one starting with our client.

NASIR: Right, and it’s interesting you mention the law but, I think our analysis was based upon even pre-2020 in the sense like I think they were all misclassified regardless even under the old law.

MATT: Let me speak to that real quick. That’s why I was kind of reluctant to say dramatically shifted because, people, even if there’s one of the carve-outs for example under the new California law, you still revert back to the previous test which again also makes it hard to classify people as independent contractors when they should be employees. Sometimes people see those exceptions and they’re like oh we’re safe, but it just reverts back to a test it’s just not as strict or as broad as the new one is.

NASIR: I think we’ve talked about this in previous podcast episodes, but employment misclassification is such a common issue. I would say a majority of new clients of ours have issues like that and frankly if you do an audit of any business, I think that’s the case. Now of course, there’s different risk tolerances and so forth and even companies as big as Walmart and Amazon and of course Uber and Lyft, these guys deal with this issue all the time and in fact a lot of them specifically tried to fight and they toed that line, but in this case, it was pretty clear. I don’t think we need to go into too much detail, but in general, you had employees or workers there that were working there full time. It’s an urgent care, it’s not like they’re working independently in multiple urgent cares and so forth. If they were physicians, that might be a different story, but we’re talking about mid to lower level staff that are actually at these urgent cares.

MATT: Exactly.

NASIR: That was one issue, I think that was a little bit easier because it was nice to actually transition like you said at closing. All we had to do was rehire. There’s all the little stuff, all of a sudden, now you’re taking over an urgent care that didn’t have a big employment workforce and now they do and so everything like employment manuals and policies and payroll, all those things need to be set up, but that’s with every business, that’s not something that is unique to this transaction.

MATT: It also helps when the client is agreeable to that too, because that just makes our job a lot easier because we don’t have to convince them otherwise or put them at more risk than they need to be so that was definitely helpful in this transaction.

NASIR: Yeah and I don’t think the employees were happy about that. Let’s talk about that for a second. When you speak to the employees, the work or the staff, I should say when you speak to the staff as to this transition of the buyer, there’s different thoughts to when to do that. It’s very case by case. In this case, they actually did it on closing day. By that time, all the staff had already caught wind about the sale. If you recall, the seller kind of told the staff pretty early probably a little too early, thankfully, it wasn’t too disruptive of the business and you have to have that conversation like, “Hey, there’s going to be some changes here.” And one of the first one was that you’re not going to be an independent contractor. You’re going to be an employee, and that comes with some benefits and drawbacks. Benefits meaning actual benefits like medical and paid time off and things like that and sick leave in California but the drawbacks of course are the tax withholdings that individuals may not be accustomed to or prefer.

MATT: That always makes the situation more difficult if some of the staff don’t want to do the shift and that’s the problem too. We’ve definitely spoken to people or business owners where they say the staff doesn’t want to do it, so I’m just going to keep them there and it’ll be fine. Well, it’s fine until it’s not, and you leave on bad terms and then they make an issue of it. Again, in an ideal scenario, you move everyone over to employees and everyone’s fine with it, but usually, it’s not really a realistic way things are going to actually happen.

NASIR: I think the big problem that was uncovered in the last call and we kind of left it, it was left a little open was the seller received a trademark infringement demand letter basically, a cease and desist. It was a kind of a tough situation because the brand was important, but as we talked to the buyer, hopefully we made them realize the brand is important, but it’s not the only thing it’s not the business. The fact that there’s an urgent care there for x number of years, that in itself has value as well and so if they had to change the brand, then yeah it would be worth less money, but they would still want to purchase the business, and knowing that information from the buyer and giving credit to our buyer again of having that steady hand to be able to do that analysis with us, it was very easy for us to go back and negotiate with the seller and say “Hey look, we’re willing to buy this business but if we can’t have this trademark or this brand, then it’s worth x dollars less.” And I think we settled on — I can’t remember it was like 40k, 50k, something like that and a reduction in the purchase price, but we were also as attorneys, pretty confident that we could figure out and resolve the matter with this other company because we felt that their trademark was weak on one hand and also even if there’s a genuine dispute, maybe we can enter into some kind of agreement that allows us to both exist in this space, and we gave ourselves three months to do so.

MATT: And just real quick, I think you put that well, but to me, the past the lease issue was more critical than the trademark, the branding because I think the actual location meant more at least that’s the impression I got. I think our client agreed.

NASIR: You’re right, that would have been a deal killer for sure.

MATT: Yeah, exactly. We did this hold back for three months I believe is what it was and essentially what that allowed our client to do is have three months to decide basically a decision on whether they want to move forward with the brand or not and have that hold back money sitting there. Then if they do, the rest of the money gets transferred over then to the seller.

NASIR: If they choose to keep the brand, then they transfer the money to the seller. If they decide to forego the brand. We attorneys say look it’s not worth it, you’re walking into a lawsuit, let’s avoid this problem, then they can actually keep that money that holds back and they would just be prohibited from using that brand. It was a great compromise, the seller was up for it. We also gave them assurances to help it along, like hey, “We’re pretty sure we’ll take the brand, we can get this done, but if we can’t do this, then we can’t close.” And of course, that made it a lot more simple right.

MATT: And going back to what I said earlier, it’s all about problem solving, and then finding the solution that’s gonna appease both sides as much as possible just to keep the transaction active and get to the finish line.

NASIR: That’s our series. It’s not quite over though. We’re gonna do one more episode kind of wrapping everything up in a nice little box and package, and we’ll put it in a ribbon and then we’ll slowly open it up, see what’s inside and analyze it as much as possible, and also hopefully we can try and talk about some of the feedback that we’ve already been getting on this podcast series. We’ve had questions, we’ve had comments. If you haven’t sent that already, now is a good time because we only have one more episode left to do so. You can of course follow us, we’re very active on social media, Legally Sound Smart Business and also Pasha Law, and then of course if you have any comments or questions that you want to send directly to us, you can do that by email at ask@legallysoundsmartbusiness.com which by the way, previous I’ve been saying info@legally soundsmartbusiness.com. I don’t know if you noticed that Matt.

MATT: That’s the important thing.

NASIR: They both work.

MATT: Everything you put in front of the @ will actually work, I don’t know if that’s correct.

NASIR: That’s actually true. I have to double-check that. It may go to who knows, some random person. but we’ll get it somewhere. And of course, since we’re ending our series, if you’re listening to this, this is a perfect opportunity. I think you’ve listened to enough episodes now to leave a review and if it’s not a positive review, then just keep listening to other episodes until it becomes a positive view and then leave the review. That’s my advice.

MATT: We’ll turn you at some point so it’s just a matter of how many episodes in. For most people, it’s the first second of the first episode, but with others, it takes a little bit of time I suppose.

NASIR: For most, they listen to the jingle for the first 10, 20 seconds and they’re like this is done, I’m not even gonna listen to the rest, I’m just gonna leave a five-star review, that’s the commentary I’ve been getting. Listen to the first 10 seconds and that’s all you need.

MATT: Perfect.

NASIR: You’ll be set for the rest of the day. So that was the closing, but it’s not done yet. In fact, especially for our client, they actually have to start their business, but in next episode, we’re actually going to take the entire transaction, wrap it up into a gift, put a nice little bow on it, unwrap it for you all and really talk about all the things that we’ve gone through throughout this transaction, answer your commentary, your questions, or respond to your commentary and your questions that you’ve all sent in and speaking of, don’t forget to keep sending those in because this is going to be your last chance before we talk about Behind the Buy series, and of course after Behind the Buy, we’re going to continue our Legally Sound Smart Business podcast where we cover business in the news and add our legal commentary to that. We really appreciate you joining us.

MATT: Yup, keep it sound, keep it smart.