The Offer, Part Six
Over the years, I've discovered that at a certain point in every deal, time becomes your enemy. It happens after the big issues have been settled. You've agreed on the price. You've agreed on most of the terms, including all the major ones. You've resolved whatever doubts you may have had about moving forward. Then the lawyers come in, and the haggling begins over the few remaining questions, a couple of which may turn out to be important but which drag out the process and prolong the agony.
That's where I am at the moment. I had set a deadline of February 28 to close the sale of my businesses. We've obviously passed it. I guess that, in my heart, I knew we would. If I'd really believed we were going to make it, I probably wouldn't have waited until the last day of February to return from my vacation in Telluride, Colorado. Then again, I never told Chris Debbas, the person who put this deal together, precisely when I was coming back. I said February 28 was a "strict" deadline. At the very least, I wanted to have an agreement in writing by then, and I knew I would get it only if the other side believed the deal might collapse without one.
But I never said I wouldn't grant an extension, which has to do with a basic rule of negotiating: Don't paint yourself into a corner. If you give people an absolute, unconditional no and then back off from it, they will conclude--correctly--that your no doesn't necessarily mean NO. You should reserve no for when you really intend it to be the last word. In all other situations, leave yourself a way out.
And here's a second rule of negotiating: Don't take anything personally. That's how we ultimately resolved the problem I mentioned at the end of last month's column--when I refused to change a contract term we'd already agreed upon and the CEO of the company we'd be merging with got up and left. He eventually called me to apologize for walking out on me, and I apologized for provoking him. From then on, we had no problems.
I later met with him and the board of his company, Nova Records Management, to deal with the last seven items we hadn't yet agreed on. At the end of the meeting, I told the Nova guys I was leaving for Telluride later that week. They said they would have their lawyers write up what we'd worked out and send it to my partner Sam in a few days. When I called Sam from Colorado the following week, he said he hadn't received the new draft of the contract but he'd been told it would arrive by the weekend and we'd probably have something to sign shortly thereafter. I said I'd fly back to New York on Saturday in hopes of wrapping up the contract--if not the actual sale--the following week. I'd then return to Telluride.
But, soon after my return, it became clear that my week in New York would not go as planned. On Sunday, Sam told me that he had still not received the new contract, and there was no sign of it on Monday either. Then on Tuesday, Chris came by and said, "I have bad news that's really good news."
"I know a sales pitch when I hear one," I said. "What is it?"
"The equity guys have backed out," he said, referring to the private equity firm that was putting up the equity portion of the financing. As I later learned, one of the firm's partners had sold the others on the deal by touting the involvement of Peter Pierce, former CEO of Pierce Leahy, a records storage giant that had merged with Iron Mountain (NYSE:IRM) in 2000. Pierce's noncompete clause had recently expired, and he wanted to get back into the industry. He'd brought our deal to the private equity firm, in which he was an investor, saying that he planned to invest on his own in any event. Since then, however, he'd had a change of heart and was courting another company. The partner who'd touted Pierce now told his colleagues that Pierce's involvement wasn't important and that his emergence as a possible competitor was no big deal. The flip-flop was too much for the other partners, who opted to withdraw.
"So now what?" I asked.
"We go to Plan B, which is actually better than Plan A," Chris said. "Goldman Sachs (NYSE:GS) wants to do the equity as well as the debt. So that's one less group of people I have to rope together to get the deal done."
That was better. Goldman Sachs had indicated all along that it would like to handle all of the financing. Why Chris hadn't accepted that offer, I have no idea. Unfortunately, making the change now would mean putting off the closing at least a couple more weeks. Goldman Sachs would need time to do more due diligence, looking at the deal from the point of view of an equity investor and not just as a lender. But I was more concerned about Nova now. I hadn't heard a word from anyone there since returning from Colorado. I couldn't even get people to return my phone calls.
And so I came to another predictable stage of a deal: the paranoia moment. I began wondering whether the Nova people really wanted to go through with the sale after all. They seemed to be stalling. It had been two weeks since the meeting at which we'd resolved the last issues. At least I thought we'd resolved them. Was Nova having second thoughts? Why couldn't I get through to anyone on the board?
Fortunately, I've been involved in enough deals to know that the paranoia moment is a normal part of the process--which is not to say that the paranoia is always unjustified. Sometimes it is, and sometimes it isn't. When the moment comes, your best course is to get a better read on the situation as quickly as possible. And that's what I did. On Wednesday morning, I told Chris that I wanted a conference call with the Nova board that afternoon, or I would draw the only reasonable conclusion--that the deal was dead--and take the next plane back to Denver on Thursday. The call was quickly arranged.
We wound up talking for about an hour or so. By the end of it, I felt I had a better idea of where things stood. First, I could see that the Nova board really did want to do the deal. The company's lawyers were responsible for the delay. Second, I learned that the Nova people still had two outstanding issues they wanted to resolve. That didn't upset me very much: Two issues were fewer than seven. But there was a third revelation, and it was much more serious. I realized that a potential deal breaker was looming, and I'd soon have to decide how to handle it.
The problem concerned some changes that the Nova board wants in the lease agreement between the entity that owns the three businesses we'd be selling and the real estate company we set up when we separated the ownership of the land from the ownership of the operating businesses. I don't mind the changes themselves. What bothers me is the time required to make them. We have what is known as a securitized mortgage on the real estate that isn't being sold. With that kind of mortgage, we need the approval of several outside parties, including the bond rating agencies, to change the lease. I feel confident we can get their approval, but it will take three months at least. The Nova board wants the changes made before we do the deal. I won't wait that long.
Why not? Because nothing good can come from delaying the closing. The longer we wait, the more likely it is that something will happen to upset the apple cart. There are, after all, only so many ways that things can go from here. The company could experience setbacks--losing major accounts, for example, or having key salespeople leave--that might give the buyers cold feet. Alternatively, the company could do much better than anyone expects, raising questions about whether we're getting a good enough deal. As it happens, the latter has become a very real possibility.
I realized this when I got the results from the first five months of our fiscal year, which runs from July 1 to June 30. We blew away all our growth targets. Then December's numbers came in even better than November's, and January's were better than December's. I now believe that our EBITDA will increase by more than 20 percent this year. The thing is, we based the sales price on last year's EBITDA. So what started out as a great deal for me--the deal of a lifetime--has now become a great deal for the Nova people. I guess that means they were smarter than I was after all. Granted, it's still a pretty good deal for me, but I could probably get the same price from a lot of other buyers.
I can live with that. Price aside, Nova is still the company I feel best about having my employees work for in the future. Moreover, we've invested a lot of time and money to get this far. I don't relish the prospect of starting over. By May or June, however, we'll be so close to the end of our fiscal year that I might feel compelled to revisit the question. It would be very tough to sell my businesses for substantially less than they are worth. While I obviously don't want to be in that situation, a long delay in the closing could make it unavoidable. I had very much hoped that this would be a done deal by now, but as we went to press with this magazine, the issue of how we'll handle the proposed lease remained unresolved.
My partner Sam taught me long ago that three obstacles always crop up near the end of a deal, any one of which can kill it. His Rule of Three has proved correct in almost every deal we've done. My guess is that the timing of the lease changes will turn out to be the first of the three obstacles to the completion of this deal. I can't wait to find out what the other two are.
Norm Brodsky (firstname.lastname@example.org) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
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