The Offer, Part Seven
There's an important stage that every deal has to reach sooner or later--every good deal, that is. The moment has to come when the parties stop acting like adversaries and start working together like collaborators. If you never reach that stage, it's because one side continues to harbor reservations about going forward. The deal might happen anyway for one reason or another, but somebody is going to walk away unhappy.
I knew I was ready for the collaboration stage by early March. I wasn't so sure about the people from Nova, the company that would be acquiring my business. My first deadline had passed, and--although I'd granted an extension--things seemed to be moving very slowly. Of course, everything slows down when the lawyers take over. That's okay. In fact, it's necessary. But the process can take forever unless someone injects a note of urgency. In this case, it seemed as though I was the only one who felt any urgency at all, which made me wonder whether the Nova board might still have some reservations. There were several issues to resolve, any one of which could turn into a deal breaker unless we approached them as collaborators rather than as adversaries. My question was, were the Nova people ready to collaborate?
So I called a meeting. We gathered in the offices of Nova's attorneys--my partner Sam and I, the Nova CEO, two members of his board, and the lawyers for both sides. "The purpose of this meeting is to get any outstanding issues on the table," I said. "We need to close them and then set up a schedule of dates that will be strictly adhered to. After today, I'm not discussing anything new."
There was a pregnant pause. "Is this going to be written up in the magazine?" asked a board member named Frank. "You haven't made things easier by putting everything we say out for public consumption."
"Well, I guess you have to watch what you say," I said. "But by the way, Frank, you're going to love the next column." I was talking about the one that ran in April.
"Can I see it?" he asked.
"No," I said. "You'll have to buy the magazine like everyone else. We need the circulation." There were groans and chuckles around the room. "But I can give you a taste." I read them a couple of excerpts, including the sentence in which I said it turned out they'd been smarter than me about the price.
Everybody laughed. "That's really good," Frank said.
"Well, not necessarily," I said.
"Why not?" he asked.
"Think about it," I said. "I've taken away your last excuse. You can't ever say you didn't do it because it was too expensive."
Frank and his colleagues looked at one another. I could see him absorbing the point. "Well, then," he said, "let's get on with it." At that moment, I began to sense we were ready to collaborate.
There were four issues I cared most about. One concerned our 401(k) program, which has a 150 percent match--that is, we put in $1.50 for every $1 the employee invests. I had insisted that the program continue for at least five years. The Nova people said they didn't mind giving the money to my employees, but under ERISA Nova couldn't continue the program for more than two years without offering the same benefit to everyone at Nova. "We're probably not going to do a 150 percent match for everybody," they said.
"But I want my employees to get that money."
"What if we just increased their salaries?" they asked.
I thought about it. "No," I said, "that won't work." Either they'd get a raise on top of their annual raise, which wouldn't be fair to the other people, or they'd get this raise instead of their annual raise, which wouldn't be fair to them. "But you could give it to them directly, outside the 401(k)."
"We can do that," they said. We were collaborating.
The second issue had to do with the three-year no-cut contracts I had demanded for our five senior managers. "As it stands, we can fire them only for the specific causes we list here," the Nova people said. I'd agreed that the managers could be terminated if, for example, they did something illegal, but for almost no other reasons. "What if they come to the office and don't do any work?"
They had a point. "But I need them here," I said. "I've still got money in escrow, not to mention equity. I want to make sure that my business keeps running the way it's been running up to now. Maybe I can be the arbiter of whether they're working."
"We have no problem with that," they said, "but there could be tax consequences if you're making the decision." Apparently, the rules covering golden parachutes could make the managers subject to a 20 percent excise tax if the payments were deemed to be golden parachutes in disguise, as might well happen if I controlled the purse strings.
We discussed other solutions. Finally I said, "What if we say they can get fired after the first year for nonperformance, but then instead of getting paid for the next two years and having a noncompete for a year after their last paycheck, we'd pay them for the two years over four years. And the noncompete runs out when they get the last check. That'll punish them for not performing their duties, but they still get the money."
"Okay, fine," they said. "We can live with that."
The third issue involved the company's potential liability should it be sued over environmental issues. The Nova people wanted to shift the entire liability to me. So if Nova lost a suit and was ordered to pay a lot of money in damages and fines, I'd be on the hook for the whole amount. Although I thought that, as the tenant, Nova's potential liability would be close to zero, I wasn't about to take it on with no limits of amount or time. When I first heard that the Nova people were insisting on that, I thought the issue might be one of the three deal breakers that Sam likes to say will arise in any major negotiation. In our new spirit of collaboration, however, we were able to resolve the matter quickly and amicably. I agreed to put a few million dollars in escrow for nine years, provided that I could control how the money would be invested and that the proceeds would come to me. We came up with other provisions that would take effect if a judgment against Nova were to exceed the escrow amount, but the chances of that happening are minuscule.
Similarly, we reached a compromise on the fourth issue: the fees associated with asking our mortgage holders for permission to change the terms of the lease. As I mentioned last month, we have a securitized mortgage, meaning that it has been bundled with a lot of other mortgages and chopped up into dozens of pieces with different risk-reward characteristics. The various pieces have been sold to investors. You need the permission of those investors to do anything that might affect the value of the mortgage--such as changing the lease. I didn't mind the changes that Nova wanted, but it would cost money to get them approved. The Nova people suggested we split the cost. "That's okay," I said, "but we need to cap our liability. We'll pay half of the total up to $150,000, or $75,000."
"Okay," they said. "That's fair."
That was typical. I didn't low-ball them, and they didn't try to negotiate a higher commitment from me. We weren't really negotiating anymore. We were just trying to be fair.
"Now we have to talk about dates," I said, turning to Nova's attorneys. "When can you have this done?" They gave me an answer, and I asked my attorneys the same question. I made it clear I wanted it done as soon as possible: no extensions, no excuses.
We settled on April 5 as the day we would sign the final contract. So, by the time you read this, my three businesses should have a new owner--on paper. Unfortunately, the deal won't be done because no money will have changed hands.
The sale is contingent upon the approval of an important amendment to the mortgage that the main financial backer, Goldman Sachs (NYSE:GS), is insisting on. Goldman wants the option of taking over the lease and operating the business if Nova fails to make its payments. That option is valuable because, no matter what happens to Nova, the boxes we store will continue to generate income. Normally, if the tenant defaults, the mortgage holder has the right to take over the lease and the income. Since the holders of our securitized mortgage would be ceding that right to Goldman, the change requires their approval. To get it, we have to go to the mortgage administrator, which in this case is a company called Capmark. The administrator in turn goes to rating agencies such as Moody's (NYSE:MCO) and Standard & Poor's (NYSE:MHP) to find out whether the change will affect the mortgage's rating and thus the value of the mortgage holders' investments. Capmark could then insist on conditions that may or may not be acceptable to Goldman.
Our lawyers do not anticipate any problems, mainly because they see little possibility that the change will affect the rating of the mortgage. It certainly can't hurt, after all, to have one of the world's preeminent financial services companies serving as a backstop to protect the value of the mortgage holders' investments. Still, the process could take from two weeks to two months, I'm told, and there's no way we can influence, let alone control, the outcome.
So just picture me sitting here in my office, twiddling my thumbs and struggling to contain my impatience. I figure I'll explode sometime around the middle of May--a year after Chris Debbas and I first met at an industry conference and talked about the possibility of doing a deal. I don't know whether I'm more amazed at how far we've come or how long it's taken. I just hope that the suspense is over soon and I can finally start focusing on the future.
Norm Brodsky (email@example.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
PRINT THIS ARTICLE