You gotta know when to walk away

I'm no gambling woman, but the Kenny Rogers hit seems like just the right song for the dilemma we find ourselves in. Let me explain.

When my business partner and I send in an LOI (Letter of Intent, or offer letter) to a potential seller, what we get back is typically a redlined version with changes that are known as "comments." As a sidenote, the comments don't explain any of the changes; the changes are made directly to the text, and are simply called comments. We then go through the seller's comments, and respond with our own comments. And so on. There are lawyers and advisors on either end to help each side understand the consequences of the changes, and the process chugs along at the speed at which the seller team and the buyer team move, hopefully towards an agreement that both buyer and seller sign.

As you can imagine, this process feels incredibly slow to us. And oddly formal. I'm tempted to add in bubbles to explain each change that we put in, but I'm told that is not The Way Things Are Done. Fair enough. Formal processes do bring order to complicated exchanges, and a consistency in style can allow one to focus on substance. But what if the process can be hijacked? Then what does the hypothetical gambler do?

Well this is exactly the situation we encountered recently in an exchange with a seller. After some back and forth comments, we got back a redlined copy, and also a clean copy of the latest seller version. We were puzzled to find that the clean copy was actually already signed by the seller. Then we read the wrapper text. This was apparently the seller's last stand, and we had a week to respond yay or nay.

We weren't sure how to feel. If we were closer to agreeing on the terms, these actions would make sense to us. But several key items in the offer were nowhere near the point of settlement, and we thought we'd be addressing them through verbal discussion or more LOIs. Now the process was out the window, and though it looked like we were about to go a lot faster, we were in uncharted territory. It was hard to figure out what to do next:

     a) ignore the power play and just send back comments as before
     b) ignore the power play and not even respond
     c) choose yay or nay and respond as directed
     d) choose yay conditionally, presenting a third option that is better
     e) choose nay on principle and say we don't work with bullies.

The options ran the gamut, but we didn't know how to choose from among them. This was a whole new world. We still don't know, but we've got some questions for ourselves as we work through this period of the deal cycle:

• When we encounter a bully or a bullying action, do we respond in kind (escalate), do we try to change the tone (mitigate), or do we walk away (terminate)? This sounds like a strategic decision but it's as much a gut check. I'm not sure I can stomach the escalation option.
• What do we consider appropriate reasons to walk away? Quitting isn't fun, and given sunk costs of time and effort, it's hard to let go of anything. But when do we really need to? (And why?)
• And finally, if we can figure out when to walk away, then how do we actually do it? There are reputation issues, and breaking up is never easy besides. So when push comes to shove, how do we shove off?

So many questions. Answers to follow.

Retaining counsel

I used to want to be a lawyer. My favorite read of 1992 was John Grisham's The Firm, and I ruefully admit now that Mitch McDeere, a figment of Grisham's imagination, was an early professional role model for me. A high school colleague I ran into at my ten-year reunion this past weekend referred to Grisham's influence in her career visioning, and we laughed about the author's surpassing professional influence on our generation. The difference is that she's a litigator today, and I'm still wondering where my criminal defense lawyering fantasy went.

So anyway, here's a primer in retaining counsel I've cobbled together after three months of searching: How to hire a good lawyer.

To begin, my business partner and I had been vaguely aware of the need for counsel eventually, and had gleaned in our professors' asides how important legal counsel could be to the health of our business investments. But we didn't know what to look for, and certainly couldn't say concretely why we might need one. More than anything, we were suspicious of the billable hour. Being a pair of bootstrapped search funders, we weren't keen on shelling out $300 to $700 an hour for advice we could get from our deal advisor as part of our normal course of business.

A note on the billable hour. My business partner and I are dumbfounded that this payment system is the norm in the legal profession. We're not legal types (come to think of it, we're not financial types either), but it doesn't take a law or finance professional to react: Now wait a minute. You're incented to take as long as you can to solve my problems? That just doesn't sound right. The norm of compensating lawyers by the billable hour certainly didn't endear us to the firm-based lawyers we spoke with -- through no fault of their own, we allow -- so we held out. Maybe there were others in the wilderness.

And so there were. Upon hearing of our woes, our deal advisor and another b-school colleague of ours who is a former lawyer suggested looking for counselors who work on a contingency, or perhaps a success fee. A whole new world opened up. To be sure, business lawyers who work on an arrangement that isn't the billable hour aren't common, and as they tend to be independent, can be rather tricky to find. But once we learned that they were 'out there,' we reset our search terms and began afresh.

We contacted former co-workers, alums who do business transactions typical of those a search funder would do, and anyone else who seemed to have a sense of what we were looking for. We cast a wide net, and as we spoke with lawyers across four states and three time zones, a few criteria became clear to us. We wanted someone in our own time zone who gave us just enough advice to make an informed decision. Lawyers are fundamentally different animals from us MBA types, we came to realize. They are trained to anticipate the 1% risks, i.e. the unlikely scenarios that might derail or harm a business, whereas we're trained to imagine the 1% growth possibilities. We admit that that form of legal training is important -- it certainly grounds people like ourselves when we ignore or downplay risks in hopes of growth. But it was downright depressing to talk to lawyers whose only contributions to our dialogue were those 1% risks.

To wind down this long story, we found our man, and through a most unlikely source: the seller's counsel.  Given our interest in setting up for a smooth transaction (and given that the seller's longtime counsel was someone we liked speaking with), we asked for an introduction to a lawyer the seller's counsel trusted, respected, and had worked well with in the past -- crucially, as opposing counsel. It's not easy to be a watchful consiglieri without also coming across as a nervous Nellie, but somehow our counsel does it, and does it well. And as a bonus, he was willing to work with us on the compensation front too.

Our search has finally ended. Bye bye John Grisham. We've retained counsel, and we believe we're in great hands.