How to close an LBM deal

Earlier this year, Morgan began to share his experiences in a book titled The Closer described as “an inside look at the world of high-powered sales, big money and big egos.”

In Chapter 37 of his digital book, Morgan examines some best practices to avoid post acquisition litigation and shares real-world experiences.

“Your best protection from a lawsuit is truth and full disclosure,” he writes. Sometimes, however, things get tricky.

Here’s the full Chapter 37, “The letter I’ve kept in my desk for forty years.”

Frequently I smoothed ruffled feathers. An angry seller would call me up, incensed about a low offer. He might say, “Larry, this offer’s an insult. You call that son-of-a-bitch and tell him the deal’s off.” I’d then call the buyer and slightly mollify the sellers words. “Bill’s not happy with your offer, and frankly I can’t advise him to sell at that price. We both have a lot respect for you and your company and I know Bill wants to make a deal. But if you can’t do better than that, you’re forcing me to find another buyer.”

Having spent a lot of time and money on due diligence, buyers hate to walk away empty handed. Worse, they then likely watch as the second buyer steps in and based on the due diligence already completed, they buy the company. I worked hard to keep the first buyer at the table. A buyer’s first offer is seldom his best or final offer, but he’s often your best buyer. For your client’s sake, try not to lose him.

IF YOU WANT TO AVOID LITIGATION AVOID LITIGIOUS PEOPLE

By their nature, some people are litigious. Likewise, some industries. Once again I was lucky. I’d blundered into the perfect industry for avoiding lawsuits. After completing nearly 100 transactions, I’ve encountered only one seller with fraudulent financials. (He went to jail.) I’ve never had a buyer or seller violate a non disclosure agreement. Owners of building material companies tend to be honest, hard working patriots with middle class backgrounds. For the most part they drive pickups, wear blue jeans and live far below their means. LBM Corporate CEO’s may drive fancy cars, but they too are honest and most lack pretense.

Big egos and big deals don’t mix, especially in cases in which BOTH the buyer and the seller have an exaggerated sense of self-importance and entitlement. Big egos often result in arrogance, a lack of empathy for others and feelings of superiority. These people think they deserve special treatment and recognition. Ironically, A big ego is often the result of a deep seated feeling of insecurity and a lack of self confidence.

This isn’t to say that having an ego is always bad. A healthy ego can indicate a balanced sense of self worth, confidence and empathy. People with a healthy ego have a loving but honest sense of self. In a negotiation, the person with a healthy ego is capable of resilience and has the ability to solve problems creatively.

Having a PhD in Child psychology proved invaluable in dealing ‘little boys’ with big egos in corporate broad rooms. But big egos made it nearly impossible to pull off a successful acquisition. My solution was simple. I avoided working on difficult deals brought about by big egos.

This isn’t to say all deals were easy. There’s been a few difficult transactions in which one side or the other grumbled after the deal closed. But the grumbling was almost always about money. Typically the buyer thinks he’s selling a little too cheap and the buyer thinks he’s over paying. I welcomed that point in the negotiations. It’s at that point that most deals close.

Even after the owner sells out and puts millions in the bank, their lives usually don’t change much. Many stay on to run the company they’ve just sold. Building materials is a tough, competitive industry and owners work long hours, sometimes six days a week. That’s a mindset and habit hard to abandon, so retirement doesn’t come easy.

Quite often I’d get a call from a seller’s wife telling me to “Find something for John to do. He’s driving me nuts hanging around the house.” I’d then call the guy up and say, “Hey, why don’t you throw in with me? Selling corporations is way more fun than running them.” A few agreed and we did some deals together.

In my quest to find sellers, their work ethic made them easy to track down. They were always in the office and frequently answered their own phone. I seldom encountered arrogance on the part of a seller. They were friendly, courteous and easy to talk with. If they had a fault, it was that they worried more about their employees’ retirement than about their own.

Many started or inherited a small company and after forty years found themselves turning seventy with 100 employees and ten million bucks on their bottom line. Their kids grew up watching them work 60 hours a week and had no interest in following in their footsteps. Or maybe their kids had become woke and were incapable of running their own bath water, leave alone running a complex business. With no one to take the reins, their only option was to sell. Occasionally bad health forced a sale. I hated those deals and here’s why.

PRACTICE FULL DISCLOSURE AND NEVER LIE

Your best protection from a lawsuit is truth and full disclosure. That can get tricky. I typically represented sellers and I had a fiduciary responsibility to act in good faith regarding their best interests. But suppose your seller is dying of cancer and doesn’t want the buyer to know. (Desperate sellers make poor negotiators.) The seller has told you no one else is capable of running the business. but your buyer is counting on your seller to stay around and manage the company.

Legality and ethics can be incompatible bedfellows. LEGALLY my fiduciary obligation is to my client, not to the buyer. But is it ETHICAL for me to mislead the buyer? This shouldn’t even enter into the equation, but let’s assume I’ve done numerous deals with this buyer. They’ve always treated my sellers fairly and the buyer trusts me. If I mislead this buyer, I could lose lots of future deals with big commissions. What do you do?

The first time this happened I called Al Pitman, my Dudley Do Right in reserve. He told me, “Your seller should come clean with the buyer regarding his health issue. It likely will be impossible for him to keep his ill health a secret, meaning the deal could blow up before it closes, or result in litigation after it closes. And if he’s sick and dying, that’s the last thing he needs.”

On a non-legal note, my experience has been that the seller is usually not as “indispensable” to the operation of the company as the seller would like to believe. As the old adage on self importance goes, “Stick your fist in a bucket of water and then pull it out. How big a hole did you leave?” Sellers usually stay around for less than a year anyway, so the buyer knows that sooner or later the seller has to be replaced. Better sooner than later.

This health situation happened to me three times in forty years. In each case I told the seller what Al had told me and I convinced the seller to seek the advice of his own attorney. In all three cases the sellers ended up telling the buyers about their health. After some renegotiation, all three deals closed.