Whether you are looking to sell a business, acquire a business, or recapitalize or refinance your business, it is imperative you build a first-class team of advisors to assist you in the process. A critical player on your deal team is your attorney. Hiring the proper attorney for your transaction, and utilizing his/her services and advice properly, can be the difference between a successful and unsuccessful transaction.
Based on CFA’s 57+ years of transaction history, we have extensive experience working with all types of attorneys. Furthermore, through my own participation as the only non-lawyer in the International Business Law Consortium (www.iblc.com), I have been afforded a unique perspective into how attorneys and their firms are best selected and utilized in a variety of transaction types. In today’s article, we examine the Five Biggest Mistakes Clients Make When Hiring An Attorney; in my next article, we will examine the biggest mistakes clients make when utilizing their attorney for their transactions.
The Five Biggest Mistakes Clients Make When Hiring An Attorney
1. Lowest Price Does Not Necessarily Mean Lowest Cost. Often when our clients ask for a referral to an attorney, they are concerned about fees. Just as often, these same clients are more worried about cost than quality, assuming all attorneys are alike.
Unfortunately, the hourly rates (or total project cost) quoted by the attorneys you interview may not directly correlate to the quality of work/service provided. We know from experience attorneys in larger markets (New York, Boston, Chicago, DC, LA) typically charge much higher rates than lawyers in slightly smaller markets (for example, Cleveland, Detroit, Portland, Dallas).
Furthermore, while one transactional attorney may have a higher quoted hourly rate than another, he/she may be more efficient and will be able to get the work done in less time. Time and again, we have seen experienced attorneys accomplish a task in half the time of their less experience colleagues, thus reducing the overall cost of their services. Accordingly, higher rates do not always lead to higher costs.
It is also important to remember the more complex the transaction and the more “moving parts,” the higher your legal bill. For example, we had a client who complained about the cost of his legal fees, stating, “When my brother sold his business last year, his legal fees were 50% less than what I have been charged.” Upon further discussion, we learned his brother had a simple sale of assets for all cash at closing in a transaction valued at less than $2 million. Our client was involved in a transaction involving three separate entities with separate owners/shareholders, two complex real property leases, a stock/equity roll-over agreement, and several other ancillary documents in a transaction valued at $33 million. I told our client, based on the data provided, he was getting a GREAT DEAL if his fees were only 50% higher than his brother’s.
When interviewing a prospective attorney, you might consider asking the following questions to help you determine the overall cost of his/her work, not just the quoted hourly rate:
- How will you utilize your associates and other team members on this project?
- Can you provide me with a “best guess” estimate of how much the total project will cost?
- What can cause the legal fees for this deal to go above your estimate?
2. No Relevant Experience. The following quote may terrify your advisors, “My (brother/sister/child/fraternity brother/next-door-neighbor) is an attorney, he/she will be happy to work on this transaction for me.” Yes, it is true, any attorney who has passed the Bar exam is allowed to work in any area of the law, but you are wise to hire an attorney who has significant, and relevant transactional experience.
Clients often tell us, “But my attorney is my friend. We grew up together. He has done lots of real estate deals so I know he can handle the sale of my business to this private equity group.” Unfortunately, while real estate deals are transactions, they are quite different from M&A transactions. Experience in one discipline does not necessarily connote expertise in the other.
An analogy we often use in this area is: Imagine a situation where a loved one (your child, your spouse, your parent) sustained a serious head injury. Would you entrust their care to a heart surgeon or a dermatologist? Of course not! You would seek the services of the best neurologist you could find. So why would you retain an attorney to guide you through a complex M&A transaction who does not have relevant experience?
Furthermore, you want to know your attorney has experience with the type of transaction you are contemplating. That is, if you are looking to take on a $30 million subordinated debt-placement, does your attorney have experience with these type deals? If you are doing an equity recapitalization with a Private Equity Group, how many of these type deals has your attorney done recently?
The following are some of the questions we suggest you ask your attorney when you interview them:
- Please tell me about the last three to five transactions you worked on: when did you complete them, how large were they, what type of deals were they (note: the deal business changes rapidly, the more current experience your attorney has the better).
- How many deals have you or your firm done in my industry?
- Are you familiar with the ABA and/or SRS Deal Points Study(ies)? (note: if your attorney is not familiar with these studies, this should be a major red flag).
- I am thinking of doing a/an (equity recap, dividend recap, senior loan, acquisition, stock sale, asset sale). How much recent experience do you have with this type of transaction?
3. No Bench Strength. To paraphrase a famous First Lady, “It takes a village.” Deals today are very complex and getting even more complex by the day. Whereas 20 years ago the simplest asset sale could be completed with a 10 page Definitive Purchase Agreement, today, the Agreement for the same deal would have 10 pages of definition of terms!
When interviewing an attorney for your transaction, it is important for you to determine the strength of his/her entire firm (their team, if you will). Because of the complexity of deals today, it is impossible for one attorney to be expert in all aspects of a deal; they will need to call upon their colleagues in the following disciplines: ERISA, Environmental, Intellectual Property, Information Technology, Labor, Real Property, and Tax laws, just to name a few. They and their firm will need to be comfortable with FCPA, AML, HSR filings, and more.
We have seen situations where our clients insist on using the services of their local, one-man law firm. These hardworking professionals can do a great job, but they can be overwhelmed by the transaction. Rest assured, if you are selling a business for more than $5 million, the acquirer will have a stable of attorneys working for them. Make sure your legal team is up to the task or you risk getting outmaneuvered in the deal.
What are some questions you should ask a prospective attorney about their “bench strength” before retaining their firm?
- Do you have specialists in your firm for the various aspects of the deal and how do you interface with them?
- What happens if you need to take a vacation or get busy on another deal? Who is your back-up…and may I meet this person as well?
4. Only Hiring Local. Given the preponderance of technology used in business today, the days of only hiring a lawyer in your backyard are gone. Yes, you do need to be considerate of using an attorney or firm who is cognizant of the laws of your local jurisdiction, but, at least in the USA, a sharp attorney in Kansas City will be able to close transactions across the country (consulting with local counsel as necessary, of course).
We have had the pleasure of working with outstanding lawyers and law firms in Omaha, Denver, Salt Lake City, Savannah, and Des Moines, just to name a few. We have referred clients in California to firms in Omaha and clients in New York to firms in Denver.
Given the use of email in today’s legal community, it is rare for opposing counsel to meet face-to-face on transactions.
We see two key benefits for seeking counsel outside of your local area:
- If you do live/work in one of the higher cost locations noted above, hiring an attorney from a lower-cost regain can provide you the opportunity to retain a top-flight firm at a lower overall cost.
- If you live/work in a smaller market which is not fortunate to have experienced transactional attorneys, looking outside the region will provide you with a larger pool of attorneys from which to choose.
5. Not Trusting Your Instincts. Hiring and retaining a transactional attorney is a personal experience. You will be spending a great deal of time speaking with and listening to this person. While they do not have to be your best friend, you do have to trust and respect them and their opinions and counsel.
Too often, we see clients who hire their attorney for all the wrong reasons (most often price/cost driven). We believe if you do not genuinely “like” the person you are contemplating hiring to represent you, your experience will be poor and you will not be satisfied with the outcome of the work provided by your attorney.
Go with your gut, trust your instincts. If you do not have some sort of “connection” with the attorney you are interviewing, you probably should move on and interview another firm.
Clearly, if you are reading this article you are successful in your business and you have been successful because of your ability to make difficult decisions. Hiring an attorney is not an easy decision, so you have to take proper precautions to make the right decision, including putting faith in your ability to listen to your “inner voice” and trust your intuition.
Recently, I was at a conference where Admiral (ret) Eric Olson was a keynote speaker. He made a statement which perfectly sums up the need to have a connection with your attorney and trust your own instincts. Admiral Olson said: “When the map differs from the terrain, go with the terrain.”
Our next article will dive into the biggest mistakes clients make with lawyers in their transactions. Remember, the legal business is a contact sport: make good connections, conduct proper interviews, and you will be pleased with your results.
Posted by Jim Zipursky.
This communication is not a solicitation for the offer or sale of any particular security, product or service, and no investment or other decision(s) should be made based on this communication. For securities purposes, Corporate Finance Associates Nebraska is associated with Colorado Financial Service Corporation (“CFSC”), Member FINRA and SIPC. Corporate Finance Associates and CFSC are independent entities. The solicitation and consummation of any particular securities transaction(s) are subject to compliance with all applicable securities and other laws, rules and regulations, including but not limited to those relating to any/all required registrations and qualifications and/or exemptions thereto.