WEBVTT
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In the world of business, not all deals are what they say.
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Fortunes rise, empires crumble, all stroke.
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Mergers, acquisitions, and hostile takeovers.
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Welcome to Mergers She Wrote, where we examine strategies and stories behind the biggest deals in business.
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Because in MA, the real risks are the ones you don't take.
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Welcome to Mergers She Wrote.
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I'm Paloma Goggins, the owner of Nocturnal Legal, and your host.
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I'd like to welcome my guest today, Monica May Dunn.
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We are going to talk about demystifying the transaction process for mergers and acquisitions and explain that there's a few different ways for you to sell a business.
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Monica, thanks so much for being on today.
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Thank you for having me.
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So Monica is owner and CEO of Arizona Title and Escrow Corporation, which, for anyone joining our conversation today that is new to the merger and acquisition space, Arizona Escrow can play a pivotal role in the way that you close your business.
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And I think I have a list of questions for Monica today.
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I think based on our pre-discussion for this episode, I'd like to start maybe with just a couple of basics for anybody who's listening and doesn't know kind of where escrow begins and ends.
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So when we're just about to go through the initial offer, which is in a transaction, you have a letter of intent.
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If you're a buyer, you're writing that letter of intent to a potential seller.
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That sort of solidifies the very first piece of paper that says, I'm serious, we're gonna buy your business.
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Now, in the letter of intent, we can have a thing called an earnest deposit.
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And like selling a home, it's like putting down a deposit on a new home.
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Tell us how Arizona escrow kind of plays a role with the earnest deposit.
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Okay.
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So with the once we have the letter of intent and the earnest money is, you know, given, we get the the sooner we are involved, the better.
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For you know, every question that comes up.
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The sooner we're involved, the better.
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And so we will open that escrow, assign it an escrow number, and then we will send out wiring instructions.
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Um, that is the preferred way to get the earnest money.
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And then we we kind of wait as the uh brokers or the attorneys let us know what the next steps are.
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So we can either do the UCC search.
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We're there really to be the gatherer of all the information, all the contacts, that's what's most important.
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Um, buyers and sellers' names, entity documents, all those things.
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So as soon as we can get that open, the better.
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So when someone deposits the earnest deposit with Arizona Escrow, the role then is just to hold on to it until closing.
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What happens if the closing doesn't occur and the LOI just becomes dead in the water?
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So depending on what it's written in the LOI, normally that money goes back to the buyer unless there's something in the LOI saying that the money is non-refundable after a certain date.
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So we really we look at the contract and we make sure we follow all the instructions in there.
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Have you guys been in a situation where it got heated and you have to wait essentially until the parties reach an agreement?
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Or potentially, I I know there are some times that it goes to litigation.
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I haven't been part of that, but have you guys been in sticky situations before where the earnest money is in dispute?
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Yes, nobody can agree.
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The contract was too vague.
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And so either we do a 13-day demand letter, and um, if that doesn't work, then it ends up going to interpleter.
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And when it goes to interpleter, usually that the attorney fees get taken out of that those funds.
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So yeah.
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Well, and I would say most earnest deposits aren't substantial amounts of money, they're more of like a in-kind deposit to make sure that you're serious, right?
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Correct.
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So this whole idea that if you can't reach an agreement, you could have fees taken out of it.
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I mean, at that point you might as well just agree on what the sum.
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Obviously, if if the amount is like$50,000, it might be a different story.
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Correct.
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But sometimes most of the times five,$10,$15,000,$25,000.
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Yeah.
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Yeah.
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So it's it's one of those things that I want to make sure that, you know, in the contract, we have to make sure that there's really good instruction on what's to happen uh with that, with that money if if the sale doesn't happen.
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Absolutely.
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And I was gonna say too, the I get asked all the time by my clients, you know, can you just hold the earnest money?
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And I always recommend using escrow because I'm not really a third-party neutral like you guys are.
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Um, you know, I represent one party over the other.
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And granted, there are times when people are okay with having counsel of one party hold on to the funds, and there there are fiduciary responsibilities there, but I just think it becomes a little bit lopsided in terms of power.
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Um, and if there is a dispute, could it be marred by the fact that the party holding the funds technically represents and has a fiduciary responsibility to their client specifically?
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So exactly.
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Because we help we assist other attorneys who have um who may want to do the escrow themselves and we are able to hold just the earnest money.
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And uh then that's a different situation between two attorneys.
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They bring us because we are that neutral third party.
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Well, I'm gonna dive in.
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I think that was a great introduction.
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I just I want everybody listening who isn't a hundred percent aware because I feel like there are times when clients come to me and we get into the discussion of earnest deposit.
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And especially if it's a seller who's worried about sharing confidential information or intellectual property, you know, we get into these discussions about earnest deposits and how they can kind of act as a gateway or a threshold for maybe disclosing more important information as the deal progresses and getting to keep some of that money.
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And um it's it's just what's crazy to me is that earnest deposits aren't used all the time.
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And to me, it's you would never buy a house without an earnest deposit.
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Why would you buy a business without putting an earnest deposit down, especially considering how much time and money is going to be spent in drafting the rest of the documents and negotiating them?
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Absolutely.
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And yeah, I highly recommend earnest money because then the seller is actually opening their books up to the new buyer, and yeah, during that due diligence period, there's a like a lot of private intellectual property things that they may not want the buyer to know just yet.
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But with that earnest money, it kind of they're committed, they're really serious about buying it.
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Absolutely.
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So besides facilitating essentially the intake, holding, and payout of earnest money, which if the deal closes, gets credited towards the purchase price, it kind of gets bundled in.
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What other roles does Arizona escrow really facilitate or handle when it comes to transactions?
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So after that, that period, we can do a UCC search, which actually will look for any liens or judgments that the seller may have that the buyer you know may want to address, or they have things, the liens that need to be cleared up.
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So we will do a UCC search.
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We'll ask both parties if they want that, and then we start gathering all the information, entity documents from the operating agreement or the membership interest documents, uh, because we need to find out who is who's really legally able to sell or buy the business both sides.
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If your entity documents have to be your operating agreement, you have to be able to either prove that you can buy a business with that entity or sell a business with that entity.
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And then we start gathering, um communicating with the lender, if there's a lender, um, and then the documents that we prepare for the for the closing is the entity documents.
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And also there's um some addendums.
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If things happen during the L or the purchase agreement and the closing, there's things in an addendum that we can add that things that change as the process goes on.
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And uh yeah, I I would say that mostly it's the payoffs and how we're gonna be processing that that closing.
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For anyone who's unfamiliar with what payoffs are, um essentially if a business that's being sold has outstanding debt on the books, Arizona escrow can essentially take in the purchase price from the buyer and utilize a portion of those funds to pay off the debt so that effectively the qualifier in the purchase agreement, whether it's like free of debt and liens and all these other things, is satisfied at closing.
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So, yes, at closing, we'll take the the sales, the proceeds, and we will pay off all the debt.
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So then the buyer is coming into a business with zero debt.
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That's the goal.
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And I well, and I think that that part of your role is so critical that a lot of buyers don't really take time to consider because if let's say, which is very common, a seller doesn't have the funds on hand to make all those payoffs on their own prior to closing, then they have to be in receipt of the purchase price in order to then turn around and pay those debts.
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And so the question then becomes can you trust that the buyer or the seller, I mean, is going to turn around and take a portion of those proceeds and pay off the debt when they could be arguably, you know, incentivized in a way to not do that, right?
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And keep the total purchase price.
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And then you'd have to fight them after the fact.
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After the fact.
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And when it happens after the fact, it's a lot harder.
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Absolutely.
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I think, yeah, the buyer and seller do need to trust each other.
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But when it we kind of take that that guessing out of whether or not it's gonna happen, we, you know, we will take care of all that at closing.
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A common term that's used in MA deals is funds flow or flow of funds.
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And one of the other things, too, that Arizona escrow essentially puts together with the closing is and kind of tied to this payoff piece of it too, is where does all the money go at closing, right?
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So, like you're taking in the purchase price, which ultimately anything left over from the purchase price after all the the amounts are deducted gets paid to the to the sellers.
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But um funds flow, I give me like the most basic description you can have for anyone listening who's like, what what is funds flow or flow of funds?
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So from the earnest money all the way to if you hear there's a lender or if you have a cash buyer, those funds come in and we hold those funds until closing, and then we have actual with the with the closing statement, it's you know, it's written out right on the closing statement exactly what we're gonna pay.
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It's clear to all parties where all that those funds are going and what they're gonna get at the end of the closing.
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And I that piece I think gives a lot of solace to buyers and sellers that there's no a jet hidden agenda or anything else that would obscure what's happening with the purchase price, which I think at the end, you know, sometimes there's a decent amount of money being passed around.
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So being able to see a line item for each thing that's getting paid out or dispersed is is helpful too.
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Yes.
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It I I know it gives our buyers and sellers both peace of mind.
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Definitely.
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So thinking about how that transactions are can be two different sizes.
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When you're handling a closing for a smaller Main Street deal, which is really just a colloquial term to say, you know, brick and mortar, you know, million and below, I everybody's got a different threshold for what Main Street means.
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Um, versus something that's a$50 million deal.
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How does the role of Arizona Astro change and shift based on it being a smaller deal versus a larger deal?
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Well, our role is pretty much the same, um, but there is gonna be more parties involved with those bigger deals.
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When we have a big MA transaction, you're gonna have you know attorneys, CPAs, um sometimes private equity, um, venture capital.
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You're dealing with a lot more um parties involved.
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So sometimes those take a little longer because it's all about that open communication with all those, yeah, all the people involved.
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The smaller and the smaller, you know, Main Street, um, it's usually the buyers or sellers, or sometimes they're not entities, they're just, you know, they've been running a business their entire life, a service business.
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And so yeah, it's sometimes it gets emotional.
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I think there's one misnomer that people have is that a smaller deal is simpler.
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And we both know from experience that not only are emotions high sometimes in smaller deals, but just the fact that they've never gone through a transaction, this is oftentimes the first and only time they're going to sell a business.
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There's a lot of unknowns.
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I think sometimes those smaller deals can be exceptionally complicated and slow as people are riding that emotional roller coaster.
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Absolutely.
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I believe that sometimes when it's just the buyer and the seller, there's a lot more time involved with them because they don't know.
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Um, and so there's a lot of explaining, a lot of and we're we're happy to do that.
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We have very open communication with with all parties.
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So when you see closings get delayed, regardless of size of transaction, is there anything common among those delays that you can share that maybe as a potential buyer or seller they could then be aware of those pitfalls and avoid them themselves?
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Yes.
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So lenders and landlords are probably the, and I'm not putting blame on lenders and landlords.
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Usually it's about a miscommunication.
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So if the borrower doesn't get the lender all the required documents, because they if it's an SBA, there's a lot of you know things that they need to accomplish before they can get that SBA number or the loan amount.
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Um, and as far as for the lender the landlords, it's just negotiating with those landlords.
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And a good attorney or or business broker can really help assist with those negotiations because it it could get it could we've had it happen where the landlord just didn't agree to you know transfer the uh the the lease to the new buyer and the deal canceled.
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So it's upsetting, yes.
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That's talking about the landlord is an excellent point because I feel like sometimes I bring up the lease really early on in transactions because of that.
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I've seen it hang things up, slow things down, or worst case scenario, like you said, just trash the deal altogether.
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And you know, we'll be just past the LOI signing, and I'll start, you know, helping with the disclosure schedules and diligence and all this other pieces.
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And I'll say, has anyone had a conversation with the landlord?
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And they're like, oh, well, we're like 30 to 60 days from closing.
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Like, we don't need to have that conversation quite yet.
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And and I always say, no, no, no, we need to start that conversation because not only can the landlord be a non-player, but I've also seen times where they just are so slow to respond.
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And they have so many hierarchies of like layers in there, you know, especially corporate landlords.
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Right.
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They have so many layers you don't even talk to the landlord themselves, you've got like intermediaries that you're working through.
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And it really, I mean, the fact that you're playing a telephone game where you've got one person who's then relaying it to like an attorney who's relaying it to the client.
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I'm like, this is really slowing down this process.
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So the sooner the better.
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Yes, sooner the better.
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Um, in terms of getting documents over to you guys, is that something that you've seen?
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Obviously, you know, well-organized broker attorney team or broker attorney duo is probably going to get you guys the relevant documents that you need as quickly as possible.
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But have you seen people drag their feet on getting you the required documents to show proof of ownership and that has slowed down a closing?
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Yes, that does happen.
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We have on our website we have a smooth closing checklist, which is accessible to anyone who goes on on our website, but it actually takes the guesswork at exactly what we need.
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I think that I mean, just being able to communicate with the buyer and seller, their information, email address, addresses, you know, phone number, um, the entity documents, that seems to be the a lot of people don't know where their entity documents are.
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So that that kind of slows things down.
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But the sooner that people can get those items to us, the better.
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What blows my mind is that there are so many very successful businesses that have been operating for 20, 40, 50 years and they don't have an operating agreement or bylaws, or they have no idea where their articles are.
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And for some of those really long-standing businesses, you go on the Arizona Corporation Commission and it's so old that it like gives you the little blurb as like on film or microsite or whatever they have on their website.
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I'm like, we can't even pull this this entity, it is so old and well established that it isn't even available online.
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We have to physically go down to their office and have them like pull out probably like a sheet, a clear sheet to print from.
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I don't even know what those look like.
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And we need that because how are we supposed to who's has the authority to buy or sell a business?
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So on a on a kind of related note, one of the issues I've seen with people who own entities that are in states that sort of hide ownership, like Wyoming, where what do you guys ask for in order to prove ownership?
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Well, there's other, you know, other ways we can can do that.
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Um, there is a service that that will do the little bit of investigating for us, or we just, you know, have to ask and keep asking until they get us something.
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I I feel like a lot of people don't realize that that's one major pitfall of you know opening a business in a state that does kind of hide their identity, is that anytime you want to do anything that shows ownership, you've got a million hoops to jump through.
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So I always warn people, I'm like, do you really need to be in Wyoming?
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Because that could open up a whole new can of worms, especially, I mean, even just for like banking or getting loans or things like that.
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So do you get involved in anything post-closing related to holdbacks?
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And before you answer that, we're gonna give the explanation of what holdbacks are.
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So in a transaction, there are times where a certain amount of the purchase price will be held back.
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And that can be either to cover a potential claim made from the buyer to the seller based on maybe immaterial material facts that were misrepresented.
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Uh, that was a tongue twister.
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Um, or uh kind of related to a holdback and sometimes used interchangeably an earnout, which is based off of how much revenue is made the year after closing or some other time period that's measured and specifically set forth in the purchase agreement.
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Yes.
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So yes.
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Uh in all those cases, we have situations where we do hold back funds.
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Um and for all those reasons, they have to know that that that money is secure and our fiduciary responsibility is to our buyer and our seller.
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And when you guys do the the holdback process, it would follow just like kind of doing the earnest deposit, right?
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Where, you know, you release based on certain metrics, put in the documents and things like that.
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Yes.
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There's in the in the contract, it'll state how long or what what different timelines, you know, there could be um or just proof that something like if it was a tax liability, um that proof that that was paid, and then that would trigger us to release some of the money or all of it.
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Okay.
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And then I'm gonna switch gears a little bit here.
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We're we're we're running through this.
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I have a list of questions for Monica, and and as if feel free to to dive off and talk about um unrelated or related topics that are sort of tied to these questions too.
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We don't have to hold to them perfectly, but um, is there, you know, in terms of one thing that lawyers or MA advisors, including things like brokers, don't realize about escrow that could save time and money, generally speaking.
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I would, you know, back to the same thing about getting us all the information as soon as possible so we have that.
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Um, and I think another misconception with business sales is it's not just a bill of sale.
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And that's what a lot of people think.
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And there's other documents that need to be prepared.
00:21:20.319 --> 00:21:31.519
And so that that definitely is one of those big things that people are totally missing, totally misinformed that it's not just a bill of sale.
00:21:31.599 --> 00:21:39.680
We there's a lot more to it, um, and there's a lot more liability um to handle and to deal with.
00:21:39.839 --> 00:21:41.519
So we're we're really there.
00:21:41.759 --> 00:21:46.079
We just about to celebrate our 50th year in business and congratulations.
00:21:46.480 --> 00:21:47.599
It's all about thank you.
00:21:47.759 --> 00:21:51.359
And it's all about trust and those relationships that we build.
00:21:51.680 --> 00:22:00.079
I'm glad that you said it because I feel like sometimes I stand on the tip top of a building shouting that this it's not a bill of sale.
00:22:00.319 --> 00:22:06.960
And I can't tell you how many times people come to me with that misconception of like, let's just put together a simple one pager.
00:22:07.119 --> 00:22:16.880
And I'm like, no, like the like to your point, the liability that sits with an asset sale or purchase is huge.
00:22:17.119 --> 00:22:46.400
And the reason why, you know, for anybody going through this process for the first time, the reason why we have a diligence period is not only for the buyer to thoroughly investigate the seller and make sure that the decision is the right decision and that they feel confident in buying essentially what the seller has represented as the business, but also for the seller to take all of the things and disclose them to the buyer so that post closing, there's no surprises.
00:22:46.559 --> 00:22:54.000
Um and I think sometimes it gets lost on clients that like the diligence process is it sometimes is skipped.
00:22:54.160 --> 00:23:00.480
And it is just a more pivotal part of the transaction that actually serves to protect both sides.
00:23:00.640 --> 00:23:05.359
Um, and so I always I always worry when when people come to me.
00:23:05.599 --> 00:23:17.039
Um, I don't get it frequent too frequently, but I do get people come to me who have sold a business in the last year, signed all the documents, and they're like, hey, can you help me?
00:23:17.359 --> 00:23:23.839
And I I'm, you know, I'm always sorry because they've signed on the dotted line, they've closed the deal, time has passed.
00:23:24.000 --> 00:23:28.319
And a lot of times the documents they've signed are lacking those protections.
00:23:28.480 --> 00:23:32.720
So when it comes to enforcing the contract, there's not much teeth to it.
00:23:32.960 --> 00:23:33.200
Right.
00:23:33.519 --> 00:23:47.119
So kind of on this related topic, in a competitive MA market like Arizona, how do you see Arizona escrow or see Ariz escrow officers adding value beyond just being a neutral third party?
00:23:47.599 --> 00:23:57.279
Well, our escrow officers they do create a relationship with all the parties, either the brokers, the attorneys, the buyers and sellers.
00:23:57.440 --> 00:24:03.039
And I think what's important for the escrow officers is clear and open communication.
00:24:03.359 --> 00:24:11.279
Um, being that resource that they can call to ask questions, or we are proactive.
00:24:11.599 --> 00:24:30.480
Um that's one of the things at Arizona Escrow that we do is we let we give people timelines and if something new, we keep all parties involved on an email that may not pertain to the buyer's attorney, but they're on the email just so they know what the flow.
00:24:30.640 --> 00:24:36.559
The whole escrow, you talk about the money flow, but the the actual escrow process flow.
00:24:37.359 --> 00:24:38.079
A hundred percent.
00:24:38.160 --> 00:24:59.519
I I work with Darcy all the time, and you know, one thing I appreciate is that she calls me, you know, and I I think in a world where communication is dominated by email exchange, sometimes it's easier and clearer to just have a phone call and to get up to speed, make sure we're all on the same page.
00:24:59.680 --> 00:25:09.680
And so that's one thing I've really appreciated about your company is it's the ability to get in contact and and to have that clear communication back and forth.
00:25:09.839 --> 00:25:12.880
I mean, it makes all the difference, especially when a deal is moving really quickly.
00:25:13.119 --> 00:25:13.759
Yes, yes.
00:25:13.920 --> 00:25:21.279
And then we do like to have things in writing, of course, but when we do have a phone conversation, we we do track that as well.
00:25:21.440 --> 00:25:29.119
We we make sure that we type that up in our conversation log so it is there for legal purposes later on if something does happen.
00:25:29.359 --> 00:25:30.480
That's excellent.
00:25:30.799 --> 00:25:34.480
Can't ever have enough uh documentation, especially in the legal process.
00:25:34.640 --> 00:25:35.920
We go through a lot of papers.
00:25:36.799 --> 00:25:38.000
I can imagine.
00:25:38.240 --> 00:25:42.880
Um, I know there's times when you guys close in person versus remotely.
00:25:43.119 --> 00:25:44.880
You know, do you have a preference?
00:25:45.039 --> 00:25:47.599
Is it really based on just party preferences?
00:25:47.759 --> 00:25:51.359
You know, I've come to your office to do in-person closings.
00:25:51.519 --> 00:26:01.839
I personally think that they're kind of nice because it's like the old-fashioned version of closing on a house where everybody sits around a table and you know, shake hands, break bread or whatever it is.
00:26:02.000 --> 00:26:05.200
But is there any preference that you guys have as a company?
00:26:05.519 --> 00:26:06.960
No, we don't have a preference.
00:26:07.119 --> 00:26:11.359
We usually sometimes the broker decides um what their preference.
00:26:11.680 --> 00:26:15.599
We have brokers that will only um have a in-person closing.
00:26:15.680 --> 00:26:17.599
They don't like remote closings.
00:26:17.759 --> 00:26:27.279
But after 2020 and the pandemic, 60% of our closings are now electronic because it saves people so much time.
