Deal Makers and Deal Breakers

Their role is to flag every risk. Yours is to decide which ones to take.

Charlie Munger told a story about a gas pipeline that he and Warren Buffett were purchasing out of the Enron collapse.1 To secure it, they had to make a multimillion-dollar deposit by Monday, and it was a Friday. Despite their attorneys' advice to the contrary, they went ahead and sent the wire so it would arrive that Monday. The deal was based on a wire and their word. If they had listened to their attorneys, that deal would have been dead. There are countless other stories of businessmen who went against their attorneys' and financial advisors' advice to acquire a company because they had a gut feeling that it would be a successful business.

There are many things that can kill a deal. Sometimes the financing doesn't work, due diligence might reveal a problem that makes it impossible or too risky to move forward, or the terms of the deal might be modified to the point that it no longer makes sense. One of the worst is attorneys or financial advisors. Not because the deal doesn't make sense, but because their risk-averse view of the matter beforehand can make you think twice about moving forward.

The same applies to a company's operations: if a company were to follow every piece of advice given to it by lawyers and auditors, it would stall operations — the ability to operate effectively, move quickly, or pivot if necessary. Speed matters in business; knowing when to throttle up or down is an art as well. Once, when the organization I worked for went through a full audit, the auditing firm, one of the "Big Four," came back with a brutal list of "recommendations" for every division in our company. It was massive and extremely detailed, covering all the processes they suggested we implement throughout every department. I sat through that meeting and afterward told my boss that if we implemented all of these suggestions, every department would spend more time on checks and balances than actually conducting business. My boss told me a lesson I have never forgotten to this day: "It's their job to make all the risk-averse suggestions to us, and it's our job as executives to decide what things we're implementing and what things we're going to forgo so we can operate correctly."

Their job is to look at every single angle for their client and make sure the client understands every single parameter. By nature, they will be very conservative; hence, if you're not careful, they will also kill your deal.

There are two breeds of advisors: deal makers and deal breakers.

Even those that are deal makers will always be extremely conservative, but you definitely want to vet who you have on your side. Once you meet a team of advisors that are very good at what they do and are also deal makers, you want to hold on to them, because it matters when complexities arise. In every deal, it's not only you as a buyer or seller with your counterpart; it's also the lawyers and their relationship as they move with the deal that can make or break it. The same goes with your financial advisors.

Case in point, I've been in my fair share of deals and will tell you without a doubt that having the right attorney on your side who can "smooth things over" with the other party's attorney is a must. I've been in deals where, thanks to the team representing us, both parties got along very well. Doubts were always clarified, and things moved along efficiently because both parties wanted to make the deal. This included deals that extended for half a year or more because of the complexity of the acquisitions. We managed to keep the deal alive despite setbacks that required several extensions to get the due diligence and financials pinned up properly. I've also been in deals that almost fell apart because the attorney on the other side was being difficult, usually because they took it upon themselves to decide that it was not in their client's best interest to sell or buy the business, despite their client's wishes to the contrary.

If there's any advice to take from this: don't skimp on who you have representing you; make sure they are good and that they understand well how to make a deal and their role in it. There's nothing more disappointing than losing what could have been a fantastic deal because the advisors from both sides can't get along and distort the bumps in the road that always arise to a degree that it poisons the well.

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1 The story comes via David Senra's Founders podcast. The pipeline was Northern Natural Gas. Berkshire's MidAmerican Energy bought it from Dynegy in August 2002 for $928 million in cash plus $950 million in assumed debt; Dynegy had taken the pipeline over from Enron after their merger collapsed.