Over the past 20-plus years, I have represented clients in hundreds of industry transactions and dozens of disputes. In that time, several tried-and-true adages come up continually. Here are the five top lessons to be learned on your road to success.
1. In this industry, you can never have enough insurance. I once represented a wholesale monitoring company in a catastrophic fire loss involving 12 plaintiffs seeking more than $10 million dollars in damages. My client only had a $3 million insurance policy, and the installing dealer had an additional $1 million in coverage – that was $6 million short, and the alarm defendants faced what is called “excess liability.”
The owner of the monitoring facility (my client) had to pay another lawyer to watch my every move (the insurer paid my bills) – annoying for me and expensive for him. If we lost the case and damages exceeded the policy, the plaintiffs would have been able to take possession of the monitoring facility and sell it. After three years of hard work, we got a great result, settling it for pennies on the dollar; however, the owner still probably has not regained the sleep he lost during those years.
2. Anything you say can and will be held against you in a court of law. The morning after the fire, my alarm defendant admits to another alarm defendant that his company has absolutely no idea why there was a missed signal. Then he says, “I guess that’s why we have insurance.”
Yikes! An admission you are clueless about the cause of the loss and then you offer up your insurance? That is not something you want in front of the jury! If there is a loss, keep your mouth shut, and your hands off the keyboard – e-mails are discoverable. The only person you can speak to without it coming back to haunt you is your lawyer, your clergy and your spouse – think Dragnet.
3. In equal partnerships, include a way to resolve disputes. I have had a couple of these in my career. Two partners become equal shareholders in a corporation and build a nice business. At some point Shareholder B decides to spend her years sailing the Caribbean while drawing salary and a distribution, leaving Shareholder A to manage the business alone. Sooner or later, Shareholder A has had enough but can she get Shareholder B out of the business? Probably, but what is it going to cost?
If the partners don’t have a shareholders’ agreement, or if the agreement does not adequately deal with the issue, Shareholder A can expect to pay a premium. Make sure you have a well-drafted equity agreement. With any luck, you will never have to read it.
4. A good deal works for both sides; one-sided transactions create problems. This can be a tough industry with plenty of people looking for an unfair advantage – resist the urge. In hundreds of acquisitions, I have learned that an unfair deal means the aggrieved party will create problems that will cost far in excess of the perceived advantage.
Here is another corollary – make sure you really know with whom you are getting into bed. Even in a fair deal, a scoundrel will take advantage sooner or later.
5. The best operators use two resources well – debt and lawyers. Borrowing in our industry can be complicated and expensive, but that does not stop good operators. If you can leverage debt effectively to build recurring revenue, you have the beginnings of an empire and a class A exit.
The same is true for using lawyers. When I look around the industry, the top players understand the need for good legal counsel and run their businesses accordingly. When it comes to legal advice, do not be pennywise and pound-foolish.
Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. Reach him at [email protected]. This column does not constitute legal advice; please contact an attorney with questions.
