There are many levels of Brodom, and the path to excellence is a long and arduous journey. It is not unusual for one to labour for many years before obtaining the distinction of Consummate Bro. Nevertheless, you can elevate your Brostatus by avoiding rookie mistakes–like signing a document with binding legal terms before calling your lawyer.
Today is January 12, and I have already received three phone calls this year from clients with the same story:
Rookie Bro: “Hey, I have this great deal I want to do. We just signed a little LOI/NDA, but I need you to help me draft a contract to make sure we’re protected.”
Me: “Absolutely! This is great news! Send me what you have and let’s get started.”
Later that day, I call the client back.
Me: “This NDA/LOI has non-refundable earnest money, a non-compete, no-shop provisions, personal guarantees, attorneys fees and liquidated damages for not closing on the deal!”
Rookie Bro: “But they told me nothing was final until we get a contract!”
Me: “Bro, you already signed a contract. No matter what a scheister tells you, this document has binding, legal obligations. This will be an expensive mess to clean up.”
The lesson here is to call your lawyer before signing any document that you are not intimately familiar with, especially when it comes from someone wanting to buy your business or “bring you a great deal.” The words on a page matter. That’s why most legal documents have a Merger Clause, which states that only the terms of that written document are included in the contract. Everything else said, mentioned, emailed or tweeted is not relevant and not a part of the deal. You cannot rely on what someone tells you when the written word will control. This is especially true when dealing with private equity firms. (I can tell you as a partner in a PE firm that a lot of the players in this industry have ice in their veins.) You have to burn through a lot of 15 minute document reviews before you reach the cost of a six-figure screwup.
Elevate your Brostatus.
Here are five common traps to watch for when negotiating a deal. Mastering these areas will get you close to Pro Bro status.
First, never pay any type of deposit, escrow or earnest money unless you are getting a real benefit in return. If you can’t articulate what the earnest money buys you in 3 words or less, the answer is zero.
Second, always look for clauses that say you agree not to talk to other investors/buyers/customers while negotiating this transaction. Strike them out! If this deal isn’t good enough to beat the competition in an open market, it won’t be good for you and certainly isn’t worth your time. The other party should be confident that their proposal will stand on its own merits.
Third, do not include yourself in a transaction. Leave business deals to the business entities. Your company should be the only party to any transaction that doesn’t involve multiple commas being added to your personal bank account. You as a person should never agree to anything, and you should always sign on behalf of your company in an authorized capacity. (This is especially true with banks, which we’ll discuss in a future post.) Personal guarantees are kryptonite.
Fourth, remember the primordial rule of poker: if you don’t know who the chump is at the table, it’s you. Question the motivations of every party in the deal.
Fifth, call your lawyer and ask her to spend 15 minutes to review the document. A good lawyer won’t nickel and dime you over document review, because they know you will pay good money for a successful business transaction. Honest, efficient, results generate much bigger profits for both clients and lawyers than a few bills for .2 hours.
So be it resolved this year that you will advance in your quest to become the Consummate Bro. Avoid rookie mistakes by checking with your lawyers before signing unfamiliar documents. In almost every scenario, a simple non-disclosure agreement is enough to get a deal going. Work with your lawyers to get a form NDA for your company that you use for all negotiations. And you can tell that scheister that if his deal ain’t good enough to survive a quick glance from your lawyer, you have better things to do, like earning the designation of The Consummate Bro.
Glossary of Terms
LOI – Letter of Intent aka a “written expression of interest”
NDA – Non-Disclosure Agreement
Levels of Bro
10. Pro Bro
11. The Consummate Bro