The First Rule of Deal Making

Welcome to my first newsletter!

Thanks for reading Mike Lang Legal—Making Business Deals Stronger

This newsletter is going to give you weekly actionable tips to help strengthen your business and reduce your business risks. There’s going to be a mix of evergreen tips and tricks, my thoughts on relevant current events as they affect business owners, and ideas based on things I’m seeing in deals today.

I also have a real estate newsletter.

That newsletter is intended to help anyone who uses real estate—buyers, sellers, landlords, tenants, and owner-occupants—about how to strengthen their real estate position. Almost every business owner uses real estate, so you should really check it out.

The first 2 rules of deal making

Warren Buffett’s number 1 rule is “Never Lose Money.” His second rule is “Never Forget Rule No. 1.”

My advice is similar. My first rule is “I will know what happens if the other side doesn’t perform.” The second rule is “I will know what happens to me if I don’t perform.” You really shouldn’t do a deal without knowing—and being ok with—the answer to both of those questions.

Today we’ll talk about the first rule. Next week, we’ll talk about the second.

Lessons from the first week of law school

During the first week of law school, my torts professor told us that the most beautiful legal theory didn’t matter if you couldn’t collect a judgment or get someone to stop doing something. What you can get a court to do is called the “remedy”.

Remedies are the most important part of the contract. Say you are selling your business and part of your compensation is paid in the future if financial targets are hit. How do you get paid if the buyer doesn’t pay you? Are you limited to suing them and hoping they have cash? Was money escrowed at closing to cover the earnout? Can you go after the new owner’s personal assets? Whether you actually see any part of the earnout (and how much you’ll spend in attorneys’ fees to get there), is dependent on what your agreement says your remedy is?

Sometimes, the law will highly regulate your remedies. For example, many states make it hard (or impossible) to offset against employee wages. It’s important to know those rules. In many states, you can’t take someone’s real estate without a court order.

If your contract doesn’t say “if X happens then you get Y”, you will probably have to pursue a money judgment and prove how much you’ve been damaged. That can be difficult and expensive.

My favorite thing to add are liquidated damages. Your contract will say something like “For every day the deliverable is late, we can deduct $XX from the amount due.” It’s clear and you know exactly what will happen.

Make sure you understand what will happen if the other side doesn’t do what it’s supposed to. And make sure you are ok with that.

Rule 2 might not be to never forget rule 1. But don’t forget rule 1.

If you want to better understand what happens the other party to your contract doesn’t do what they say they want to do.