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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Andrew Tellijohn
June 2004

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Mergers: Part two

business builder mergers: part two  

Do ask, do tell
when considering
any financial deals

by Don Keysser  

A number of years ago, the phrase “don’t ask, don’t tell” achieved some unfortunate attention. Whatever your thoughts on that particular context, this phrase should never be part of your vocabulary when talking about business financing transactions, including mergers and acquisitions.

The principles of due diligence (asking) and disclosure (telling) are critically important in these transactions, to protect yourself from bad decisions and from legal liabilities.

Black’s Law Dictionary defines disclose as: “To bring into view by uncovering, to lay bare, to reveal to knowledge, to free from secrecy or ignorance, or make known.”

It defines due diligence as: “Such a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case.”

To simplify, let’s define disclosure as the act of providing full, complete and truthful information of all material facts concerning your business or transaction, and not failing to omit material information; and let’s define due diligence as the act of thoroughly examining, in as much detail as reasonable and possible, all aspects of the business you are contemplating buying or investing in, or the transaction into which you are considering entering.

What is “material”? As Justice Stewart once said of pornography, you will know it when you see it. Let’s be safer and say that any piece of information is material if it even remotely relates to the soundness, quality and viability of the business or proposed transaction. Safer yet, the best rule of thumb is that if you aren’t sure, disclose it.

Let me offer an example of failure in disclosure and due diligence. Recently, I met a man who had just sold his business, including the building in which his business was located. I was curious why he had sold: He was still relatively young, he was not going through a divorce or partnership breakup, he wasn’t retiring (in fact, he immediately reinvested his proceeds into another related business), and the business he sold was doing well.

When I asked him why, he gave me a conspiratorial grin and said something like the following: “My building was built about 15 years ago, and it is a piece of junk – poorly built, with inferior materials. It has a lot of problems. My contractor told me the building needs over $200,000 of repairs in the next one or two years, and I don’t want to bother with that. So I sold it.”

Two points troubled me about this recitation, aside from the moral vacuum in which this man resided. First, he deliberately and consciously chose not to disclose information that was very material in the sale of his business – the dilapidated state of the building. Second, the buyer also failed his obligation, in that he apparently did not perform an adequate due diligence of the transaction, by not retaining a building engineer to evaluate the building as a precondition to purchasing the business.

Had he done so, the engineer would have pointed out all these impending problems, and the buyer could either have chosen to back away from the transaction, or could have used that information to negotiate a lower purchase price, to reflect the added risks.

The seller has significant potential legal liability when the buyer discovers these problems, and may come back against the seller on grounds of inadequate disclosure and fraud. The buyer not only faces some unforeseen costs that may threaten the viability of the new business, but also faces potential legal consequences, since passive equity investors relied on a proper due diligence. By failing to do so, the investors were exposed to greater risks than were disclosed.

Voluminous case law
The regulations and case law on the requirements of disclosure are voluminous. A good starting point is the SEC’s Rule 10b-5(b). Although intended to apply to securities transactions (for example, when your business issues debt or equity securities to investors), it is often used as a basis for analyzing misrepresentation and fraud in other business financial transactions.

The rule says it is illegal “to make any untrue statement of a material fact, or to omit to state a material fact.” The essence of the rule: Don’t lie, and don’t leave out important information.

Most relevant cases for disclosure in business financing transactions are also securities law cases because any sale of stock in a company, including the acquisition of company, is a securities transaction subject to the anti-fraud provisions under securities laws.

The point is that disclosure and due diligence are two sides of the same coin: the need for complete and transparent information. Any situation involving financial investments or transactions where one party withholds material information from the other, or misstates material information, and where the other party fails to properly research all material facts, may very possibly lead to adverse consequences for both parties, including litigation.

So remember to put the concepts of “asking” and “telling” into your vocabulary as you move forward into financial transactions.

contact Don Keysser is founder of Hannover Ltd. in Minneapolis, which advises companies on transactions: 612.710.0995; don@hannoverconsulting.com; www.hannoverconsulting.com