Buying and Selling a Business. Garrett Sutton
it bespeaks that your organization, your means and your manner of doing business are in order as well. It gives the attorney comfort that he is not letting his client make a mistake.
On the other hand, poor corporate records are probably the number one reason attorneys will kill a deal. You hear the lament all the time: “Their records are a mess. How can you trust them for anything?”
All right. Having discussed how to deal with deal-killers, let’s explore how to assemble your team of deal advisors.
A professional team working behind the scenes can make all the difference between a good sale and a bad one. But the difference may well lie in the quality of your team. True experts don’t come cheap and this is one case where it is likely you will get what you pay for. But don’t let high hourly rates or fancy titles intimidate you. You are in charge. You must decide when to engage counsel, when to delegate authority and when to make your own decisions. You also need to know how to choose your team. Following are a few guidelines to use when assembling your experts.
1. First look for personal recommendations. Check with others who have bought similar businesses and ask how they felt about members of their team. Tap the knowledge of friends, relatives and business acquaintances. If you can’t find any personal recommendations, check with professional associations.
2. Make a list of at least three candidates for each spot on your team.
3. Conduct interviews with each of the candidates. Don’t settle for a phone interview; do it in person. You need to know if you are comfortable working with this person. If any say they are too busy or can’t meet in person, consider this a big red flag and mark them off your list. Be sure to ask if they offer a free initial half-hour consultation. It never hurts to ask.
4. The interview:
• At the interview, pay attention to how the expert treats his or her staff. Is his or her style of teamwork conducive to your own?
• Look around the office. Is it organized? Do you see certificates from professional associations or awards from peer groups?
• Ask about experience and education. How many similar clients has he or she had? How long has he or she been in the profession? Does this professional engage in continuing education? How does he or she stay current on changes in the field?
• Discuss your own expectations and don’t be afraid to ask questions. You’re not supposed to know everything; that’s why you’re looking for experts. However, don’t shy away from a candidate who admits he or she doesn’t know an answer to a question if he or she says so and promises to find out the answer. That kind of honesty can signal a keeper.
• Listen not only to the content of the candidate’s answers, but also his or her conversational style. Is he or she specific or vague? Does he or she seem sincerely interested in your business plan or just your wallet? Do you trust this person?
• Get at least three client references (ask for the three most recent whose cases are similar to yours) and be sure to call them. Recognize that for attorney/client privacy purposes some lawyers won’t give out references. If an attorney won’t give you references, you can always go to www.lawyers.com and size up that attorney’s list of representative clients.
• We’re all taught it’s tacky to talk about money, and most of us hate this part of the interview process, but you have to ask. Make it the last topic of conversation, but do ask. If the fee seems excessive, don’t attack or criticize, simply try to negotiate. If he or she won’t lower the price, there are other ways to decrease what you pay. Offer to do some of the legwork on your own. Ask about payments. Discuss whether the candidate can keep the hours lean. A little posturing on fees can be a good thing. But don’t go overboard on the money issue. Remember, the professional is sizing you up, too. If he or she feels that money is going to be an issue, if they sense there’s a good chance that collecting from you will be difficult, they will decline to take you as a client.
5. Once you have chosen a professional, get the agreement in writing. You want an engagement letter that sets out exactly what the expert will be doing for you and for how much. Always include how the relationship can be terminated.
What follows are specific tips on many different types of professionals you may want to engage. Few of you will need them all. In the initial stages, an accountant and attorney will do fine. But don’t forget to listen to other experts as well – people whose business knowledge and integrity you trust. Ask them to look at what you’re doing and tell you what they think. Sometimes those without a vested interest in the deal can offer the most clear-sighted and useful advice.
Attorney
A good attorney should be the first recruit for a buyer’s team. He or she will be intimately involved with every step of the buying process and you best be comfortable with that. You should have a personal rapport with your lawyer, a trust and respect that is reciprocated. Bringing your attorney on early in the game can save you costly mistakes. Small mistakes in the beginning of a venture can snowball out of control by the closing. An experienced lawyer can help you craft a strategy and guide you through the complicated process of business purchase. He or she may even be able to lead you to business opportunities.
This is not the time for generalists. Be sure your lawyer specializes in business sales and/or acquisitions and has an understanding of tax law (better yet, have an experienced tax attorney on your team as well as one familiar with business sales and acquisitions). While he or she may have gaps in expertise (business purchases/sales are complicated legal endeavors encompassing a variety of fields of law), they should be able to put you in contact with others who can fill those gaps. A lawyer whom you can trust and with whom you can comfortably communicate is the ideal.
One of the first documents to be prepared by your lawyer will be the letter of intent. This document outlines the buyer’s intention, but not legally binding obligation, to buy and the seller’s non-binding obligation to sell. The legally binding part of the document deals with confidentiality and competition. The buyer cannot disclose what he or she uncovers during investigation of the business. Nor can he or she use the letter to try and get a better a deal elsewhere. The letter of intent is the document that gets the whole transaction underway.
Once the letter of intent is signed, your attorney should begin the legal investigation of the business in question. If you are looking to buy (and remember, at this point you are only looking; no commitments have been made), your lawyer will check with the secretary of state or county clerk’s office (whichever is appropriate for the given jurisdiction) for any UCC-1 filings against the business. UCC-1 forms are filed by a lender when a loan is made and security interest in any assets is taken back. The form describes any assets in which the lender has an interest. You want to know if anyone has a primary interest in assets you are considering buying. Your lawyer can set up an escrow fund to cover potential claims.
Your attorney (or you, if you’re on a budget and know how to do it) will also check with the county clerk’s office for any liens against real estate and review zoning and business license and permit requirements. He or she will also assess any leases to be sure they are valid and can be transferred to you, as well as checking the status of any intellectual property or other proprietary information. He or she will review any lawsuits pending against the company. He or she can protect you from the former owner’s creditors. If you are considering a stock transfer rather than a purchase of assets, your lawyer should review the company’s bylaws, articles of incorporation, corporate minutes and stock transfer ledger to make sure the corporation you’re getting is clean.
A good attorney can also draft a non-compete provision to keep the seller from competing with your new acquisition. And he or she can ensure that the seller guarantees all statements regarding liabilities, creditors and accounts receivable.
Your attorney should also be in contact with the other side’s lawyer. When the deal has progressed, it is generally the buyer’s lawyer who prepares the purchase agreement. Some buyers and sellers let their lawyers do the