Even in the best of times, running your business can be a challenge. With so many things to remember, it’s easy to forget certain responsibilities that could end up costing you a lot of money when you sell your company. And if a prospective buyer takes you to court over issues you fail to disclose or inconsistencies in your financials, the results could be catastrophic and even prevent any chance of selling your business in the future. Find out about the most common legal mistakes that business owners make and how you can avoid them as we welcome business attorney and managing partner of The Ticktin Law Group Mr. Jamie Sasson on this edition of “Deal Talk.”
As a lawyer I don't want to see you when you're already in litigation, I want to avoid the litigation, and I think that's a good thing to tell clients when they first come in because a lot of people have never been involved in law suits.
- Jamie Sasson
Jeff: Thank you. We're excited to have you. Let's start by talking about some of the most common legal mistakes that sellers of businesses may make. And what advice can you offer to help them avoid really what are nothing more than pitfalls?
Jamie: Okay, Jeff, that's a common, good question I hear a lot of times and what I see is a lot of times when people are buying or selling a business, obviously we all want to make money and everyone wants to be cognizant of saving money and really watching the dollar because obviously you're spending money buying a business, you don't want to spend too much. And I see that as the first pitfall because the most really important thing you need to do is you need to really make sure that the deal's being done correctly. Because you might think you're saving a couple of dollars here, but in the end you're going to spend a lot more on legal fees and possibly court resolving everything. Because there's an old saying, "One partner's fine, two partners is too many." You have to be aware of that. Anytime when we deal with bringing on partners. There's ego, there's personalities, and it's money. And anytime money's involved there's a lot of problems that can ensue. So you want to make sure that everything is done correctly. Going back to where I first started with, it's really important to get a lawyer on board. Obviously I'm a lawyer so I say that but I'm telling you I've been down this road before, that is money well spent. Because you want a lawyer to make sure that things are done correctly, the documents are created correctly, basically it insulates you from the buyer or seller also because now you have someone who's doing negotiations for you. In anything, do you ever notice, Jeff, when you go to buy a car or you go to sell your house it's always difficult because you're emotionally involved. You're saying, "Why should I pay an extra $5,000, it's not fair." By bringing in a lawyer or even a realtor, someone who's basically able to look at it from 30 feet above, they're able to basically give you the right direction because they're not emotionally involved, and that's really what a good lawyer is. We try to keep the emotion out of it. We're looking at what your best interests are, not your emotional interest. So I think it's really important to have the lawyer to make sure that certain things are done correctly.
Just quickly because I'll let you get into the next question. Certain things that I see a lot of pitfalls are, people buy companies and they end up taking on the liabilities. That's a really common one. If you correctly draft the document you make it very clear that you are not taking any liabilities. Indemnification clauses, that's another one where for instance if you were to basically, you sell the company and on the flip side someone gets injured in the store and they can't turn around and sue you because you formerly had the company. So very specific things can be done by the lawyer to make sure that both sides are protected.
Obviously we all want to make money and everyone wants to be cognizant of saving money and really watching the dollar because obviously you're spending money buying a business.
Jeff: We know that the bottoms of the documentation ... throughout the documentation, it doesn't really matter, it's full of a lot of legalese. There's so much to read. And whether you're selling a business or you're selling your home, or whatever the case may be, a business owner being very busy as he or she typically is, they go through this stuff and their head is spinning. And the fact of the matter is that language is there really to protect both sides but it's very detailed and it is written with attorneys in mind, or at least that's the way I would think, Jamie, that people should look at it. So if you see that stuff, and you know that you don't have the time to go through it, that's a perfect reason right there for getting a lawyer involved.
Jamie: Yeah, you hit it right in the head. Most of this language is very legally written. It's confusing. I will be honest with you, I'm always honest, but when I first started as a lawyer I couldn't understand it. I've been a lawyer now 11 years, eventually by seeing so many contracts and doing this I am very familiar with this. I've seen every single clause. I know how it works, how it can work backward and forward, and really the pitfall is kind of similar to what you said of how sort of language can go against someone. For instance deposit language, in most business you have to put up a deposit to buy a house or a commercial business. I deal with a lot of sales and commercial businesses. That's very popular now in South Florida because there's a lot of money people can make. You buy the property for low value with the business sometimes included, sometimes not. And then you either sell off the property years later or you just run the business. It's a very popular thing. But even something like that it gets very tricky sometimes with the deposit because the seller wants to say that the money is non-refundable but as the buyer you want to protect yourself. For instance the appraisal doesn't come through, or if something happens you don't want that money to become tied up because for a lot of people that deposit money is a main source of revenue that they have or the money they put aside. So as a lawyer I really try to protect the client both ways, because sometimes it's not worth putting it on the line. Bad things happen, that's what litigation's about, litigation is not fun. So as a lawyer I don't want to see you when you're already in litigation, I want to avoid the litigation, and I think that's a good thing to tell clients when they first come in because a lot of people have never been involved in law suits. But law suits are not fun. They keep you stuck in the past. You're looking at that person who you just wanted to get away with. And we have a saying in our office, is a law suit’s like wrestling with a pig, and the problem is the pig loves to get dirty. And that's kind of what it's like. You're dealing with someone who's litigious and you're stuck with it.
Jeff: And in some states that sort of thing can be probably worse than others. And I happen to be in Southern California right now. California's a very litigious state as you know. And Jaime, I know that things are probably much the same way in your part of the country in Florida. So we know then it's best to have a legal representation there, the help of a business attorney to make sure that you have all of your documentation, everything is tightened up as much as possible. And they are also there to be able to assist you to make certain that any risk of getting into some legal liability related issues, legal problems during the sales process is mitigated as well so they can help you avoid certain issues during the sales process. Let's go back though, Jamie Sasson, and let's talk about some of the documentation specifically that one needs to make sure that they're current on or that needs to be prepared before I can list my business for sale.
Jamie: Okay, so from the seller's standpoint, Jeff?
So as a lawyer I really try to protect the client both ways, because sometimes it's not worth putting it on the line. Bad things happen, that's what litigation's about, litigation is not fun.
Jamie: Okay. It's very important when selling your business, in 100 percent of these cases, these sales, the buyer's going to want to do his due diligence. And that's really what it comes down to. The buyer's going to be going through all your documents and he's going to be making sure that the numbers match. That's a very common law suit where you will see where they ... they say cooking the books. As a seller you never want to be in that position because if you give ... Your taxes you got to hand over, so the taxes are the taxes. But the problem is a lot of businesses which we know can play a little funny with the numbers, with IRS. The accountant, "Show this is a loss. Do this, do that." What happens is you think as a seller of a business, "My accountant says it's okay. He's saying this is how much the business is making." And now on the vice versa sometimes you're saying that you are making more for start-up reasons. So it's very important, you don't want to end up with, you do the deal, they do due diligence, and then the buyer comes back afterwards and basically claims that you cooked the books, or you didn't give the right figures. Because what happens is that that can open up even more things. Because not only you could end up in a lawsuit where the buyer is trying to rescind the agreement, but I've had many cases I've won currently right now where I'm representing a buyer of a school, a daycare. She bought the business. She hired a broker actually and the broker basically went along with everything so we brought in the broker which rarely you don't see. But long story short it turned out that the seller intentionally cooked the books. So not only am I suing to rescind the deal but I'm suing for fraud and for conversion. And other types of more serious type of claims where if I can be successful in that I would get triple the damages in some instances. You want to do things by the book. Being truthful and doing things the right way will always lead to better things. Because you might think, "I'm getting a little bit more here, puffing it a little bit here,” but it usually comes to bite you where the sun doesn't shine. So you got to be very careful there.
Jeff: Pay me know or pay up big time later, and it's a really interesting example that you use with regard to a day care facility. And people, myself included don't tend to think of a day care facility as being among those types of businesses which could be involved in something like that, but it just goes to show businesses of any size and any industry can place themselves at risk of real significant damage. And look at the people that you're hurting along down the line as well on both sides of the ball there. Jamie Sasson is managing partner at Ticktin Law Group. You're listening to Deal Talk. My name is Jeff Allen. I'm so glad you could tune in. We're talking about keeping things legal, what you need to remember on the path of selling your business and what you need to be mindful of. Let's say hypothetically I'm ready to sell my business. I'm preparing to do that and I'm considering using standardized legal forms which are pretty much readily available now online as you know, Jamie. And I want to do this because I want to save on fees. What advice do you have? Is that something I can do? Is that reasonable, or no?
Jamie: Great question Jeff, and I get asked this a lot. Because it goes back to my first thing we spoke about it, saving a couple of bucks here, is it worth it there? I very strongly suggest people do not do that. I see that so many times leads to problems later on. You see it more on the real estate side where people buy ... They'll try to draft up a quick claim deed and I know we're not talking about it today so I'm going to lead this by ... It's a similar example though. I try to draft my will myself or I try to draft a quick claim deed. That usually leads to problems because you can use a form and same thing with business contracts. Let's say I'm selling my business and I just want to draft up a contract. And I'm using the standard form. And that's the problem, the word standard. Because most of these forms, we could all find them, and I use them myself sometimes but I use it as a template to basically expound upon, and that's the problem. By using a standard form, number one, they're usually not tailored to the individual states. For instance if you'd see one online it might be from California but I'm in Florida. Some states have very different laws. That's one of the big problems. But let's assume you're using a form you found that says, "For Florida Residents Only." The problem is each deal is very specific. There's no deals that are exactly alike. What you really need is a lawyer to basically fine tune that contract for your specific needs, and that's really what I see a lot of times is the client will use a form that they found and it has language that to their blind eye, to their not legal mind, it looks fine. Oh yeah, that looks like it'll protect me. But when you really read it it doesn't protect them because it needed very specific language regarding this specific deal. I hope that explains how I feel about it. And it's not tremendously expensive. There's a misnomer out there that to hire a lawyer to do these kind of deals. Let's just use the example I said, someone buying a day care center, it's not that expensive to have all this stuff done. It could be a thousand, it could be two thousand, it depends. Where people a lot of times see that there's these huge bills is there's some very affluent law firms and a lot in California where you live where they have to pay expensive leases. What happens is if you have a very big corporation and you need to do all the paperwork, yes, that can get into $50,000, $100,000. We're just talking about a normal person wants to buy a restaurant, somebody wants to buy a bar, it's not that difficult to put together a pretty strong shareholder agreement, contracts, and basically do those things.
Being truthful and doing things the right way will always lead to better things.
Jeff: Something that's simple but at the same time it's necessary. Make sure that you're going through an attorney to make sure that your forms or the documentation that you're using is custom tailored to your own particular business.
Jamie: You got it, but I wouldn't say it's simple because that's the mis...
Jeff: That's why people go and use standardized forms, because they think that by using standardized forms, because they think it's simple that's why they would do that.
Jeff: Okay, good. So we want to make sure that people understand. It's not as easy as you think it is so please consult your attorney before you attempt to go to their sites.
Jamie: I'm sorry, I'm talking over. I got a lot of people who use LegalZoom and those things and I've seen a couple of times where people made really fatal errors by using the wrong documents, really bad stuff where they're on the hook for attorney's fees. So people have to be really careful. It's a really important issue that you brought up, and you'll see that's why a lot of these companies like legalzoom.com, they went away from this offering to give documents. The big thing now is you could talk to a live attorney because they're getting the same complaints. People are using their forums and they're getting screwed. That's my point there. You want a lawyer to make sure that things are done correctly.
People are using their forums and they're getting screwed. That's my point there. You want a lawyer to make sure that things are done correctly.
Jeff: No, it's an excellent point and it's a great point to lead out on the first segment of the program, Jamie. When we come back we're going to continue our chat with Jamie Sasson, he's managing partner at the Ticktin Law Group in Florida. We're talking about the importance of keeping things legal so that the deal does not fall through at the end of the day. As you're getting ready to cross that finish line the last thing you want is for the wheels to fall off. So keep it right here. My name is Jeff Allen. We'll both be back when Deal Talk resumes after this.
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Jeff: Welcome back to Deal Talk. I'm Jeff Allen joined by Jamie Sasson, attorney and managing partner at the Ticktin Law Group PA and he's got several offices there in Florida. Jamie, you've got probably about 12 locations throughout the state there, is that right?
Jamie: Yeah, we have about 12 locations. Our principal main office is in Deerfield Beach which is pretty close to Fort Lauderdale, about 10 minutes away.
Jeff: Let's go ahead and let's pick it up, another hypothetical. I can just be anyone here but let's say I'm selling my business this year, or maybe over the next 12 months to be more clear. I don't have any documentation for my employees per se. Maybe I've got just a small group. I've got maybe half a dozen people, I've been working with them for years. Is it too late to properly document their employment, Jamie, with only 12 months left to go before I'm ready to go ahead and get out?
Jamie: No, I think that's totally acceptable. A lot of employers do that right before ... Because it's the normal daily grind. We're all working and usually businesses a lot of times are service industries, and you're running a pizzeria, you're doing this, you're doing that. You're not keeping your eye on the ball, which I do suggest you do have an important for any business have some type of control or some type of managing kind of person to do that because there's only so much one person can do and sometimes it's better to have someone working on the sales and the other person worrying about the books. In business we try to do too much. That's probably acceptable. I see it all the time where you can put together your books, what the employees are making. I see very common where employees, you’re supposed to keep their hours and have that all recorded. A lot of times that's not done correctly and that's another thing you can after the facts put that stuff together. It's important to keep the records of that.
Which I do suggest you do have an important for any business have some type of control or some type of managing kind of person to do that because there's only so much one person can do and sometimes it's better to have someone working on the sales and the other person worrying about the books.
Jeff: I'm just wondering, is it a legitimate concern that people have, business owners have, about the possibility of their employees leaving should the employees find out that the company's up for sale. I can imagine that this would be a problem. And if it is, is there a way to ensure in any way that the employees stay on after I sell my business so that in fact the sale goes through? I don't want people to bail and then all of a sudden the new buyer comes in and he doesn't have anybody to work with.
Jamie: Right. That's a pretty tricky one that a lot of people deal with. Unfortunately, we abolished slavery in the late 1800's so we can't pretend. I'm saying that joking around but we can't force people to work. I'll just give an example of our law firm. We try to be very transparent with our employees. We got about 80 employees. And different businesses have different philosophies about that. Some businesses don't talk to their employees about how much the business is making, or what the profits are, or the state of the business. At our law firm, we think it's important that the employees do know what's going on and they feel like ... because they spend more time here than with their own families. That's what a business is, you spend the majority of your lives, especially in the United States of America compared to other countries, working. So it's very important that they feel part of the team. That's always a judgment call by the actual individual business owner, how transparent he likes to be. Some people are more to themselves, some people are more out there.
For me, I think it's better to be more in the open. So taking my approach, which I think is the best approach to deal with that situation, Jeff, which you just spoke about, I think if you are truthful to your employees and say, "Hey, this is going to be happening. I really like you here. I really like you to stay on board with this new owner and work the transition." But if you're going to just not say anything to your employees and all of a sudden get up in a meeting and say, "By the way, we brought in Darth Vader" or any type of person you could imagine, they're going to freak. It's like anything. I think if you can deal with it honestly and truthfully with the employees and basically tell them you're still going to be around. You've talked to the new owners and they know about it, people want to feel respected. I find in business, because I do obviously manage about 25 attorneys and a staff about 50, no one likes to feel like they're under your thumb. That's the one complaint I hear. And as a management and running a business, people want to feel appreciated. People take less money just to feel appreciated. I think that's very important. It's the same type of thing here. If you're honest with your employees and you let them know what's going on they're going to feel appreciated. And they'll go to this other place that you suggested and they look up to you, they're going to do what you suggest.
Jeff: And the thing is I know that this sounds very elementary to a lot of people who may be listening to this program right now. But the fact of the matter is there have been studies, there's been a lot of research conducted particularly over the last 10-15 years on this kind of psychology. Whereas if you treat your employees with respect and you let them know that they're contributing to the success of your business, you show them that in so many ways that they're going to stick around. And so your point about being transparent I think is really, really important. And that also too might extend, and I'll let you go ahead and take over here on this point too, customers too. One of the things that we know that all buyers of businesses really like, they find really attractive, is that built-in customer base. They look for loyalty, they look obviously for cash flow and revenues, but they like to be able to step in to a business, take over, and know that they've got some loyal customers that have been doing business there for years and they'd like to think that they're going to be able to retain those customers too. As the business owner, the current owner, the guy who's selling the business, from my standpoint, is there anything that I can do, any precautions I can take to make sure that those customers don't bail out?
Jamie: I kind of flip that question around because typically it's going to be the buyer who has more of a concern there. And I'll answer both ways because it makes sense both ways, because obviously both sides want the deal to go through. But the buyer is ultimately the one who's going to get the customer, the goodwill, and the money from that. There is a simple solution to that which I recommend to clients. Typically it's good to put in the contract language that the seller will facilitate with the buyer in making sure, using his or her best efforts, to make sure that those clients come on board. Because what happens is sometimes the seller sells the company and the buyer doesn't have this language in. And then he takes over and then you don't have the seller who's built the relationship with these clients. That's his clients or her clients. It's all about relationships. We can give the best numbers and the cheapest deals but it's about the individuality, the services. As long as you can get the seller, and the question as you proposed, Jeff, is how does the seller keep it? It's really easy. It's basically letting your customers know what is happening, vouching for the new owner if you can. You absolutely don't want to say this guy, this company, is the greatest thing when it's not, again, it's just being honest. And then for the next month or two, from the business individual needs, obviously the seller is going into another business, he doesn't have the time. But ultimately he should stay on board, he or she, and make sure that that transition is done smoothly, and that is typically in a lot of contracts.
That's his clients or her clients. It's all about relationships. We can give the best numbers and the cheapest deals but it's about the individuality, the services
Jeff: And that's something that I would imagine that you probably advise your own clients to do, and they're probably open to that more often than not I would imagine, is that right?
Jamie: Yeah, and something I see a lot which you should be very careful is, and I see this a lot in insurance agency sales. The insurance agent is selling his book of business, or he's merging in. And that one’s very important because a lot of times you'll take on this insurance agent, you're buying his business, and then what happens is unless you do the documents correctly, a year, two years later, whatever happens he decides to go take his book of business somewhere else. So you just paid money for nothing. Again it goes back to having the documents done correctly with proper non-competes. You can't do non-compete forever, but in that situation what I just told you, you have to put very specific language in the document saying that the clients that belong to Joe Schmoe now belong to you. Because if you just say you're buying this business and you don't have that language then it's Joe Schmoe's business and he could do what he wants with it, or his clients.
Jeff: Final thoughts Jamie Sasson, we're running out of time here. We've got a couple of minutes left but I'd like to kind of just get to maybe some take aways from you. For those business owners planning on selling their business within the next couple of years, maybe two or three key take aways of advice, some tips that you can leave them with, things that can help prepare them to sell their business and do it the right away.
Jamie: Okay, yeah, it's really easy. The most important thing as we said is making sure if you're buying a business, making sure that you do your due diligence. Making sure you really spend time looking through the documents. I advise bringing in a lawyer, an accountant, spend that money upfront to make sure that it's a good deal. You want to make sure that there's no liability. It's a very common thing. Someone buys a company and it turns out that company owe the IRS money, guess who the IRS is going to come after, the person who took on the assets. There are certain things lawyers can do to insulate you from that, from those liabilities. So that's a big one, is making sure that things are done. Typically in any type of buyer-seller relationship the seller is required to sign something called a Seller's Affidavit. And what that basically says is under penalties of perjury, I the seller don't have any liens, I don't have any liabilities, things like that. They usually will protect you but you still have to be very careful that there's not anything out there because let's say they're untruthful, the seller, all you could do now is just sue them. And a lot of times in California, in Florida, these different states, the seller doesn't have any money, they'll file for bankruptcy and you're basically left holding the bag. So it's important before for you ink that deal and pay that money over that everything is basically checked out and figured out.
From the seller's standpoint it's so important to make sure that that buyer is really viable. Because there's a lot of people out there who are just sticking their head out there trying to look for a deal, and then it turns out they don't really have the ability to do the deal. So that's why it's important to get involved with companies such as yourself or business brokers to make sure that these are real people who are looking for a business, and obviously making sure that you're protected by requiring a deposit. Making sure that certain things ... From a seller's standpoint, who wants to spend months and months working for a deal that in the end it falls apart, and all you're getting out of it is a $5,000 deposit? It's not worth it. It's a tremendous business interruption doing these things. So if you're going to try to sell your business or sell your business you want to make sure that it's going to happen and that you're going to get a real good deal out of it, you're going to make money. Because there's no other reason to sell your business unless you're going to be able to make real money and get something out of it.
The most important thing as we said is making sure if you're buying a business, making sure that you do your due diligence. Making sure you really spend time looking through the documents.
Jeff: For those business owners in the State of Florida that may be interested in seeking your counsel how can they reach you, Jamie?
Jamie: Great. We have a couple of different ways to reach us. The first way is we have a website called www.legalbrains.com. The easiest way to get us is to call **law in your phone. It's a number we bought. Basically all they have to do on their cellular phone, hit **law and ask to speak to me. There can't be an easier way to get in touch with us. But take a look at us on the Internet, you'll see the different cases that we've done. We're doing a lot of business litigation and we've been in the newspapers a lot so I'll think you'll be happy. And I love to help people out, it's what I do.
Jeff: Jamie Sasson, we appreciate your participation on the conversation today on Deal Talk and hopefully we can have you back on again real soon.
Jamie: Yeah, I love that. It was fun. I like talking about this stuff.
Jeff: Thank you. That's Jamie Sasson, business attorney and managing partner at the Ticktin Law Group in Florida. He's been our guest today.
If you're a professional who normally consults with small business owners, a serial entrepreneur who owns multiple successful businesses, or a small business owner who has sold a business and you'd like to share your experience with our listeners, we'd like to hear from you. Just simply give us a call at Deal Talk at 888-693-7834. Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one visit morganandestfield.com. I'm Jeff Allen for Deal Talk, thanks again for listening. We’ll look forward to talking to you again soon.