As a business owner, handling your own legal issues makes as much sense as performing your own brain surgery. One misstep can mean dire consequences, including litigation and financial losses that could doom your company. Find the right business attorney who has a genuine interest in your company’s financial and legal well-being, and you will have a trusted business advisor for life. Robert Shipley is an attorney specializing in business law as the principal at Shipley Law Group in Chicago. With 37 years of legal experience, Robert will explain how your attorney can be one of the most important business resources your company will ever have.
I would say from my point of view that an attorney is very, very important to the overall structure and success of a company.
- Robert Shipley
Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future, it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Today's show we're going to talk about a couple of different things. We're going to have kind of a topic A and topic B. Topic A, we're going to talk a little bit about why it's important that really you need to focus on finding yourself legal counsel and doing that early, because there's more to a business attorney that meets the eye or the ear. And I think that it's something that you really need to give some serious thought to especially in the beginning, if you're just starting things out, your business is up and going, and maybe you've talked to an attorney but you don't have one on retainer, and you don't necessarily have a long-term relationship with one. We're going to talk to you about why you need to have something like that in mind in contacting a trusted attorney. The second part of the program today, we're going to deal with preparing your business for sale and answering questions with respect to what do I do if I'm planning on selling my business and I have a partner involved. What kinds of things do I have to be mindful of? We're going to talk about both of these issues with a gentleman named Robert Shipley. He's the president and partner at Shipley Law Group in Chicago. Robert Shipley, if I may call you Bob, welcome to Deal Talk, good to see you.
Robert: Thanks Jeff, but please call me Bob. I'm glad to be here.
Jeff: Thank you so much for joining us, I appreciate it. Bob if you could, let's just start from the very beginning, getting a sense of who you are Bob and what you do with your firm, what your specialties are, and who you serve in the Chicago area.
Robert: Sure. I'm the principal to a small law firm. I've been practicing now close to 37 years. And the general area of focus and area of concentration of my practice is business law with an emphasis on business construction and insurance litigation. My practice consists of representation of small and medium sized businesses as well as individuals with respect to their personal needs.
Jeff: Very, very good. Bob, it's good to have you again, and this is kind of a nice introductory discussion that we can have with you that really speaks to those business owners, and it really doesn't matter what level of history they have with their own businesses and where they're at in their businesses' development. They could have an attorney that maybe has represented them for years and maybe they're just not happy with them, or they made some changes. We can also talk from the perspective of a new business owner who might just be getting started. And so with that said, we've kind of set the groundwork here for our chat. There are a number of very important things to be mindful of and we can't cover all of them. We might have you have back for a second show. But let's talk about the importance of having an attorney in general terms. Really, as a trusted advisor and councilor you're not just there to meet legal needs and be reactive but you're there to help the business owner be proactive in helping them from the very beginning. Tell us a little bit about why it's important and how you do help the business owner from the onset of your relationship with them?
Robert: Sure Jeff. I think that your comments are well taken and the situation that I often encounter, whether it is an existing business which may have been around for years, even generations, as opposed to newly formed. And that is the often encountered reluctance to even hire an attorney, because at times businesses that had been around for many years that get to used to doing things a certain way. They seem to have a certain culture they've been able to, up to a certain point in time, successfully handle their affairs, and then they're presented with a situation that they thought that indeed they could handle, they had in the past, they made some mistakes, and now they find themselves in the situation where they actually have a larger problem that could have been avoided. And the same is true for a new business. Expenses are often a consideration even if it's a startup company that has funding. As much as I would say from my point of view that an attorney is very, very important to the overall structure and success of a company, we're not always thought of in that regard. What I would say is that the importance of an attorney as a trusted advisor and counselor is that the attorney has the opportunity to develop relationships with the principals of the business which allows them not only to understand the business but also to understand and get to know the principals. Why is that important? Because every individual has different risk tolerances. And when you get to know the individual who's running the business in relation how their business operates, it allows me as the attorney to have a good view as to giving advice.
And when you get to know the individual who's running the business in relation how their business operates, it allows me as the attorney to have a good view as to giving advice.
Jeff: And I think times have changed a little bit haven't they Bob, because it's such a competitive landscape out there. And it's true too, I happen to know with attorneys, the importance is not just on the business owner but it's really on you to maintain a relationship that can go beyond just being just civil and professional but really being one that allows you some intimate knowledge so that you can provide specific help to each individual client on an individual basis so that you're not just providing these garden variety, generic types of responses to a problem that company A has and maybe company B has, for example.
Robert: That is so true because just as no two individuals are the same, no two problems when you drill down are the same. The quality of the relationship not only goes to the trust part that develops between the business or the individual and their lawyer, but it goes to the ability of a lawyer to understand the nature of the problem, how it arose, and what the business does need and what the business owner can tolerate in terms of solutions. For example, if I may. I've been representing a general contracting company for over 20 years and I've gotten to know the principals of the business very well. We have many, many different types of matters together both litigation matters, insurance matters, contact reviews. Through the years as I've gotten to know the principals as individuals they’ve helped me to understand what their point of view is with respect to the operations of their business. And especially in terms of litigation-related matters it allows me to structure advice and recommendations for revolution within the framework of their business that I know will be acceptable to their tolerance, if you understand what I'm saying.
Jeff: That makes perfect sense.
Robert: Because some business owners are a little bit more reluctant to engage in litigation because of the cost and that's very understandable, and others are a little bit more aggressive.
The quality of the relationship not only goes to the trust part that develops between the business or the individual and their lawyer, but it goes to the ability of a lawyer to understand the nature of the problem
Jeff: Is there ever an instance where it's a good idea for a company to feel like it should handle something on its own before contacting a legal counsel?
Robert: To some ears it might sound self-serving but I can't tell you how many conversations I've had over the years with individuals and small business owners who have recognized after the fact that they made an error in not hiring counsel originally. And here's the bottom line. It is more expensive in the long run to try to handle a problem yourself because more often than not the problem is not resolved but instead only continues to grow. Sometimes it becomes a little bit worse in terms of the consequences, thus requiring the need not only for counsel but sometimes situations are then presented where a matter that could have been settled now instead goes litigated. And so what could've been resolved perhaps through some correspondence, and perhaps a meeting or two with negotiation, has now snowballed and become much greater.
Jeff: I think so many of us tend to allow our egos and our arrogance to get in the way. And it's almost a natural thing. And I think particularly for us fellas who might be listening in the audience, we can handle this. There's no way we're going to let this get out of our control. We're going to be able to take and put this matter behind us. But you talked about paying now versus paying later, and there are certain things out there that people don't consider, certain environmental types of issues, things that are happening in businesses around them or with their clients that they don't have any knowledge about that could help to make a situation worse than it is, like you just talked about. And then once it gets to that point then it's almost like you've waited too long to contain it at that point.
Robert: I'll tell you what happens: emotions become involved.
It is more expensive in the long run to try to handle a problem yourself because more often than not the problem is not resolved but instead only continues to grow.
Jeff: Yeah, exactly.
Robert: Situations that arise which seem on the surface to an outsider relatively benign. To the insider whether they'd be individual or business owner they're not benign at all but very, very personal. And so those types of decisions rather than be made objectively are instead made emotionally by the affected individual or business owner. Having your lawyer involved gives you not only another set of eyes with an expertise to understand the problem, but also allows them a maintenance of objectivity and, here is the key with respect to any issue, understanding the big picture and being able to anticipate what might occur, or if the dispute is not resolved, or should occur if it does get resolved. Being able to contain if you will, reach a successful resolution and everybody can then move on.
Jeff: One quick thing before we go to our break Robert, and this is probably a show really deserving of a separate show altogether. We talk about, I just mentioned the things like agreements, documents, and stuff like that that you can find online in their most basic forms. But tell us about the importance of documentation, of having everything lined up when you're just getting started, or maybe when you're preparing for a sell-side due diligence as you're preparing to the sale of your company. How critical is it to have that attorney there on standby to ensure that you have all the proper agreements and documentation in place? I mean those important documents, they cannot be underestimated in terms of their importance.
Robert: No, it's absolutely critical. And while certain people do tend to look to a service such as LegalZoom, your characterization of cookie cutter is very accurate. And the reason why those services are not appropriate for real needs, whether they be individual or business is because of the individuality of each business and the problems that arise. And absent the development of the relationship that we've discussed here, you're not going to be able to gain, as an attorney, an understanding of what really needs to be done.
Having your lawyer involved gives you not only another set of eyes with an expertise to understand the problem, but also allows them a maintenance of objectivity
Jeff: Very good, Bob Shipley. Coming up next, what you need to know about selling your business when you have a partnership. My guest is Robert Shipley. He's the president and partner at Shipley Law Group in Chicago. I'm Jeff Allen, you're listening to Deal Talk, and we're coming back after this.
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Jeff: Welcome back to Deal Talk. I'm Jeff Allen with Robert Shipley from Shipley Law Group in Chicago. We're turning our attention now in this particular segment, on what you should know about selling your business when you have a partner or partners involved. And this again admittedly is probably something we could talk for really hours on, but we're going to just kind of attack one or two things here at a glance and then maybe have Bob back on to join us at a later time. And so Bob Shipley, if that sounds good to you we'll go ahead and we'll get started. What I'd like to ask you, if you've got a partner involved in a small business, one of those partners is interested in staying on, they don't want to sell necessarily, but the other one is ready. Maybe they're older and they're ready to retire or go. How does that process start? Is there a regular kind of due diligence process that would normally get underway that you might see? A business that does not necessarily have a partnership included for a take on. Is it the same kind of responsibilities and requirements needed in order to get that process underway?
Robert: I would say generally due diligence would be the same whether you are buying into an existing business that has one or more partners, or if you are buying an entire business. And due diligence is one of the most critical aspects of the work that an individual and if they choose to retain the attorney, that would be the smart decision, performs relative to making a decision as to whether or not purchasing an interest or purchasing an entire business is a good idea. So what you are focusing on is whether or not the books and records of the business are in good order. And so the types of information that you would be seeking to review would be the accounting and bookkeeping records, including tax returns for a minimum of three years, inclusive of the year of the transaction, but quite frankly I would recommend a minimum of five.
Depending on the size of the company you would want to review their personnel roster and get an understanding from the existing business owner as to their brief thumbnail sketch in terms of who's valuable and who performs what function, etc., in relationship to the financial documentation. It's not just the cash returns and the accounting information, you also want to make sure that the sales information is provided and so that you have an understanding of the history of the company and whether or not there's a motivation to sell because there's been a downturn in business, or whether things have been steady, or perhaps there's an upturn and maybe that's why you're faced with what you consider to be a premium. Depending on the nature of the business, a customer list would be important as well as an introduction once the discussion became much more serious as to those customers, so that you could hopefully maintain that relationship.
Other considerations are UCC documentation for any equipment that is owned by the business, titles to vehicles, where is the business located, is their lease that's applicable, or is target of purchase of the interest in the business especially if it's the entire business is it going to include the building that's owned in fee simple by the existing owner. Those are the kinds of considerations that I would be focusing on.
Jeff: What kind of dialogue do you have with the partner who, let's say, may be staying on? They don't wish to sell their share of the business, Bob. What is kind of their role in the process of this? They just kind of stand apart and you don't really have much to say with them? How does that work?
Robert: You know what I would say Jeff, there's many, many different considerations, but putting aside any written agreement that might control how a business interest is going to be sold, and quite frequently there are such agreements in place that outline the basic structure and perhaps give a right of first refusal to the existing partner or partners if there's more than one. If somebody wants to leave an existing business, whether it's a successful business or less so, transparency is so important. And the reason why transparency is important is because of that individual dynamic that we were talking about earlier just in relation to some other legal issues. If you express upfront your desire to withdraw from the business and are honest with your partners, that will facilitate discussions regarding how that sale is going to be consummated and ultimately will make the transition much easier, including, as might be necessary, modifications of any existing agreements relative to the sale that perhaps would have been a little bit more difficult to negotiate.
Depending on the nature of the business, a customer list would be important as well as an introduction once the discussion became much more serious as to those customers
Jeff: Very good. That makes perfect sense. Moving forward, what kinds of agreements need to be in place between the exiting partner, and the partner that is staying on board? Typically speaking, Bob Shipley, are there certain specific agreements that will have to be in place in order for the sale to take effect between both the exiting partner and the partner staying on, and the person coming in to purchase the entire business, or the half of the business that the person selling is leaving, if the partner doesn't take over 100 percent of the company?
Robert: I think the consideration is to, one, examine the existing corporate or partnership agreements that would relate to the structure of how the shares are going to be sold. And in the spirit of the transparency that was talking about, make sure that everybody is understanding on of the same page with what is required and make sure to the extent that any modifications have to be made, all parties are in agreement. And then making sure from the standpoint of the existing owners, and perhaps this is a little beyond the scope of the specific question that you ask, but making sure that there's due diligence by the existing partners with respect to the person coming in so that they are very comfortable. That same due diligence that I talked about earlier with regard to an individual coming in and buying a portion or all of an existing business. If a new partner is coming in and has the consent of the existing partners, the existing ownership, then that existing ownership is also going to want to make certain that financially that individual is qualified. So they're going to want to look at a history five years of tax returns, personal returns, as well as any business returns that the new partner may have had with respect to their prior activities, as well as conducting a thorough interview just to make certain that this is the type of person that would be a good fit. Because typically, there is language in an agreement that would give the existing partners the right of first refusal, the right to buy the shares from their now former partner.
I realize that it's not always the case that the exiting partner can successfully sell to the remaining partners but nonetheless, there’s sometimes when the individual dynamics if you will in addition to perhaps the financial dynamics do make the difference, and the existing partners end up taking control of the company.
Jeff: Am I obligated to sign a non-compete agreement with my business partner before I leave if he or she asks me to do that?
Robert: The simple answer would be yes if that's a condition of the sale. It's going to depend in part on the nature of the business. Certainly if it's a manufacturing business for example that has certain proprietary type of trade secrets or certain information in terms of their manufacturing processes which are proprietary you expect there to be a non-compete being signed so as to protect the rights of the existing business for a period of time. If for example it was a law firm and it was an exiting partner then you wouldn't typically see that type of non-compete because in that situation the clients are always able to determine what lawyer they choose to have represent them, and there can't be any restraint put on that type of relationship. In terms, generally if I may just explain a little bit more in terms of non-compete, the laws from state to state vary to some extent, but they all have a basic requirement of reasonableness with respect to the geographical distance as well as the scope. If you’re in a large metropolitan area it might be something in terms of five square miles, ten square miles, something like that. They couldn’t do the county where the city is located plus the five surrounding counties, for example. That would be unreasonable in terms of geographic scope. One year might be reasonable but 10 years for example would not be.
I realize that it's not always the case that the exiting partner can successfully sell to the remaining partners but nonetheless, there’s sometimes when the individual dynamics if you will in addition to perhaps the financial dynamics do make the difference
Jeff: We are nearly out of time, Robert Shipley. How can those business owners in Chicago Metropolitan area who have questions get in touch with you?
Robert: I'm reachable in several different ways. My phone number is 312-527-4545. My email is email@example.com and my website is www.shipleylawgroup.com
Jeff: Robert Shipley, we have to leave things here. It's been nice to talk with you about all of these issues and we'd like to have you back on again in the future at some point. Thank you so much for joining us today on Deal Talk.
Robert: Thank you Jeff. I've greatly enjoyed the conversation.
Jeff: Bob Shipley is the president and partner at Shipley Law Group and he’s been my guest today.
Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one, call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make it a point to tune in again to Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk again soon.