Tina: From a legal standpoint, if I am looking to sell my business, where would you suggest I start the process?
Royce: The starting point for each transaction is identifying your goals. Once you have identified what you want and require it becomes much easier for your attorney and the rest of your team to structure the deal and help guide the transaction in the right direction. For instance, if you are selling the company because you want to relocate and start a similar business elsewhere, this is an important goal to share with your counsel so he or she can be congnizant of that goal when reviwing non-compete provisions that are often an intrigal part of a buy/sell agreement.
As a matter of contract, you must accurately disclose the level of information you have agreed to disclose.
Tina: What disclosure obligations do I have to a buyer when selling my business? Am I legally required to tell him the bad things about my business?
Royce: As a matter of contract, you must accurately disclose the level of information you have agreed to disclose. For example, if the contract expressly places the due diligence burden entirely on buyer with buyer merely having access to your records, then you need only provide records and nothing more. However, as a matter of tort law, you are not allowed to make false statements or withhold information necessary to clear up or correct a statement, representation or warranty previously made that has become false or that is unclear or misleading without the additional information. In other words, you are not allowed to take active steps to deceive or conceal information that would clear up a material mistatement or misleading statement regardless of the contract’s provisions.
Tina: As an owner looking to sell my business, how can I minimize fees when working with an attorney? Would this answer change if I was looking to buy a business?
Royce: The cost sensative client should consider the following:
Be prepared when you meet with your attorney. It is your attorney’s job to make sure you understand the documents and the transaction. It generally takes longer if you have not read the documents, considered the transaction, and compiled your questions before you meet with your attorney.
Find an attorney you trust and then trust him or her. Clients often increase their bill by trying to micromanage a deal. Remember, your attorney must bill for each call, email or meeting. The more time spent talking through realtively minor details with you, the less time he spends actually getting those items done. He must then spend, and bill for, additional time to actually perform those actions.
Do the work you can. Attorneys will generally give you as much or as little assistance as you need. If you ask your counsel to prepare exhibits, schedules and spreadsheets for attachment to the agreement then your attorney will. However, if you prepare the business-related documents, then your counsel just needs to review and modify them, where necessary.
Tina: What constitutes a billable hour? Are these fees negotiable? How would an entrepreneur go about negotiating fees?
Royce: Different firms have different policies but the standard is to bill in six-minute increments (i.e. tenth of an hour). Generally, attorneys bill for each full and any partial six-minute increment spent on your matter. So if an attorney works 25 mintues, he or she will bill five six-minute increments to account for four full six-minute increments and one partial. Generally, more established firms/attorneys will not negotiate fees. If a lower cost is the most important factor, you may have more success finding a young/unestablished attorney. However, you should use caution with this approach because you may “get what you paid for.”
The key is to identify your primary, i.e. required, goals and your secondary, i.e. ideal, goals and provide them to your team so your broker can shop the deal you are interested in pursuing and your attorney can structure the deal toward the same goal.
Tina: I own a business and the land it is located on. I would like to sell the land to my brother, but he does not want a business. What is the best way to structure this sale? Are most people looking to buy land when they buy a business and will separating the two decrease the value of the business? What else should I consider with this sale?
Royce: Generally, any time you remove a significant asset from a business it will reduce the overall purchase price. However, a skilled broker is looking to fit the right buyer to the correct assets in order to maximize the sale you are attempting to make. For instance, a buyer who is only interested in your client list, your intellectual property or the goodwill associated with your name is not looking to purchase land. In fact, that buyer may look at the land as a detractor to the purchase. The key is to identify your primary, i.e. required, goals and your secondary, i.e. ideal, goals and provide them to your team so your broker can shop the deal you are interested in pursuing and your attorney can structure the deal toward the same goal.
Tina: What are the most important things you, as my attorney, can contribute as I sell my business?
Royce: Attorneys should first help their client understand the deal, its structure and implications as negotiated or written. An attorney should then help their client identify issues and solutions to help mold the deal into what the client requires it to look like. Very rarely are deals drafted once and then signed. In fact, a deal that is inked that quickly may be on the fast track to litigaiton. Instead, the points of the deal should be considered, discussed and agreed to by all parties with eyes wide open in order to avoid litigation because even successful litigation is often considerably more costly than a justifiable price reduction at the time of sale.
Tina: What is the most interesting matter you have worked on regarding buying/selling a business in the past year?
Royce: This is a difficult question to answer because each transaction has its own points of interest. My favorite was a deal in which I represented a private equity firm seeking to acquire a company which owned and operated salt water disposal wells in central Texas. The private equity firm was based in the east coast and the business owner was a country boy who had worked in the oilfields his entire life. The central aspect of the deal was getting each unique personality to find and focus on the common objectives that originally gave birth to the deal.
Attorneys are trained to point out the flaws, liabilities and negative aspects of a transaction.
Tina: Do you have any other tips or advice for anyone buying, selling or appraising a business?
Royce: Always remember to focus on what you are getting out of the deal as much as you focus on what you are putting into the deal. Attorneys are trained to point out the flaws, liabilities and negative aspects of a transaction. While those are important to note and consider, they must be considered squarely in the light of the benefits you are getting in return for those potentially negative consequences.