The most important part of any journey is the preparation. There are two ways to travel: use a travel agent who can match you with your ideal vacation, locate the best deals and ensure all the details are in place for a successful journey, or get on a plane with only the barest essentials and “wing it.” Most of us, especially when it comes to money, don’t want to “wing it,” and many of the clients I work with don’t intend to. They have the best of intentions to utilize their broker or investment banker and do their own research before engaging legal counsel in the buying or selling of a business.

I want this to be a successful process for my clients, so I worry when they walk into my office after they’ve already verbally agreed to buy a business or, worse case scenario, the Letter of Intent is already signed. Take for instance one of my clients who I’ve worked with for many years. By the time he informed me of his decision to purchase a new business, he had already verbally agreed to a stock sale, which had substantial negative tax consequences and potential liability. Without discussing the advantages/disadvantages of the available structures of the transaction, he could not make an educated and informed decision and know if a stock sale or asset sale was more beneficial. After commencing our due diligence, we discovered the company had significant environmental problems, including air pollution. The deal ended up dying.

As a seller or buyer, you want to know about potential problems early on, so you know how to prevent them proactively. Although a pre-sale audit or review of the prospective seller might seem cumbersome, it is better to discover and attempt to cure any problems prior to their untimely discovery, otherwise the deal could die. In the case of my client who didn’t engage legal counsel early enough, he underestimated the tax and liability considerations in purchasing a business.

There is the “usual process” of buying a business that includes standard steps, such as: conducting initial discussions; exchanging information; entering into mutual Non-Disclosure and Confidentiality Agreements; doing due diligence; agreeing to the structure of the transaction in the Acquisition Agreement; closing and satisfaction of any post-closing obligations. Then there are the unusual hurdles along the way that require an experienced guide who can make the necessary preparations; map out the quickest and safest route; and know when to turn back if conditions aren’t favorable.

For example, counsel can help clients navigate the waters through a pre-sale review of items such as the corporate minute books to ensure that they are up-to-date and include completely executed consents and a current copy of the charter, bylaws, and other governing documents. Other matters to review include tax compliance, environmental issues, labor issues, intellectual property issues, etc.

Counsel should also review the Non-Disclosure/Confidentiality Agreement to ensure the provisions are reasonable and that its application is not too broad. Once this agreement has been reached, most clients begin to enter into negotiations that will become the Letter of Intent, which outlines the basic terms of the deal, including the structure and purchase price, which can be difficult to change. One of the most important goals of a Letter of Intent is to avoid future misunderstandings, and counsel can play a vital role in seeing that this goal is achieved.

There is no universal answer to when a purchaser or seller of a business should seek counsel, but at a minimum, engage counsel as soon as discussions begin that will result in a binding document. In other words, as soon as you’re clear that you may have an ideal potential buyer, or as soon as you the buyer are serious about learning if this is the right investment.

Sheldon E. Friedman
Attorney at Law
Friedman, Dever & Merlin, LLC
www.fdmlaw.com
sfriedman@fdmlaw.com
404-236-8604

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