I'm gearing up to help the purchasers of a business that has gone bad, and I'm mad.
My clients came in, and informed me that they'd purchase ABC Business. Once they bought the business, they quickly found out that--contrary to the seller's representations--the business was loaded with debts which the seller intentionally failed to disclose to my clients. Bad, but seems straightforward enough, doesn't it? Surely that would constitute a breach of the sales agreement, wouldn't it? Well, not so fast--here's where things get interesting.
Seller talked my clients into using his attorney to draw all the documents. The documents, at first blush, looked like a standard set of business sale documents, except for the part where the seller's attorney cut out all warranties of title, and basically provided that the buyers were taking the business "as is."
The lawyer, hired by Seller, had his fee paid equally between the buyers and the seller--all the while knowing that the seller was hiding from them tens of thousands of dollars of liabilities. That's a breach of his ethical responsibility, one that may cost him.
It's too early in the game to discuss details of what I intend to do on my clients' behalf, but let me use this opportunity to offer some advice to other potential business buyers.
1. NEVER use the seller's lawyer to represent you in a business purchase. The case I mentioned above is extreme--most lawyers wouldn't purport to represent both sides yet withhold information from one party that the other is lying. But often, this joint representation is "de facto"--i.e., the lawyer represents that he represents the seller only, but the seller is telling the buyer that he really represents both sides. Don't fall for this trap. You need someone to specifically protect your own interests as a business buyer--especially if (as here) you're a first-time buyer.
2. Make sure your purchase agreement contains all the representations IN WRITING that the seller has been making to you verbally. Sounds easy, right? But often, a seller will make lots of verbal statements that for some reason don't find their way into the written document. And the standard sales agreement also contains a clause providing that the only representations being made are in writing, and that no other representations have been made. If you, as a buyer, sign this, you may not later be able to rely on oral representations made to you earlier. In the instant case, the seller, of course, made all sorts of representations about the business being free of any liabilities. But, in the document cooked up by the seller's attorney, absolutely no representations were made--as to amount of property, as to title to the property, or anything else. Think about it: if a seller expects you to give him money for his business, shouldn't he--AT THE ABSOLUTE VERY LEAST--be willing to say "I am the owner of this business, and have good title to the business?" Of course. But with my clients, the owner wasn't willing to do that. They should've smelled a rat right then.
3. Do your due diligence! Many business buyers are investing their life savings to follow a dream of running their own business, but get so excited with the dream, that they blind themselves to the realities. Take the time to look under the hood. Investigate the business finances, do a background search of the seller, do everything a smart person should do to make sure you don't get yourself into a quagmire!
If you're involved in a bad business purchase in North Carolina and need help, call me at 704-735-0483, and set up an appointment.
Tampilkan postingan dengan label business sales. Tampilkan semua postingan
Tampilkan postingan dengan label business sales. Tampilkan semua postingan
Minggu, 30 November 2008
Sabtu, 15 Maret 2008
Purchasing a Business and using Brokers
On a weekly basis I represent individuals who are buying and selling small businesses. Occasionally, these clients employ the services of a business broker who, like a real estate broker, brokers the sale of the business, often representing the interests of both buyers and sellers in setting up a deal.
I've met some very knowledgeable brokers who have found niche specialties--such as one with whom I worked last month who only brokers the sale and purchase of pharmacies. However, just as with real estate brokers, there are very good ones, and then there are those who add little value to the deal other than putting a willing buyer with a willing seller.
The purpose of this post is not to discourage business buyers or sellers from using a business broker (after all, the broker can sometimes put you in touch with another party and connect you in ways you could not do yourself). However, there are at least two areas in which you need to be careful and protect yourself when using a business broker.
1. Do not let the business broker draw up your contract. Going back to the real estate analogy, in residential (and often commercial) real estate transactions, the broker often draws up the contract to be signed by the parties. However, these contracts have often been developed over time and adopted by your state's realtors association as well as the state bar association. These contracts have been used and revised enough that they can fairly well cover the exigencies involved with real estate.
A business sale, however, is far more complicated and multi-faceted, and does not lend itself well to a one-size-fits-all form contract. Furthermore, a business broker (unless he is a specialist broker, and often even not then) will not have sufficient legal understanding of all of the issues which are involved (and the laws governing them), to adequately protect the buyer and seller in a business sale contract.
Take, for example, a form contract I recently reviewed for a client in the construction industry. He'd agreed to sell his business for a price certain, and the buyer had agreed to purchase my client's building, within 60 days of the business sale, for an additional price. The parties had also agreed in theory--as is often the case--that my client would stay on as a consultant on an as-needed basis for a certain length of time. Pretty simple, isn't it? Perhaps, but the form contract drafted by the broker left some glaring holes:
1. First, though the broker was only responsible for listing the business (and thus receiving a commission on the business), he'd written the real estate sale into the form contract such that the broker would receive a 10 percent commission on the sale of the real estate as well--more than doubling what his commission would have been!
2. The purchaser wanted my client to sign a 100-mile radius non-compete for three years, which the broker had written into the form contract. However, such a wide-ranging non-compete would likely not be upheld in the state of North Carolina. The broker didn't know this.
3. The contract provided that my client would work as a consultant, but didn't specify his hours or his rate of pay.
In addition, the broker attempted to steer both parties to one attorney who would close the deal for both of them (more on that later). By the time my client came to me, the two parties were arguing over all the gaps which had been left in the contract but were now needing to be filled in.
A broker's form contract for the sale of the business is inadequate unless it is to operate merely as a non-binding letter of intent which just ensures the parties, in theory, have an agreement.
A well-written business purchase agreement is large, often contains lots of legalese, and will sometimes take quite a bit of negotiation. However, the beauty of it is that, once it is signed, the parties know exactly what the terms of the deal are, and now can move forward to closing with a clear understanding of what the seller is selling and the purchaser is purchasing. In the last two closings I handled, the actual "closing" of the business, in the attorney's office, took about 30 minutes each!
A good purchase agreement should be clear on the details, and, once signed, allow the purchaser to move forward with his due diligence and the seller to prepare for the conveyance of his business without having to haggle over details.
In the case above, the parties were able to sign an agreement quickly, but over the ensuing months of trying to fill in the details, have now become somewhat at odds with each other. This doesn't need to happen.
2. In a business purchase or sale, each side should have his own attorney. Often, brokers attempt to funnel both buyer and seller to a supposed "neutral" attorney, who simply draws up the conveyance papers based upon what was agreed upon in the form contract. Often, I've found, these forms state something like, "You should hire your own attorney to review these documents," but in practice, my clients tell me that the broker has discouraged them from doing this, saying one lawyer is enough.
Sure, it sounds self-serving, but in a business transaction each side should have his own counsel. In many real estate transactions, one lawyer can adequately (and, at least in North Carolina, legally) represent both sides. However, a business sale is much more complicated.
In the example above, the attorney recommended by the broker was good and was honest. In fact, he was so honest that he felt he should only represent the purchaser's interests and not try to represent both sides. My client came to me with proposed closing documents that included:
1. A consultation agreement requiring him to work at the purchaser's will for less than half of his normal hourly pay rate;
2. A property lease that allowed the purchaser to lease--with no obligation to purchase--the seller's real estate, notwithstanding the provisions of their form contract.
3. A non-compete that was so overbroad and vague, it would have prevented my client from getting work that was realistically not in competition with the purchaser's acquired business.
Furthermore, if both parties go to a supposedly "neutral" attorney, what is that attorney's obligation to point out (or even correct) legal flaws created in the original form contract? In this case, the hired attorney pointed out that the originally agreed-upon non-compete was overly broad and unenforceable in our state. But what if he had not? Would he have overreached against the seller? Or would he have been negligent and committed malpractice as to the purchaser, who, if he needed to enforce the non-compete, would have been unable to do so?
In sum, though business brokers are a valuable source of information when buying and selling your business, you'd be best served to hire counsel to advise you through the process.
If you need help or representation in buying or selling your business, you can set up a consultation with me by calling 704-735-0483.
I've met some very knowledgeable brokers who have found niche specialties--such as one with whom I worked last month who only brokers the sale and purchase of pharmacies. However, just as with real estate brokers, there are very good ones, and then there are those who add little value to the deal other than putting a willing buyer with a willing seller.
The purpose of this post is not to discourage business buyers or sellers from using a business broker (after all, the broker can sometimes put you in touch with another party and connect you in ways you could not do yourself). However, there are at least two areas in which you need to be careful and protect yourself when using a business broker.
1. Do not let the business broker draw up your contract. Going back to the real estate analogy, in residential (and often commercial) real estate transactions, the broker often draws up the contract to be signed by the parties. However, these contracts have often been developed over time and adopted by your state's realtors association as well as the state bar association. These contracts have been used and revised enough that they can fairly well cover the exigencies involved with real estate.
A business sale, however, is far more complicated and multi-faceted, and does not lend itself well to a one-size-fits-all form contract. Furthermore, a business broker (unless he is a specialist broker, and often even not then) will not have sufficient legal understanding of all of the issues which are involved (and the laws governing them), to adequately protect the buyer and seller in a business sale contract.
Take, for example, a form contract I recently reviewed for a client in the construction industry. He'd agreed to sell his business for a price certain, and the buyer had agreed to purchase my client's building, within 60 days of the business sale, for an additional price. The parties had also agreed in theory--as is often the case--that my client would stay on as a consultant on an as-needed basis for a certain length of time. Pretty simple, isn't it? Perhaps, but the form contract drafted by the broker left some glaring holes:
1. First, though the broker was only responsible for listing the business (and thus receiving a commission on the business), he'd written the real estate sale into the form contract such that the broker would receive a 10 percent commission on the sale of the real estate as well--more than doubling what his commission would have been!
2. The purchaser wanted my client to sign a 100-mile radius non-compete for three years, which the broker had written into the form contract. However, such a wide-ranging non-compete would likely not be upheld in the state of North Carolina. The broker didn't know this.
3. The contract provided that my client would work as a consultant, but didn't specify his hours or his rate of pay.
In addition, the broker attempted to steer both parties to one attorney who would close the deal for both of them (more on that later). By the time my client came to me, the two parties were arguing over all the gaps which had been left in the contract but were now needing to be filled in.
A broker's form contract for the sale of the business is inadequate unless it is to operate merely as a non-binding letter of intent which just ensures the parties, in theory, have an agreement.
A well-written business purchase agreement is large, often contains lots of legalese, and will sometimes take quite a bit of negotiation. However, the beauty of it is that, once it is signed, the parties know exactly what the terms of the deal are, and now can move forward to closing with a clear understanding of what the seller is selling and the purchaser is purchasing. In the last two closings I handled, the actual "closing" of the business, in the attorney's office, took about 30 minutes each!
A good purchase agreement should be clear on the details, and, once signed, allow the purchaser to move forward with his due diligence and the seller to prepare for the conveyance of his business without having to haggle over details.
In the case above, the parties were able to sign an agreement quickly, but over the ensuing months of trying to fill in the details, have now become somewhat at odds with each other. This doesn't need to happen.
2. In a business purchase or sale, each side should have his own attorney. Often, brokers attempt to funnel both buyer and seller to a supposed "neutral" attorney, who simply draws up the conveyance papers based upon what was agreed upon in the form contract. Often, I've found, these forms state something like, "You should hire your own attorney to review these documents," but in practice, my clients tell me that the broker has discouraged them from doing this, saying one lawyer is enough.
Sure, it sounds self-serving, but in a business transaction each side should have his own counsel. In many real estate transactions, one lawyer can adequately (and, at least in North Carolina, legally) represent both sides. However, a business sale is much more complicated.
In the example above, the attorney recommended by the broker was good and was honest. In fact, he was so honest that he felt he should only represent the purchaser's interests and not try to represent both sides. My client came to me with proposed closing documents that included:
1. A consultation agreement requiring him to work at the purchaser's will for less than half of his normal hourly pay rate;
2. A property lease that allowed the purchaser to lease--with no obligation to purchase--the seller's real estate, notwithstanding the provisions of their form contract.
3. A non-compete that was so overbroad and vague, it would have prevented my client from getting work that was realistically not in competition with the purchaser's acquired business.
Furthermore, if both parties go to a supposedly "neutral" attorney, what is that attorney's obligation to point out (or even correct) legal flaws created in the original form contract? In this case, the hired attorney pointed out that the originally agreed-upon non-compete was overly broad and unenforceable in our state. But what if he had not? Would he have overreached against the seller? Or would he have been negligent and committed malpractice as to the purchaser, who, if he needed to enforce the non-compete, would have been unable to do so?
In sum, though business brokers are a valuable source of information when buying and selling your business, you'd be best served to hire counsel to advise you through the process.
If you need help or representation in buying or selling your business, you can set up a consultation with me by calling 704-735-0483.
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