A quick guide to working with an attorney to acquire a business

When purchasing a business, it’s clearly important to do so with the advice of counsel. Working with a seasoned transaction attorney can ensure that you minimize risk against yourself, structure a fair agreement, and preserve claims in case things go south.

All of these risks roll up to legal risks:

• Does the owner have the right to sell the business?

• Are the assets free of liens and unencumbered?

• Have there been any tax claims against the business recently?

• Does the owner provide a warranty on any equipment that is part of the transaction?

• Has the owner made full disclosures of any pending litigation?

Despite the value that an attorney will bring to structuring and closing a business acquisition, we often see attorneys do more harm than good. When that occurs, a buyer has a large legal bill and the transaction has fallen apart as a result of painstaking, monotonous negotiations over legal terms that may seem a bit out-of-left-field for the seller and sometimes even the buyer.

To ensure that you get the most milage out of your legal counsel during a business acquisition, there are two key components to get right upfront. First, select a good attorney. Second, scope and frame the attorney’s job.

Selecting a Good Attorney

All too often, we see small business entrepreneurs going with an attorney they know over an attorney that knows small business. This is normally a recipe for a bumpy transaction.

Most attorneys are professional and great people. But, the trade is composed of speciality practices: divorce, tax, estate, business transactions (M&A), real estate, litigation, etc. Pick an attorney who has deep experience in M&A transactions.

After all, you wouldn’t go to an ear & throat doctor if you were having problems with your foot! Don’t go to a divorce attorney to help you close on a business purchase!

If you need references for a small business transaction attorney, please reach out to our team and we’re more than happy to source some referrals for attorneys practicing in your state.

Scoping & Framing the Attorney’s Job

In addition to selecting an attorney with transaction expertise, the other piece to the puzzle is framing his or her job. If you don’t, you run the risk of the attorney trying to mitigate every risk through legal contracts and language.

While it’s always great to minimize risk, this can easily result in purchase agreements in excess of twenty pages and a legal bill well in excess of $20,000.

Eli Albrecht recently posted a thread on Twitter that outlined some of the key steps here:

1. Define the Scope. Clearly define the scope noting any areas you are worried about. If the business has 79 contracts, define which contracts are material to the business. I did a big deal as a young lawyer, where the legal team reviewed the top 50 agreements. We submitted a beautiful report, and the Buyer told us they only care about two of the contracts. Alternatively, when I worked on the T-Mobile-Sprint merger, we reviewed thousands of agreements.

2. Set the Format. Describe how you want the diligence. Do you want your lawyer to spend time formatting a beautiful memo? If you want to send this to the bank, investors, etc., maybe you do, but usually, a bullet point email and a phone call are sufficient.

3. Quantify the Risk. Make your lawyer tell you what is the monetary risk of each issue. Each risk should be quantified in dollar amounts and the probability of being an issue. This way you can weigh whether it is a deal-breaker or just an imperfection.

4. Reduce the Risk. Discuss with your lawyer ways of dealing with each issue. If there is a significant issue consider adding it as a specific indemnity to shift the risk to seller. You can also insist seller corrects the issue prior to closing and make it a condition to closing.

5. Post-Closing To-Do List Finally, use your diligence list as a post-closing legal to-do list. The legal diligence issues may not be deal-breakers, but it creates a pretty good list of issues to correct post-closing.

In addition to the above, we’ve seen buyers create an issues list during negotiations. They outline each issue that’s being negotiated between parties, and add in-line negotiating replies to the running Word document.

Instead of leaving the negotiation over terms to the attorneys, the buyer will handle going back and forth with the seller, typically explaining terms in more practical senses.

Once the negotiating point has been finalized, the parties can let their respective attorneys craft and negotiate the final language.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.