Imagine you’re back in grade school, you just ran the mile run for your gym class (PE), and your heart starts beating rapidly to the point where you can barely breathe.
You go to your primary care doctor, but they aren’t able to properly diagnose the problem. Since you’ve been using the same doctor for so many years, and you’re worried about the added cost of seeing a cardiologist, you decide to stick with the doctor you trust and hope that they figure out the issue.
This is exactly what it’s like when you work with an attorney with little to no experience in business sales.
At MidStreet, we’ve advised hundreds of business owners on the sale of their companies, and the results are clear. Hiring an attorney with transaction experience can save you from unnecessary delays, lawsuits, and get you better terms in offers and purchase agreements.
In this blog, we will go over why business owners are hesitant to hire a new attorney for their sale. Additionally, we will cover how hiring an attorney experienced with transactions can protect you and your interests.
Disclaimer: Although effort has been made in providing accurate information, MidStreet does not warrant that accuracy and is not liable for any errors or omissions. MidStreet, nor its employees, are licensed tax professionals or attorneys. Readers are strongly encouraged to confirm tax and legal issues with accountants and attorneys in your respective state or province. The article is based on information as of Spring 2022.
Choosing an Attorney With Transaction Experience
Your business is likely the largest asset you own and achieving a successful sale is likely very important to you. So why do owners often make this mistake?
Chances are, the attorney you’ve been working with over the years is not heavily experienced in transactions and lacks the specialized knowledge necessary to properly represent your interests against other attorneys who have been doing this for years.
But you trust them. And sharing that you are starting the process of selling the business with yet another professional that you haven’t met before might seem daunting.
Is it really necessary to hire another attorney or can you just get by with the one you have?
And does this mean you should stop working with your current lawyer and cut them out of the process, potentially damaging a trusted relationship forever?
Ultimately, the decision is up to you. However, we strongly advise you to consider hiring an attorney with experience in transactions. Why?
Benefits of Hiring an Attorney With Business Sale Experience
Ensure Your Interests Are Protected and Upheld
While a merger and acquisition (M&A) advisor keeps the deal moving forward to maintain your selling momentum, your attorney helps to serve as a counterbalance, bringing up possible risks.
MIDSTREET TIPIf you don't have an experienced attorney in mind, talk to your broker or CPA (if they're knowledgeable about business sales) and ask for recommendations. When you have an initial meeting with the attorney, ask them what their experience is in, how many deals have they done, and if they usually represent companies your size.
This is why it is important to work with the right lawyer. Using someone who’s inexperienced can cause the deal to fail or worse - tie you up in an unnecessary lawsuit.
NOTESome attorneys, usually those who lack experience with deals, may "run-off" with the deal and push issues that are not relevant, disregarding the seller's goals and interests. This creates a ton of obstacles and can destroy the deal.
Not all attorneys are made equal. To get the best results, find an attorney with good deal experience as well as one with empathy and understanding of your selling goals.
Ultimately, the attorney you pick needs to take direction from you. They can provide legal advice, but if your goal is to sell, your attorney needs to help you achieve that.
Draw up Contracts and Other Legal Documents
A while back an owner came to us and told us that he wanted to sell his business. When we asked who he wanted to use as legal counsel, he told us he had someone in mind. We met with the owner and their attorney and after receiving an offer from a great buyer candidate, their attorney told us, “I don’t believe in LOI’s; I like contracts.”
Since this attorney was not experienced with business sales, they weren’t aware that LOI’s are designed as a prelude to an asset purchase agreement and, in addition to non-binding provisions, often contain binding provisions, which could include: exclusivity, non-competition, and broker's disclaimer clauses.
With this lack of M&A-specific knowledge, a normal business attorney can get caught up in the minutiae of the selling process. Attorneys with experience in transactions have in-depth insight into what is “market” (what they often see) and can provide you with direction.
With a background on how a letter of intent (LOI), non-disclosure agreement (NDA), and asset purchase agreement (APA) are incorporated in a business sale, an attorney can spend more time analyzing these for your sale.
When they analyze these documents, they will consider the terms and the potential pitfalls that exist. As a business owner, you don’t know what maneuvers can be used against you, but your deal attorney will.
In most instances, the buyer’s attorney will draft language in the agreements that is very favorable to the buyer and is not favorable to you. This can cause issues if you don’t have experienced legal counsel to review these.
The documents will usually be drafted and revised by the following parties:
NDA - drafted by the seller’s attorney or provided by the broker and signed by the buyer. In some instances, buyers may redline an NDA. If this occurs, your broker will send the NDA to your attorney for review.
LOI - drafted by the seller’s attorney, the buyer’s attorney, or provided by the broker.
APA - drafted by the buyer’s attorney and redlined (revised) by the seller’s attorney until an agreement is determined.
Your attorney will also know the different stages of a deal and therefore when different ones come up and when certain ones need to be drafted.
Assist in Creating Deal Structures
Just as your attorney will know what is market for legal documents and the terms contained within them, they will also be able to assist you in creating deal structures.
An attorney is as critical for creating deal structures as your broker is. They will be able to help you balance the give and take in negotiations between you and the buyer.
For instance, a fairly common deal structure like an earn-out can seem straightforward but may be structured in a way that gives the buyer more power. In an earn-out, where a portion of your payment is reliant on certain goals being met, you want as much control as possible.
This control can look like clauses on the earn-out or a revision on how the earn-out is measured. Your attorney will be able to identify unrealistic earn-out structures and offer you advice on how to dictate the earn-out to increase your chances of receiving it.
Legal Issues and Litigation
There are a host of legal issues that a good attorney will help you identify and resolve - here are a few:
- The type of sale you should do
- If you are breaking any laws
- Copyright and trademark regulations
- How to resolve outstanding lawsuits
The difference between a stock sale and an asset sale can mean the difference in your taxation and the risk you retain. Your attorney and your CPA serve as an integral part of your deal team in helping you make this decision.
If you are breaking any laws, your attorney will advise you on how to remedy any issues you may have that you need to resolve. For example, they can advise you on how to get your real estate up to code before the sale.
One thing many business owners may not be aware of is copyright and trademark regulations. Your attorney will be able to help you resolve an infringement on a trademark or patent you may not have the legal rights to. You might need to work with an attorney specializing in patent law for this.
From our experience, if there is an existing lawsuit, a business sale will not close - depending on how severe the lawsuit is. For example, if the lawsuit threatens the business model of the company, the deal won’t move forward.
If you do have outstanding lawsuits, an attorney can help advise you on what needs to be resolved before you can move forward with listing your business.
Know The Value of Having an Experienced Attorney in Your Sale
If you were to prioritize the members of your deal team, besides an M&A advisor, an experienced attorney would be at the top of the list. They provide valuable and necessary legal counsel that no one else on your deal team will be able to offer.
However, by having a solid and complete deal team, you will be able to protect yourself fully in the sale of your business. Learn who should be included on your deal team by reading “Who Should be on Your Team of Advisors When Selling Your Business?”
As someone who has most likely never sold a business before, the nuances can be overwhelming and confusing. To get help selling your business, give us a call today.