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Is an Attorney Necessary, in Buying a Business?

March 28, 2012

Some of our best friends are Attorneys.  We are not the kind of Brokers that feel that Attorneys “break deals – they don’t make them!”  On the whole, we have excellent relations with Attorneys and get many referrals from them.  Certainly, we have had our share of Attorney-horror stories.  But we have also had horror stories about Sellers that kill deals; Buyers that kill deals; Brokers that screw up and kill deals…

But to succinctly answer the original question of whether an Attorney necessary, the answer is an unqualified

YES!  YES!  YES!  YES!  YES!

We have read that 70% of ALL of the World’s Lawyers are in theUSA.  There is unquestionably legal overkill, in some areas.  But Attorneys are like Insurance Policies:  You have no idea how vital they are, until they save your sorry butt!

The purchase (and sale) of a business can be a highly, technical transaction, legally.  As a Buyer, how do you protect yourself from debts and other liabilities that were historically generated by the Seller?  Is an Asset Purchase or the purchase of the Corporation best for you, and how does that relate to the previous question?  Legally speaking, does timing matter?  This is particularly true if you are dealing with permits and licenses, such a Liquor Licenses.  What about Employment Agreements that may be in place?  Or Employment Agreements that you may wish to attempt to create, when you take over the business?  How does Bulk Sales Tax affect your purchase?  This is something that varies from state-to-state, and it is something that is not only decided with your Attorney, but with your Accountant, as well.

What about contingencies to a Contract of Sale that allow you to withdraw from the deal without penalty or liability, if you find something has been misrepresented or undiscovered in prior discussions with the Seller or Broker?  That does not necessarily mean that they purposefully hid such a negative characteristic of the business from you; but such information can radically and justifiably cause you to change your offer or simply withdraw from the transaction – and you cannot do that if your Contract of Sale does not permit it.  Without contingencies, you could be facing a long legal fight, potentially costing you even more in legal fees than if you had simply worked with an Attorney in the review and development of the original Contract.

Most Brokers – and we are Brokers – are not Attorneys.  Some Attorneys do Business Brokerage, but frankly we do not feel that is an appropriate use of a Lawyer’s skill or time.  Many may be great legal minds, but lousy promoters of businesses, and even worse in performing positive negotiations.  In the initial negotiations, ideally you want to have the Buyer and Seller working toward a common goal, rather than in opposition to each other as you would in a lawsuit.  Moreover, does the Attorney still work on an hourly basis, when he/she is acting as your Broker?  (Most Business Brokers only get paid if and when the business sells.)  If that Lawyer/Broker is on an hourly rate, what is his/her incentive to get the deal done efficiently and quickly?  But that is another story…

Many Buyers and Sellers want to save a buck and ask us to do Contracts.  A smart Broker will not do that!  Ever!!!  For one thing, it is not legal, (at least inMaryland); that would amount to practicing law without a license.  Even as non-Attorney Brokers, we know that much.

Moreover, if we represent one party to the deal and try to write or review a Contract, and the other side of the deal has an Attorney, we would be completely out of our element, in negotiating technical, legal issues.  We would be doing a tremendous disservice to our Client.  It would be like going into a duel against a Navy Seal, and us never having used a gun before.

We sold a large Motel a couple of years ago, which was owned by a Bank.  The Bank AND ITS THREE (3) ATTORNEYS provided the Contract.  Our Buyer said he did not need a Lawyer and reviewed the Contract, himself.  We begged and pleaded for him to retain his own legal counsel, and we refused his request to help him read through the Contract.  We told him we were not adequately trained to do so, and we backed our concerns up verbally, in e-mails and even certified mail.  Our communications were in part to try to impress him with the critical nature of our concerns, admittedly as well as our effort to protect our own derrieres, from a legal perspective.

He went into the transaction on his own, and as a result, he probably incurred about 20% more in avoidable costs, than he needed to.  It would have cost him less than 2% of those cost overruns, in legal fees.

We had another Buyer who wanted us to write the Contract of Sale.  We told him we could not legally do that and that it would be to his disadvantage for us to do so.  Then the Seller retained an Attorney, and we emphatically explained to the Buyer that he must do the same.  He is no longer speaking to us – though he is going through with the deal – because he feels we are “just costing me a lot of money…I will talk to the Lawyer, but not to you!”  We are sorry he feels that way, but when we received a 23-page Contract from the Seller’s Attorney, we knew we were correct in our stand.

On the other hand – Attorneys, do not read this part – Attorneys are not gods!  And all Attorneys are not created equally.  Moreover, some have skills in specific areas that you would not use for buying or selling a business.  A specialized divorce Attorney would not necessarily be the best to author a business Contract of Sale.  This would be like asking your next-door Gynecologist to take your tonsils out!

In over a dozen years of being part of the Business Brokerage industry, we have had only two (2) Buyers lose their deposits; and in both cases, it was caused by negligence on the part of their Attorneys!  In both cases, we warned both the Attorneys and the Buyers of the danger of this occurring, with plenty of time in each case to avoid the loss, verbally and in writing; and in both cases, the Attorneys told us that we were not Lawyers, we did not know what we were talking about and to stop interfering with the professional relationships they had with their Clients.

Benjamin Franklin potentially said it first, but not in these words:  Question authority!  Do not assume that your Attorney knows everything about your transaction.  You need to protect your own interests from the other party in the transaction, from the Broker, from your own Accountant as well as the Seller’s CPA, from the Bank, Title Companies (if applicable) and from both Attorneys.  DO NOT ASSUME ANYTHING!

This is potentially the biggest business transaction you will ever do; it could financially make you, or ruin you, if you do not plan and research and monitor every step along the way.

We sold a business to an Attorney, once.  He was the walking stereotype of an arrogant, tough, shrewd, lawsuit-oriented Lawyer, and we dreaded the deal.  We thought he would be scrutinizing every syllable of everything that was said or written to and for him.  We thought the deal would take months and months and months to settle, if it settled at all!

No way!  It was the smoothest and even most enjoyable transaction we have ever done.  And when it was over, we said to him, “Nate, we were prepared to hate you.  How come this was so easy?”

The part we liked best was when he said we provided him with everything he needed to make an informed decision on each issue that came up.  But more importantly he said:

“When I represent a Client, in any transaction, I feel it is my duty to tell him/her all of the horrible things that can possibly go wrong, and prepare the Client by inserting protective language for each issue, in the Contract.  But as an Attorney, I know there are some things that have a billion-in-one chance of happening.  I know there are things that I would ordinarily contest or throw into a Client’s Contract that I just did not need to worry about.”

A suspicious mind might ask whether that such a Lawyer is “inserting protective language” truly for the benefit of the Client, or simply to ratchet up billable hours.  But, for whatever it is worth, think about that when your Attorney tells you, “This is language you need if a comet hits the Earth, and the Seller demands his money in the hours just before the comet hits…”

Remember that YOU are paying the Attorney; YOU are the boss!  There is a very delicate balancing act in arguing with your Lawyer, because you are paying him/her for his/her legal expertise.  But there are also issues of common sense that you need to keep in mind; and the Attorney also does not know the business as well as you do – IF you are doing your homework, before you ever get to the Attorney’s office.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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