One of the most critical mistakes I've seen business sellers make is selecting the wrong attorney to handle their business sale transaction. Sometimes a business seller will insist on using a friend who is a business litigator or an attorney who helped them with other business or real estate issues but who has limited experience with business sale transactions.
Here are a few things to consider when selecting an attorney for a business sale transaction:
Here are a few things to consider when selecting an attorney for a business sale transaction:
- An attorney will usually get paid whether the deal closes or not. Since they typically bill at an hourly rate, their financial interests are not aligned with yours. The greater number of time-consuming issues they can bring up that need to be resolved, the more money they make. Good attorneys who are experienced at business sale transactions realize that if enough transactions fall through, it could impact their firm’s reputation and business development activities. Nevertheless, I have been involved in transactions where attorneys create mountains out of molehills and create enough issues that the deal has almost died unnecessarily, while racking up billable hours and creating significant angst for both the buyer and the seller. When selecting an attorney you will want one who not only is experienced at representing business sellers and buyers, but also who has a strong track record of getting transactions closed.
- The attorney’s specialty can have a dramatic impact on the outcome. An attorney who primarily does litigation may have a strong, competitive, abrasive, win-lose orientation that is antithetical to the cooperative, pragmatic, positive, win-win approach that most successful small business transactions require. Likewise, a general business attorney who isn’t experienced at business sale transactions may not be knowledgeable about, or skilled at, dealing with even the most common issues that arise in a small business sale.
- Some attorneys believe that they should be the primary person negotiating the major business deal terms rather than being a supporting member of the deal team. While some attorneys may be effective at leading negotiations, a skilled business broker or investment banker should usually be the one primarily negotiating the major deal terms. Your business broker or investment banker has taken the time to develop a deeper understanding of the business as well as the market and the acquirer. This knowledge will help the broker or investment banker gauge how hard to push for certain terms, at what point the buyer will likely walk, and whether if the deal falls apart there are likely going to be acceptable alternate buyers. The role of the attorney should be as a team member - providing input, bringing up issues and risk factors to consider, negotiating the legal points of the documents (for example, representations and warranties and indemnification language) and making sure that the legal documents used in the transaction accurately reflect the business terms that have been negotiated and provide necessary protections.
- Some attorneys do not have a strong knowledge of finance. A lack of financial knowledge can be detrimental if the attorney is actively negotiating the deal terms. For example, I was working on the sell-side of a transaction where the buyer’s attorney was negotiating terms of a seller note. Later, as he shared with me his monthly payment and balloon payment calculations, it became apparent that the attorney didn’t have a clue about how to calculate an amortized loan with a term that was shorter than the amortization – in fact, he didn’t even know how to calculate a fully-amortized loan! Using bizarre methodology, he calculated monthly principal and interest payments that were 24% higher than they should have been, and the balloon payment he came up with was 20% less than it should have been. Without understanding the financial implications of the transaction, he was not the appropriate person to be negotiating the basic terms of the deal. Whether you are relying on an attorney for help with negotiating the deal or not, it is good to use an attorney who has a strong understanding of business and financial issues. It may even be worth considering using an attorney who has an accounting background, an MBA, or who has owned a business.
- An attorney's risk tolerance may be mis-matched with your level of risk tolerance. In general, attorneys will be far more risk adverse than entrepreneurs. This is good because their advice can prevent you from doing stupid or overly risky things, but sometimes it will cause an attorney to push for deal terms that are unrealistic and inconsistent with how most more-risk-tolerant business owners would proceed. For this reason it is important to make sure that you are listening to and considering your attorney’s advice, but that you are still the one making the final decision. If you perceive that an attorney will be resistive to, and fight you on, making final decisions based on your personal risk tolerance level, then you don't have the right attorney.
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