One of the most painful mistakes I see business sellers make is to select the wrong attorney to handle the business sale transaction. Sometimes a business seller will insist on using a friend who is a business litigator or an attorney who has 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 to help with the process:
1. An attorney will usually get paid whether the deal closes or not. Since they typically bill at an hourly rate, their financial motivation may be to bring up as many issues that need to get resolved as possible. Of course, good attorneys realize that if enough transactions fall through, then it could impact their firm’s 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 massive 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 the transactions closed.
2. 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 some of the common issues that arise in a small business sale.
3. Many attorneys think that they should be actively involved with negotiating the major business and deal terms. While some may be very effective at doing so, generally speaking that’s probably not the best role for them. If you are using a skilled business broker or investment banker, they should be the ones primarily negotiating the major deal terms. Your business broker or investment banker has likely thoroughly analyzed and more intimately understands the business as well as the market and the acquirer. This knowledge will help the broker or investment banker to better understand how hard to push for certain terms, at what point the buyer will likely walk away, and whether if the deal falls apart there are likely going to be acceptable alternate buyers. Usually the role of the attorney should be to provide input, bring up issues to consider, and make sure that the legal documents used in the transaction accurately reflect the business terms that have been negotiated and provide necessary protections.
4. Some attorneys do not have as strong of an understanding of business and financial issues as people may believe. Consequently, if they are negotiating the deal they may not have the business and financial knowledge necessary to effectively negotiate. For example, on one transaction I was working on the buyer’s attorney was negotiating heavily on terms of a seller note. Later, as he shared with me his monthly payment and balloon calculations, it became very 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 was supposed to be. 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 be worth locating an attorney who also has an accounting background, an MBA, or who has owned a business.
5. Attorneys tend to be very risk adverse. This will sometimes cause them to push for deal terms that are unrealistic, or may cause them to encourage you to move forward in ways that may be dramatically different than the way most business owners, who are more risk tolerant, 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 making the final decisions. If you perceive that an attorney will be resistive to, and fight you on, making the final decisions based on your risk tolerance level, then keep looking for someone else.
6. An experienced business broker or investment banker can likely make excellent referrals of attorneys they have interacted with who have demonstrated success in getting small business transactions successfully closed.
Codiligent Business Brokers – Portland, Oregon based business brokers representing sellers of businesses with $500k – $20 million in annual revenue. To schedule a free consultation to discuss the possible sale of your business you may contact Eric Williams at 503-535-8817 or E@codiligent.com
