IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by David Cook, managing attorney of the Sovereign Legal Group (www.sovlg.com):
When Should You Get an Attorney Involved in the Business Sale Process?
The answer depends on the condition of your operations and records, and on your management style and personal preference. Most sellers think they are excellent, but then again, most sellers aren’t able to look through the lens of a potential business acquirer (or their advisors), and bristle when the questions and requests start getting more pointed. Candidly, in approximately 80% of the sell-side transactions I’ve worked on, I was pulled in when a buyer was already identified and an LOI was already being drafted. But if you are following the IBA blog, you almost certainly appreciate the value of engaging a business broker to represent your interests, and that a great deal of their value lies in the preparation & execution of the sale. A good broker helps you, amongst other things, establish valuation parameters, prepare for and run the process – notably, identifying and negotiating with potential buyers. So how does the attorney fit in to this preparation…?
The “Pre-Inspection” Approach
Increasingly, brokers and other advisors are bringing us into the process earlier. Why? It’s not unlike the upscale residential real estate market, where it’s now commonplace for brokers to order pre-inspections before listing the property. What we do is similar. Over the course of 20 years and approximately 150 deals, we already know what your buyers will likely ask for and want to see – beyond the basic financial and operational information your broker will help you organize. We’ve developed industry-specific due diligence checklists (which we use when representing buyers). By working these diligence checklists in advance with a seller, we accomplish three primary goals: 1) avoid the stress, mistakes and delays associated with a rushed diligence gathering process; 2) the seller looks polished, which instills confidence in the buyer; and 3) if we spot issues, we have time to triage them before going to market.
What are the Common Areas of Focus?
The following are the most common areas, but typically there are several others we help prepare for.
Facility lease. What are the assignment provisions? How long do you have control on the building? Should you anticipate any pushback from the landlord on the assignment, or might they use this as an opportunity to renegotiate new terms? When and how should we engage the landlord to optimize the outcome?
Customer contracts and related documents. Are they “automatically” assignable? How well do you insulate the business from any liability, and is there any ongoing warranty or other liability for products or services you’ve delivered? Do you have collection leverage, such as late fees, interest and attorney fee clauses? Does it make sense to take a more aggressive approach to collections in advance of the sale process?
Employment arrangements and documentation. Can you demonstrate compliance with applicable regulations, including PTO and right to work acts? What does your L&I and ESD rating look like, and do you have any pending or past claims to explain? Do you have any bonus plans, equity or other non-salary/wage compensation arrangements (whether in writing or by historical practice)? How certain are you that you’re in compliance with all wage and overtime regulations – and can you support your classification of employees as exempt?
Corporate Governance. Are all your organizing documents available and in good order? Do your bylaws or operating agreement fully and accurately reflect the ownership and management of the business? Do you have all the federal, state and local licenses and permits that are required to operate? Do you have multiple owners, or any options or equity rights? When and how do you involve them?
The “Four Ds”
Of the approximately 20% of sell-side transaction clients that do bring me in in advance, the seller is typically a highly organized Type-A personality, and often someone who had been through the process before. In this past year, I sold 3 businesses where I had represented the owners on the purchase of the same business years earlier. They wanted to be as prepared as possible to minimize the potential for the “Four Ds” – Delays, Dings in price, Disengagement of the buyer, and post-closing Disputes. By putting in the prep work, we were able to not only avoid the Four Ds, but foster an efficient process that resulted in timely closings that maximized value for the sellers.
David Cook is the owner of Sovereign Legal Group, PLLC – a firm he founded in 2009 to focus exclusively on privately held Northwest businesses, with an emphasis on M&A transactions. Previously, he served as general counsel to a regional investment banking firm, and prior to that, oversaw acquisitions for Digital Insight Corp (Intuit’s online banking group). For more information, visit: www.sovlg.com
David Cook is the managing attorney of the Sovereign Legal Group. If you have questions about the content of this article or any area relevant to Mr. Cook’s expertise please contact him at (206) 788-5222 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.