Eric J. Gall | April 21, 2017
As most people know, attorneys can be your best friend or worst nightmare in small business. It all depends on how and when they are used. Below are my three rules for involving attorneys in a business transaction (in Florida):
When working in the Corporate world, it is quite common for two companies to work a deal on paper and then hand it over to Corporate Counsel to tie up all the loose ends. In the small business world, attorney involvement is completely different.
Corporate Counsel doesn't exist in small business. Legal expense is not a budgeted item. Small business owners' experiences with attorneys are often unpleasant, for example, initiating or defending a lawsuit. When it comes to a business purchase and sale, small business owners prefer to do the deal businessman-to-businessman and keep the attorneys on the sidelines. I both agree and disagree with this approach.
I agree all Purchase and Sale Agreements should be first negotiated businessman-to-businessman with the intermediaries (either a transaction business broker or both buy and sell-side business brokers) in-between to diffuse emotion, help answer sensitive questions, and solve problems. My experience has been eighty percent of the time when a buyer enters a negotiation to purchase a business with their attorney drafting the initial agreement, the deal fails. And even if it succeeds, half the time the deal winds up in litigation after the sale. Attorneys are paid to over protect their clients. When a buyer's attorney drafts the Purchase and Sale Agreement it is generally very one-sided. It immediately breaks trust and creates an adversarial relationship between the buyer and the seller. Small business deals get done when the buyer and seller like and trust one another. Break the initial trust and the deal is likely done or poisoned leading to post sale problems.
Intermediaries generally start with a neutral document (I use the Business Brokers of Florida Standard Asset Purchase Agreement) designed to equally protect the buyer and seller. If two intermediaries are involved, the buy-side intermediary puts together the initial offer. A neutral document will highlight where protections above and beyond the norm have been added allowing for easy review by the seller and their counsel. When protections are clear, an open and honest negotiation can proceed. When buy-side attorneys write the agreement, protections are often hidden or baked into the "legalese;" thus creating mistrust.
Rule #1: Have your intermediary write up the initial Purchase and Sale Agreement.
As an intermediary can help solve problems between buyer and seller, a third-party closing attorney will help solve problems between the buyer's and seller's attorneys. I always recommend the buyer and seller select a third-party closing attorney to handle escrow, draft the closing documents, and execute the closing. Of course, I provide recommendations based on location and expense. Third-party attorneys do a great job in keeping the buyer's and seller's attorneys from creating unnecessary turf wars with their resultant legal expenses. I've seen buyer and seller attorney bills greater than $25K per side when buyer and seller refused to use a third-party closing attorney. I've seldom seen buyer and seller attorney bills over $2K when a third-party closing attorney is involved from the initial placement of escrow.
Rule #2: Agree on a third-party closing attorney.
Where I disagree with this approach is I always recommend small business sellers and buyers to have an experienced business transaction attorney review all contracts. This includes the Purchase and Sale Agreement, the closing documents and any contracts that are to be transferred as part of the sale. In Florida, buyer and seller have five business days after the signing of a Purchase and Sale Agreement to have their independent counsel review the agreement and request changes. I have found attorneys seldom drive changes to the document that will break trust and kill a deal after the buyer and seller have initially agreed in principle to the transaction.
Rule #3: Use attorneys to review all contracts associated with the purchase and sale of a business.
This by no means constitutes legal advice and as stated using independent counsel to review all documents associated with a business purchase and sale is always recommended.
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com.
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