We had the opportunity to ask Steve Parr, Corporate Lawyer and Founder at Parr Business Law, the top 7 legal questions we get from buyers/sellers.
Below are his answers. Not one for reading? Skip to the full video at the end! ↓
1. Before someone decides to sell their business, is there any legal work they should do before listing?
Yes, there is, but you’re not going to know what it is until you take a look, as it will be particular to that specific business. What I see a lot of times with owner managed businesses is that they come to me with their books (corporate financial records) and they are not in good shape or properly kept. This will create uncertainly in the deal.
ADVICE: Before signing on or uploading information for your business sale, work with a corporate lawyer to ensure that your books are in good shape, cross all the T’s and dot all the I’s so that you don’t run into any hiccups.
2. Are there special types of lawyers I should use for my business sale?
Yes, lawyers who have done this before. That’s the short answer. You don’t want to be asking your family lawyer, or criminal lawyer, or anyone that practices outside of the corporate law field. M&A work is quite technical, and requires a substantial amount of experience. Additionally, working with a lawyer that you just have a good vibe with is essential, because you’re going to be communicating with this person quite a bit.
ADVICE: When you’re working with an advisor or lawyer, you want to ensure that this is their area of expertise. Ideally, you want to find someone who is very well connected with other types of advisors who work in the same space; business brokers, accountants, insurance advisors - all these individuals come in and play a part in the transaction. Check references, ask candid questions from the get-go and ask around about them.
3. Should I have buyers sign an NDA?
Yes, your company information is confidential and it should be treated as such. It also shows a degree of respect on the buyer side, if they’re serious enough there’s no reason they would refuse to sign an NDA with respect to the information they are about to find out.
ADVICE: Ensure an NDA is signed before buyers access your buyer presentation. (Don’t worry - DealBuilder has this feature built in)
4. What is a common mistake you see sellers make during a transaction?
One is that they may not have considered the consents that are required. For example in a share sale, they are selling all the obligations that company has as well. So, the seller may have entered into all kinds of vendor contracts, leases, things of that nature and so one mistake they might have made is that they need to obtain the consent of the landlords/vendors etc that have relationships with the sellers company. I’ve seen that overlooked and that can really jam up the actual closing of the business transaction and requires extensions and all kinds of headaches.
A bigger one is probably on the tax side of things, where they haven’t consulted with a good tax advisor and perhaps if they are doing a share sale they may not be eligible for lifetime capital gains exemption if they haven’t done their homework.
ADVICE: If you're selling, it’s a long term gain. Earlier you think about these issues, the earlier you can surround yourself with the right business broker, the right tax advisor, the right lawyer, everything’s just going to be so much easier and you will get the outcome that you want.
5. Offers or Letters of Intents (LOI’s) are typically non-binding in a business transaction. How seriously should I consider them?
The general purpose of an LOI or a term sheet is to structure the deal and to save you time, money, and legal fees down the road. So, if you have a letter of intent set up properly that reflects the terms that the parties are intent on pursuing, then it’s just going to save you time. An LOI can be very helpful because (unfortunately) many deals never close because of a lack of certainty or clarity on terms.
ADVICE: Yes, they should be treated seriously. LOI’s usually do include some binding terms, like a non-disclosure confidentiality agreement etc.
6. What is a typical mistake you see a buyer making during a transaction?
Lack of due diligence, or not digging deep enough. This is where a lawyer will become very helpful. Another one is not knowing how to negotiate, not understanding what the appropriate dynamics are for negotiation and how to get more value out of the deal. There are a lot of different ways to structure a deal, and it’s something that shouldn’t be done alone.
ADVICE: Surround yourself with the right people and professionals that help you negotiate and bounce ideas off of. This is going to be very, very useful.
7. How much will hiring a lawyer cost to sell my business?
This is completely dependant on what’s required. Larger businesses will have more complexity and there will be a higher degree of risk. It really varies. With a business that’s worth $200,000, there will be a practical cap on how much you’re willing to spend, because it just doesn’t make sense to spend $20,000 in legal fees. For a really small business, you’re probably looking at around $5,000 and it goes up from there.
ADVICE: The best thing to do is once you’ve had a few chats with different lawyers and figured out who it is you want to work with, they should be able to provide you with a quote. M&A is notoriously open-ended because of course the dynamics of a deal can change all the time. Clients need to be prepared for that and need to be cognizant that this is an area that is going to be very resistant to flat fee arrangements. That said, you should be able to at least get a scope or range of fees from your lawyer.