Q & A with Tony DeChello – Buying a Business

Q – Let’s talk about someone who is looking to buy a business. Say they’re a successful carwash operator, and they’re looking to acquire a carwash in New Haven. Is that a normal example of the situation?

A – Precisely, and now in that case, we start with identifying what the client is looking for in a buyer. In the carwash example, the most important thing to a carwash is the physical location. Is it in a high-trafficked area? Is the location convenient? If it’s a destination kind of location, where the people have to go looking for you for the car wash, that’s not what you want. You’re looking for the potential impulse, where “oh the line’s not long. Let me drop by and get a car wash.” That kind of thing. So, in many cases, if someone is interested in a carwash or or perhaps a franchise, it’s location, location, location. They may be doing some demographic studies, how many people are there within a mile radius? 3 mile radius? Half-mile radius? That kind of thing. There may even be brokers or investment bankers that specialize in that sort of industry, who can guide them in finding those kinds of sellers.

Trust me, if you’re a buyer and you let the word out that you’re interested, the word is going to get out to the right people. It seems that brokers always have their ears to the ground when they’re trying to sell something, and through word of mouth, it comes out. I’ve had instances where clients have just sent out postcards saying “I’m interested in acquiring your business. Contact me confidentially,” and it has worked.

Q – Give me an example of your involvement in helping a business buyer make a better purchase.

A – For the buyer, the most important thing is to do due diligence. Due diligence occurs at a number of levels. One is from the organizational standpoint. Is it going to be an acquisition of assets, or an acquisition of stock, or ownership interests, and for each there are different issues and concerns that come into play.

In general, the most important thing for the buyer to do is to drill down and to see what is the core of the business that they’re buying. Is it a certain relationship with their customers, is it that they have a product or service to offer that’s unique and in demand? Is it that there are some key individuals in the company that are integral to the success of the business?  If so, what do you do to protect them and guide them, to make sure that the buyer is getting what they think they are getting, and that what they’re buying is not coming with all kinds of contingent liabilities, with potential lawsuits out there and the like.

It’s just a matter of understanding the business, asking the clients the questions to know the information that you request from Seller  as part of the due diligence process, that then work their way into the representations and warranties in the purchase and sale. You would hope that a buyer looking to buy a business would have some background and experience in the industry. It’s unusual for a buyer to go in cold with no prior experience, and buy a business, and run it successfully. In many cases, people learn from experience, and you hope it’s a good experience as opposed to a bad experience.

Q – I think when most people think of a lawyer, they think “ok, look at this contract, does it have any problems? Look at this purchase agreement. Ok, we’re done.” You’re talking here about a set of issues that goes beyond that narrow definition of lawyering.

A – Absolutely. I think it’s what distinguishes an experienced lawyer, or a lawyer who really has the best interest of the client at heart, from someone who’s looking at it as a one-time transaction. I tell clients all the time that a contract is only as good as the people that are behind it. You could go and search the internet for a form contract, fill in the blanks, and you’re ready to go, but you’ll find that there are a whole host of issues that are not even considered in that contract.

I’ll give you an example. In the state of CT, a seller of business assets is required to make sure that their employees’ taxes and all taxes due to the state of CT, such as sales taxes, employee withholdings, corporate income tax, are paid. There’s a statute that says if a buyer buys the assets and if there are unpaid taxes, there is the equivalent of a lien on the assets that are sold, and that the buyer could be obligated to repay if there are state taxes owed. That can be a nasty, unplanned shock for the buyer.  There’s a way to get around that, where you can get what’s called a “tax clearance letter” from the state. I’ve seen many lawyers who are representing the buyer, who don’t put in the contract that the sale is contingent on getting the tax clearance letter. They just don’t know that it’s a potential issue..

I had a car dealership I represented in a sale, and now think about the amount of taxes a car dealership owes, especially if there are sales to buyers out of state and the like, or other potential issues for where sales tax is due. Here, it was an out-of-state buyer for the dealership, with an out-of-state lawyer, and they didn’t know about the importance of a tax clearance letter from the state. I was representing the seller, and it wasn’t my obligation to warn them, so they went ahead with the purchase. Luckily, my client was very fastidious in staying on top of things, but it’s a big potential risk that’s out there.   That’s just one instance.  There are many more.

It’s all a matter of the experience that you have in handling these transactions, and being able to guide people.

  • If you’re a buyer, in many cases you’re going to want a non-compete from the seller, since the last thing you want to do is go and buy the seller’s assets, and a year later they turn around and open up a new shop down the street, and the customers go down the street to him because there’s a longstanding relationship.
  • If you’re a seller, you want to make sure that there are nondisclosure agreements. That would mean that the buyer can’t use or disclose the information provided as part of the due diligence if they don’t purchase. If you are a buyer you also want nondisclosure agreements so the seller and the employees couldn’t take the confidential information of the business and either provide it to competitors or use it to their advantage and your disadvantage as the buyer of the business.
  • You’d want to make sure that there are indemnities, that if issues arose after the closing, that the seller was going to pay you or protect you from those claims, and in many cases you ask for an escrow so that you know there’s a pool of money specifically being held in case claims arise. Likewise, whenever I represent a seller, one of the first things I talk about is a cap or limit on the indemnity, because why would I want to sell you my business for $3m and run the risk of getting a lawsuit for $5m. I prefer to discuss that issue right up front. The same holds true for the amount of the escrow. If you’re a seller, and you’re having an escrow, you’d certainly like it so that the cap on your liability was equal to the escrow so that you could sell and go to sleep at night knowing that, absent fraud, the money you received on the sale is yours to keep.

So, it’s very dependent on whether you’re representing the buyer or the seller. But, if you don’t do this as a regular and consistent basis , you don’t always know the ins and the outs, and you don’t really deal with the issues enough to know how to be creative and come up with ways of enabling a sale to go through that’s in the best interests of your client, whether it be the buyer or the seller.