Q & A with Tony DeChello – Selling a Business

Q – Let’s talk about buying and selling a business. What brings people to you? What kinds of situations are they in? What kind of problems do they have?

A – Whether it’s buying or selling a business, in my view, the most important thing is to understand the business, to know what the key issues are, and to plan accordingly. Take, for example, the business owner who has run his or her business successfully for years, but there is no natural succession, whether it be family members or even key employees to take over, so you must test the waters by looking outside. The key is to know that process, to know what potential buyers are looking for, and to plan for it.

I’ll give you an example. If you’re looking to sell a business, it’s important that you have your house in order. By that, I mean that with key employees, you have employee agreements in place, non-compete agreements, confidentiality agreements, etc.  Those may seem like details, but that all adds value to the business, because the buyer coming in now has more certainty as to what’s going on. Next would be financial statements. There’s often a question of how legitimate financial statements are, is it easy to identify owner expenses run through the business? You should make sure that you put every nickel on the books, and that you consider audited financial statements if it’s appropriate. You’re making it easier for a buyer to evaluate your business going down the road. The same would be true for your key customers. Are your customers under a contract, and is the contract transferrable?  These things give the buyer some certainty in the cash flow that they’ve seen the business generate over the years. If it applies to the business, then that’s something you can work on to plan things to maximize value for the seller.

Q – This sounds more like a list of business consulting questions, not what I would think of as a typical list of “ask my lawyer” issues.

A – It’s all in how you view your role. My viewpoint is that I’m trying to provide the maximum advantage to my client.  I have years of experience in seeing the mistakes and the problems that arise when people haven’t dotted their i’s and crossed their t’s in terms of getting things properly prepared.

I’ll give you an example. A client with a cleaning service which does millions of dollars a year in business, but it doesn’t have any written contracts with its customers. So a buyer going in is going to look at it and say “how do I know that when there’s a change in ownership, they won’t say ‘oh, I was doing business with Jim Jones over here, and now it’s Sam Smith, so I’m going to put it out to bid.'” So, if you have planned through these issues, and set up simple contracts with your customers, now when the prospective buyer comes and meets with you ahead of time, you can give them this customer and contract information, and do so in a way where you have nothing but their best interests at heart.

Contrast that with the business broker or investment banker who is looking at the sale of your business as a one-shot transaction.  They may be viewing their task as liquidating the business, or converting it to cash. Not necessarily in terms of “how do I maximize the return and minimize the risk?   How to reduce the number of issues that a potential client or seller would have to worry about in selling their business?” That’s what I view my role as, trying to provide a comprehensive package where you work collaboratively with their accountant, their financial advisers and banker, etc., and consider all possible scenarios that could work to their advantage. If you have the time and the planning to take advantage of those situations, I can really better prepare the seller to get the most out of the sale.

Q – Is there a typical length of time that it takes someone to get their house in order and get ready to go with a sale?

A – It varies from client to client, and it also varies according to nature of the business. For instance, in some businesses, it’s kind of a closed industry and there’s a small population of potential buyers, so it will be quick. Either one of them is going to bite or not. If they’re not, you have to look at alternatives for how they sell, whether they bring somebody else in from outside the industry to run the business as opposed to a consolidation where they acquire and look for some synergies by the acquisition, or you bring someone from outside the industry to just take over the operations.

In general, though, there’s a solicitation period, and that solicitation of potential buyers can take a host of different forms, where the seller is identified or the seller isn’t identified and only discloses generic data about the business, or where perhaps the buyer identifies potential buyers that they’re willing to have the broker or the investment banker contact and identify the seller. There may be, for competitive reasons, potential buyers that are not contacted for fear that, if word got out that the seller is selling, it could hurt the seller either because the competitor is going to approach their customers or try to spread rumors or take action to hurt the company, so they don’t want that competitor to know that they’re looking to sell. So it varies from situation to situation.

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.