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 doesn’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 upfront. 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 on 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.