I have seen a number of people lately who are buying businesses from brokers.  This is a very common method of finding and purchasing smaller micro-businesses and even some small companies.  But many of these folks are coming to an attorney too late in the process.  An attorney should be involved from the beginning.  If you bring me a signed letter of intent or agreement to purchase, after the expiration of the due diligence period, and after things are already not going to according to plan, then don’t be shocked to learn it is going to be a lot more difficult to get the deal done according to the terms you want.

So why do they delay? I can’t answer that question with any certainty but I would suggest it may be because they are putting too much reliance on the broker.

Understand, the broker is not a neutral third party.  The broker does not work for the buyer.  In most  cases, the buyer will never sign a document that contains any promises or assurances from the broker.  In fact, most documents will include clauses expressly limiting the buyer’s reliance on the broker.

Why? Because the broker works for the seller.  The broker is hired by the seller to sell the company.  The broker gets paid based upon a successful transaction.  This means two things: (1) the broker wants to keep the seller happy; and (2) the broker wants to see the transaction concluded.

Neither of those incentives work to the buyer’s benefit.

Now, I do not mean to suggest that broker’s try to cheat buyers or hide information.  But the fact is the broker’s incentives align with the seller and not the buyer.

Here are a few more reasons a buyer should retain an attorney for the transaction:

• In many cases, the buyer is buying a business for the first time and has little or no experience in conducting an appropriate due diligence investigation.
• The forms used by brokers are often just that: forms.  They are used for each and every transaction and minimal effort is put forth to customize the agreements for a particular transaction.
• Remember, the broker works for the seller, so many of the form agreements are drafted to be pro-seller.  For example, many of the representations and warranties included in a well drafted purchase agreement are excluded from broker drafted forms.
• Some brokers use escrow attorneys retained by the broker to conduct a “due diligence.”  But if you read those documents closely you will usually find a disclaimer stating that the buyer may not rely upon the attorney’s work.  Why? Because he works for the broker, who works for the seller.

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The Act achieves this by relaxing some of the regulations that previously restricted the availability of funds for small and emerging companies because of the regulatory burden or outright prohibition under archaic rules.

Here is a copy of the JOBS Act.  Look for a more detailed post about this important piece of legislation next week.

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This morning, I came across a blog post titled When to hire a Lawyer for Business Matters (and when to Do it Yourself).  Now, I have never commented on the ads run by companies that have tried to commoditize legal advice.  The are private companies out to make a profit and it is their right to advertise their products.

But I had to talk about this blog post for one very important reason: it is on the SBA website.   The SBA is suppose to be a source of sound advice.

First, let’s clear the air.  I am a lawyer who represents small and closely held companies.  If my clients decide to handle their legal issues on their own then it hurts my practice.  So clearly, I have a financial interest in dispelling the assertions in this post.  But there is a flip side to this as well.

The fact is that lawyers often end up making more money off clients who attempt to do things on their own.  Inevitably they get sucked in by this type of argument and are stunned to find out they did not quite get what they were expecting.  It costs a lot more to pay me to fix your problems on an hourly basis than it does a flat fee to protect your business up front.  Think about this, is it easier (meaning cheaper) to do things right the first time or to go back, cleanup a mess, and redo everything correctly?

Now, allow me to comment on the five topics Caron Beesley suggests do not require the assistance of a lawyer…

“1. Naming your business and claiming a trademark – The process of naming a business isn’t as simple as just picking a name and running with it. If you choose any name other than your own, you’ll need to file a “Doing Business As” Name. ”

• Not accurate. You don’t always have to file an Assumed Name Certificate  (Texas’s version of the dba) when you operate under a title that includes more than just your name.  Also, the fact that you include your name in your company name does not exempt you from having to file an Assumed Name Certificate.
• As for claiming a trademark, step one according to the SBA’s page linked in the article is to “Determine whether your product is eligible for a trademark.“  But that’s it.  No information on how you can make that determination.  Guess what, USPTO filing fees are non-refundable.  The government thanks you for your contribution.
• I would also note that even the USPTO agrees, “a private trademark attorney (not associated with the USPTO) may help you avoid many potential pitfalls.”

“2. Legal structure for your business – Entering into a partnership agreement or forming an LLC can be done without legal assistance. You can also use the services of an online broker such as LegalZoom, MyCorporation, or The Company Corporation.”

• Every partnership should have a Partnership agreement and every LLC should have a Company Agreement.  These are separate and apart from anything filed to actually create the entity.
• Point of fact: you don’t actually need to file anything to create a partnership.
• Each type of business entity is governed by a set of statutory defaults that are in effect unless they are modified via a Partnership Agreement, Company Agreement, or Shareholder Agreement.  Do you know what those rules are?  Do you know whether those rules are how you want to run your company? Do you know which rules you can modify by agreement and which rules you cannot?
• Dirty little secret: most of the documents provided by these companies simply guide you through making elections under the default rules.  Want any actual effort to draft documents specific to your company? You’re on your own. Or hire a lawyer.
• Really?  It’s ok to do it yourself on the LLC and Partnership, but not the corporation?  Is there any difference in the degree of difficulty between drafting bylaws, resolutions, and a Shareholder agreement versus a Partnership or Company Agreement?

“3. Filing and registering the paperwork to start a business – Most of the legal steps involved in starting a business can be handled without the help of a lawyer.  This includes applying for the right licenses and permits, registering your business for tax purposes, and applying for an Employer Identification Number (EIN).”

• Eh, this is probably the most accurate statement in the article.  We could argue over whether a lawyer is more apt to accurately assess the licensing and permitting requirements but in truth that depends upon each lawyer’s unique experience.  Every industry has different requirements.  If the owner has been in the industry for a while it is entirely possible they are in a better position to ascertain those requirements.
• As for the tax registrations and EIN, there is such little effort involved in these activities that filing them is a tiny factor in any fees charged by a lawyer.

“4. Creating contracts and non-disclosure agreements (NDA) – Customer contracts, partner or vendor agreements, and NDAs can all be prepared without the assistance of a lawyer.”

• OK, but do you want to be able to enforce them?  I could see certain situations where a client could adequately draft basic customer contracts and vendor agreements.  But why take the risk?  Your livelihood and the success of your business depends upon getting paid.  The words in that contract dictate everything about when, where, why, and how you may or may not get paid.  They dictate your remedies should a customer not pay.
• In regards to the partner agreements, see my comments to point #2 above.
• As for non-disclosure agreements, this is a big red flag.  If you have something worth protecting, something worth going through the effort of drafting a non-disclosure agreement, then it is worth paying a lawyer to draft it.
• NDA’s are very difficult to enforce even when they are perfectly drafted.  The enforceability of these agreements often comes down to key words, the type of information involved, and even the timing of signing the document in relation to exchanging information.
• NDA’s are almost always accompanied by non-compete agreements.  Those aren’t on the do it yourself list.

“5. Creating buy-sell agreements – If you are in a business partnership or an LLC with multiple owners, you’ll need a buy-sell agreement in place to protect you, in case a co-owner dies or wants to transfer ownership.”

• Often these appear in as part of Partnership, Shareholder, or Company Agreements so see my comments to #2 above.
• Or gets divorced in a community property state (Texas), or an owner wants to terminate the company, or any number of other reasons you may need a buy-sell agreement.
• Do you understand the various options for funding the purchase price under such an agreement?  The valuation options?  How about the tax impact of who owns any insurance policy used to fund the purchase?
• Note, the page linked in this subsection concludes with “it is always smart to consult professional advisors, including an attorney, accountant and insurance agent before finalizing the Buy-Sell Agreement.“

Now, I want to point out that Caron states at the beginning that these are simply guidelines but some of these suggestions are dangerous.  They can lead to serious problems for business owners who are unaware of the pitfalls involved.  These are the types of suggestions that land business owners in an attorney’s office saying, “but I thought I was protected.”

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If you’ve come here via search and you found this instead of the search result you were looking for then I apologize.  The content will eventually be recreated and loaded into the blog. You can also use the search box to the right to try and locate the information you were looking for in its new location.

For now, take some time and look around to see what information is available.

Dave