You are selling your company for cash – up front. The buyer is doing due diligence, but you just care about signing the contract and getting the money, so no due diligence by you. So why does your lawyer spend so much time and send you a big bill? Here are some things your lawyer might handle in a “simple” deal like this:
1) Representations And Warranties (R&Ws) – Besides the buyer’s due diligence on you before signing the contract, expect the buyer to request loads of R&Ws in the contract by you about your company. (“As is” deals, with no R&Ws, are few and far between, and they generally bring lower prices because of the risks to the buyer.) Depending on how cautious – or picky – the buyer is, R&Ws can be maddeningly long and detailed – and they can be a trap! Long after the deal closes, if the buyer finds inaccuracies in your R&Ws, he might come after you and demand some money back. This can get sticky, as there could be arguments about whether the buyer was really damaged by the inaccuracies or whether they were just harmless errors. But you don’t want to wind up in that kind of fight, even if you win (in or out of court).
Your lawyer’s task is to wade through pages of R&Ws and seek to delete, modify, or limit them in ways that won’t trip you up later if you have overlooked something. Another task is to help you understand what is actually being asked of you in the R&Ws (this might require translation from legalese to plain English), and guide you in providing whatever information is needed for accuracy.
This not the most fun part of the deal for anyone; many clients can’t even sit through these negotiations. And it might wind up being the most time-consuming and expensive part. But time well spent by your lawyer now on R&W negotiations might give you the best protections later, after your deal has closed.
2) The Buyer’s Lenders – The buyer might be paying you with borrowed money. So the deal might require more than just negotiating with the buyer. The buyer’s lenders might want to conduct separate due diligence on you and they might demand post-closing protections on the buyer’s side (such as more nasty R&Ws) to keep the deal from going bad later and causing a loan default. So you and your lawyer might wind up negotiating with the lenders as well as with the buyer, and fielding the lenders’ due diligence requests, even though they aren’t even a party to your contract. This can turn into a three-sided negotiation, and lenders can be more demanding than the buyer. So before you even get started, ascertain whether the buyer needs financing to do the deal; if so, your lawyer might have to work through various issues with the lenders, even if you and the buyer see eye-to-eye on everything.
3) Noncompetition Agreement – Are you planning to take the money and enjoy retirement, or continue earning a living? If the latter, it can get complicated. If you read Part III of my blog series, “Top Ten Pitfalls In Negotiating And Drafting Business Contracts,” you know what can happen with noncompetition clauses. (If you haven’t read it yet, here you go – http://richardgalin.com/2014/06/17/top-ten-pitfalls-in-negotiating-and-drafting-business-contracts-part-iii-noncompetition-clauses/.)
While R&W negotiations can be long and tedious, noncompetition clause negotiations can be long and heated. After all, the potential conflict between the buyer and seller is clear – the buyer doesn’t want you to take business from him after he pays a lot of money for your company, but you still want to earn a living doing what you do best. And there is more involved here than just negotiating. There are laws and court decisions in many states about the permissible scope of noncompetition agreements, and each state can have different limits. Your lawyer needs to be up to speed, and might need to bring the buyer’s lawyer up to speed, on what is legal and what crosses the line in your state.
4) Post-Closing Employment Agreement – Your future plans might be a double whammy when it comes to legal fees. Per #3 above, the more employment freedom you want, the more heartburn the buyer might give you.
But let’s turn it around with this example: You are valuable to the buyer, and you want to remain with the company after you sell it. So part of the deal is for you to stay on with the buyer as an employee or consultant. That should keep you from competing, maybe more easily than a noncompetition agreement would. Now, though, there are two different deals and contracts being negotiated and drafted – one for the sale of your business, the other for your future relationship with the buyer.
You might know how to negotiate the sale of your business. Maybe you’ve been planning that exit strategy for some time. But if you’ve been your own boss for so long, do you know how to negotiate with the new boss who will be running your company? And are you getting stock options, performance bonuses, or other special incentives that have to be negotiated and drafted into your contract? Or are you more concerned about your future boss’ termination rights under the contract, given that you’ve been accustomed to doing all the hiring and firing.
You can’t leave yourself out in the cold in these negotiations. It might be all new to you, but many business lawyers deal with these scenarios on a regular basis, and you need the right lawyer. It really can get expensive, even though you thought you were just signing a contract and getting a check. But it beats getting sued later for a breach of R&Ws, or having your deal messed up by lenders whom you don’t even know, or being restricted from earning a future living, or getting tied down in a miserable employment agreement. Be prepared to pay for expert advice now, and enjoy life later.