>>LEGAL – (March 2020) – Passing the bar doesn’t qualify a lawyer to do all things legal. The authors have been licensed to practice law in Florida for more than 42 combined years and have achieved the highest ratings for competency and ethics, but you do not want us to write your will, handle your adoption or chair your company’s litigation. In today’s legal environment, a lawyer needs to be a specialist to be competent, but intense competition often forces many lawyers to try to be all things to all people.
We routinely see this issue arise in the context of selling a business. Unfortunately, not only does the general business lawyer not know what he doesn’t know, neither does the owner of the business. As an entrepreneurial business owner, you have spent a good portion of your working life creating something of great value. Now, when it’s time for the most complicated and important transaction in which you might ever be involved, you should not hand your life’s work to a lawyer who may be well-intentioned and enthusiastic but is a novice at these types of deals.
How do you know if your lawyer can competently protect you from the risks that could reduce, or even completely eliminate, the amount you ultimately net from the sale? Any lawyer representing you in the sale of the business should be able to answer these four questions to your satisfaction:
- How many business acquisitions have you handled?
You want to interview lawyers who represent buyers and sellers in the sale of businesses as a regular part of their practice. In other words, corporate acquisitions are what they do routinely, as opposed to being something they dabble in. Ask for a list of transactions and seller references for deals in which the lawyer has been involved. In addition to quantity, the quality of the transactions is critically important. Ask whether the lawyer has worked on a deal involving a buyer that was a sophisticated private equity group or a public company. These buyers are often the most intense and thorough, bringing out the widest range of complex issues and establishing “market” terms. Even if your buyer is not an equity fund out of Chicago or Boston, you want a lawyer who is experienced in the issues raised and tactics employed by those buyers.
- Do you have a corporate/partnership tax lawyer (LLM degree in income tax) on staff and available to work on this deal?
Every sale of a business invokes complicated and critically important tax considerations. The purchase price in your letter of intent is a top-line gross number. What ultimately stays in your pocket is a bottom-line net number. Numerous issues affect the net number, not the least of which is taxes. Competent M&A tax lawyers can potentially save millions in taxes by identifying an issue, pointing out the implications and restructuring an element of the deal that would have gone unnoticed (until tax time) without experienced tax counsel. Remember, the net amount you keep is more important than the gross amount listed in the agreement.
- Does your team have the breadth of expertise and experience to handle issues that arise in a variety of legal disciplines?
The sale of your business will require assistance in some or maybe all of today’s legal specialty areas, such as real estate, data privacy, employment and employee benefits, intellectual property, environmental law and estate planning. Buyers routinely look for issues in these areas and can make demands to hold back substantial portions of the purchase price resulting from unexpected shortcomings in these areas. Your lawyer needs to be able to call upon reliable and available specialists from his or her firm in these areas.
- Can you tell me a little about indemnities, caps, baskets, limitations, exclusive remedy and R&W insurance? As a business seller, there will be 100 things you and your lawyer could fight about with the buyer. One benefit of experienced deal counsel is knowing which issues are important and which issues are not. If you fight about all 100, you will never sell your business. If you fight about none, you will probably have a result you will regret. The buyer will make considerable efforts to negotiate the right to get money back from you in various circumstances and through various methods, including indemnities. This nuanced negotiation is never outlined in the letter of intent and is usually negotiated toward the end of the deal, when the seller is emotionally and mentally drained. However, the outcome could make all the difference to you, so your lawyer should be able to communicate to you a strategy for limiting indemnity risk.
About the Authors
Matthew D. Armstrong is a partner in the Orlando office of Nelson Mullins and concentrates his practice on mergers and acquisitions, private investments and raising capital.
Doug Starcher is the managing partner of the Orlando office of Nelson Mullins and head of the firm’s Florida corporate team.