The Point of No Return

(The Purchase Agreement with special guest Margaret Salinas)

What’s wrong with lawyer jokes? Lawyers don’t think they’re funny, and other people don’t think they’re jokes.

A woman went to a lawyer and asked what her fee was.

“$500 for three questions,” replied the attorney.

“Isn’t that a little steep?” said the woman.

“Yes,” said the lawyer. “Now what’s your third question?”

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What do you call a lawyer gone bad? A senator.

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We all love a good attorney joke, until we get in a jam and need a good one on our side. But attorneys are probably better utilized as a preventative measure. I’m not a fan of having an attorney write up and/or review every document I sign, but there are some things I will not do alone. I’m good writing my own LOIs, but if you feel better having an attorney do yours, go for it.

The purchase agreement is another matter. Buying a business is a large, life changing purchase and deserves the extra scrutiny and cautionary measures that a good attorney will provide. On the other hand, like any of your deal advisors, your lawyer should be working to help make the deal happen, not to tear it to shreds. Yes, they are there to protect you and plan for when circumstances go awry, but they should be deal facilitators, not deal breakers.

Your family law guy or your estate planner is probably not the best person for this job. You’ll want an experienced business lawyer. One that has dealt with business sales for many years. That Letter of Intent I mentioned earlier that had no actual offering price in it? That was done on the advice of their attorney. SMH.

Anyhow, the buyer’s attorney, your attorney, should be the one to draft the Purchase Agreement, which is a binding contract. The Point of No Return. The form documenting every facet of this transaction. Other documents will need to be drafted as well, such as a non-compete, a bill of sale, perhaps “loan” paperwork too, if there is seller financing.

Right now, we’re going to focus on the Purchase Agreement, because it’s definitely the crux of the deal. As I said earlier, I am not an attorney so I’m not giving any legal advice. But I do have a great attorney friend out of Chicago. And let me tell you, she is no laughing matter. She is a kickass mom of a beautiful little girl (no, her name is not Sue) who was born last fall, as well as an M&A rockstar. Margaret Salinas is a principal with Chuhak and Tecson law firm. You can totally stalk her ​here​ or on ​LinkedIn​. (In a professional way, of course.)

The Purchase Agreement is kind of a gigantic document and of course it’s written in Legalese, so we thought the best way to break it down was with a Q&A session, so that’s what we did. All of the Q&A part is Margaret’s work. I added My Two Cents in italics. I’m dividing it into two articles for easier digestion, cuz this shit can definitely give you a tummy ache. Margaret is always happy to chat and would love to help on your next deal, or even offer a second opinion. Find her at the links above.

These things can seem daunting, but you aren’t expected to become the expert on legal documents. That’s why you hire an expert like Margaret. But, you do need to have a certain level of knowledge and competency, and interest in this facet of deal making for your own protection. No one knows you and your situation like you do😊

Here it goes:

PS: I may have to throw in a few more jokes to lighten things up. Please forgive my sense of humor…

QUESTION: What legal documents are required to finalize a business acquisition?

ANSWER:

If the transaction is an asset sale, the legal documents include:

• bill of sale· assignment and assumption agreement

• assignment of domain name(s)

• documents to transfer ownership of intellectual property (if applicable)

• certificates and resolutions authorizing the transaction from each party

• other various documents depending on the assets and the deal

If the transaction is a stock/interest sale, the legal documents include:

• assignment separate from certificate and newly issued stock certificates (if the entity is a corporation)

• or an assignment of membership interests (if the entity is an LLC)

• resignations, releases, certificates and resolutions authorizing the transaction from each party

• other various documents depending on the deal

Either type of deal can also involve:

• a seller note (if there is seller financing)

• a subordination agreement (if the seller note will be subordinated to a lender)

QUESTION: At what point should the parties begin drafting the purchase agreement?

ANSWER: Once the letter of intent (“LOI”) is executed or, if there is no LOI, once the deal structure (sale of stock/interest vs. sale of assets) and substantive deal terms are agreed.

My Two Cents: Consider beginning the purchase agreement once you are well into financial due diligence and are still comfortable moving forward with the deal. If you’re finding any massive deal breakers, I would hold off.

QUESTION: Whose job is it to prepare the initial draft of the purchase documents?

ANSWER: In practice, it is the purchaser’s attorney’s responsibility to prepare the initial draft of the purchase agreement.

In addition to the purchase agreement, the purchaser’s attorney will also typically prepare a majority of the other documents listed above, (sometimes referred to as “ancillaries”). When representing the purchaser, I prepare the first draft of the purchase agreement and a majority of the ancillaries because I have preferred forms that I’ve perfected over time and that are cohesive with the purchase agreement.

I would expect the seller’s attorney to prepare the seller’s certificate and resolution. However, every deal and attorney is different so it is not unusual for drafting responsibilities to be switched around.

QUESTION: Is it true that the party that writes the purchase agreement bears more responsibility if it were to go to court?

ANSWER: It is true that, depending on the applicable law, in the event the parties litigated over the language of the purchase agreement, the court construing the agreement may construe it more strictly against the drafting-party.

If you are the drafting-party, you should be sure language is included in the purchase agreement to provide support in the event this occurs. An example of such language I’ve used is: “The parties acknowledge that each party, together with such party’s legal counsel, has shared equally in the drafting and construction of this Agreement and, accordingly, no court construing this Agreement shall construe it more strictly against one party hereto than any other.”

My Two Cents: This is what I would consider a great insider tip. I made this discovery over a deal gone wrong, but it worked in my favor.

QUESTION: How much should I expect to pay my attorney for one deal?

ANSWER: It is difficult to give a quote for a deal without knowing the major terms, structure and possible issues or complexities of the deal. However, I suggest asking your attorney for their hourly rate and a quote or range at the onset. However, there are times where the range is exceeded due to an issue arising that requires many more hours of work or the deal drags on.

I’ve had many people ask me how much the legal fees will be for a purchase price of $X amount. However, the purchase price is not what determines the legal fees. Rather, they are driven by the intensity of negotiations, deal complexity and the amount of diligence required.

I have been involved with deals that landed around $20,000 in legal fees because the parties worked out major issues during the LOI phase, the seller was very organized and able to provide all of the requested documents efficiently, and there were minimal negotiations. I’ve also been involved in deals where the legal invoice exceeded $200,000 because the parties were at opposite ends of the spectrum in regard to the major deal terms, there were many rounds of negotiations and major “surprises” were uncovered along the way during diligence.

My Two Cents: Another good reason to work on your own negotiation skills. Ideally, you’re hiring the attorney to formalize the deal as you and your seller have agreed, and not to negotiate the deal for you.

QUESTION: What can I do to help keep my attorney fees down?

ANSWER: Attorneys charge by the hour. Therefore, anything you can do to decrease the amount of time the attorney devotes to your deal will help manage costs.

For example, some sellers are very organized and good at responding to diligence requests from the purchaser and completing their disclosure schedules. Others need more assistance from the attorney, which requires a lot of time (especially the disclosure schedules!).

If an attorney sends a document to review, the best practice is for the client to review the document in detail on their own and make a list of questions and issues to discuss with the attorney, as opposed to reviewing the document for the first time as the call begins.

Also, involve your attorney as soon as possible- at the LOI stage or even during preliminary discussions! If you are a purchaser, ask your attorney to prepare the draft LOI. If you are a seller, provide your attorney with the draft LOI to review and markup. The attorney should pre-negotiate the major deal terms in the LOI so that, when it comes to the purchase agreement, there should be minimal negotiations. It is better to find out that the parties are not on the same page at the LOI stage as opposed to later in the deal when more costs have been incurred.

My Two Cents: We may not 100% agree on all theses points… And that’s actually fantastic! You need to form your own opinion and figure out the best way to do deals on your terms and at your comfort level. I would not put my attorney in charge of collecting information from the seller’s side. That’s a job for you and your own assistant. Margaret does make a good point for a comprehensive LOI in order to avoid problems down the road. On the other hand, I wouldn’t want to over complicate things right off the bat. Again, you’ll find your own deal cadence with experience.

QUESTION: Does my attorney need to specialize in M&A?

ANSWER: Yes. M&A attorneys know what provisions are considered “market”, the language to add or push back on, and the best ways to allocate risk and decrease your potential liabilities. M&A attorneys know the intricacies of a purchase agreement, especially the more technical or complicated sections. They also know how to address issues outside the purchase agreement, such as analyzing issues that come up in diligence, assisting in obtaining third party consents and releases from lien holders, and generally guiding the seller or purchaser on the transaction process on a practical level.

I have been involved in a handful of deals where the opposing party’s attorney was not an M&A attorney and those deals did not go smoothly. It often adds a lot of expense and burden to the other side because the M&A attorney has to essentially direct the other attorney as to each step of the deal and take the lead on responsibilities (such as drafting documents) that would typically not be theirs. Experienced transactional attorneys also know the “rhythm” and process of a deal to get it closed as quickly as possible. Importantly, it ultimately hurts the attorney’s client. I have been involved in deals where non-M&A lawyers representing the seller review a purchaser-friendly purchase agreement and either immediately agree to the terms or negotiate terms that have little to no benefit to the client and completely overlook the provisions that would have been heavily marked-up by an experienced M&A attorney.

My Two Cents: Yes! Yes! And Yes! This is not the time to give your cousin’s wife’s brother-in-law that just passed the bar a chance to work on your deal.

QUESTION: Should I expect my attorney to facilitate closing and be at the closing?

ANSWER: Yes, absolutely! For the last 10 or 15 years, closings have been conducted remotely by e-mail. Therefore, the parties sign the closing documents or signature pages in advance, e-mail them to their attorney and they are held “in escrow” until the closing. Depending on the transaction, most (if not all) closing documents can be signed electronically. Instead of meeting in a conference room, the parties will decide on a closing date and e-mail everything required to the other side in advance of such date. Once all deliverables are exchanged and documents are signed, the parties can proceed to close. This typically involves the parties and attorneys getting on a call (referred to as a “closing call”), where each side confirms they have everything they need and releases their respective signature pages. At that time, the purchaser will initiate the wire payment(s) and the seller(s) will thereafter confirm receipt of the wire(s). After closing, the purchaser will put together and distribute a closing set (in PDF format) for each party to keep in their records, which includes all the signed closing documents and various closing deliverables.

My Two Cents: I’ve actually never heard of this closing procedure. This must be the way they do it in the big city.😊 Honestly, the thought of signing documents for them to be held in escrow is uncomfortable. I threw a fit at the eye doctor’s office last week when they asked me to sign a blank screen with no indication of what I was signing. Then, they could barely produce a copy of the document with my signature on it.

QUESTION: What are the biggest issues you see in Main Street M&A?

ANSWER: In my experience, the same issues can arise in the smallest of deals and the largest of deals. From a legal standpoint, the biggest hurdles I see in Main Street M&A are not entering into a properly drafted LOI and diligence issues. Entering into a poorly drafted LOI can be costly and leave a party with unfavorable terms in the end. It is an uphill battle to argue for significant changes to terms already agreed to in the LOI.

The diligence issues arise from some sellers not having readily available copies of documents and records requested by the purchaser, such as corporate/organizational documents, real estate/lease documents, material contracts, employee documentation and financial documents. Properly preparing for the sale of a business can save sellers a lot of effort and cost. I previously prepared an article for sellers, which discusses five things they should do to prepare to sell their business.

My Two Cents: Hmmm…? Maybe we should pick Margaret’s brain on the Letter of Intent next. And due diligence? No offense to business sellers, but many of them know remarkably little about the finer details of their operations.

This was a great overview of how business buying works on the legal end. Next issue we’ll get into some of the finer details of the purchase agreement around topics like liens, employees and real estate, to name a few.

One more for the road, and speaking of road:

Why did the lawyer’s chicken cross the road?

Because he had an easement!

Peace Out!