BizQuest's Business for Sale Blog

Buyout Agreements - Don't enter into a partnership without one!

Question:
A friend and I are planning to buy a business together as a partnership. We have already created an LLC, but we were recently told that we should have a “Buyout Agreement” in place before we move forward. We are unfamiliar with this agreement, and skeptical about whether we need one since we are planning to run the business together, we get along very well, trust each other, and we then plan to then sell it together when the time is right. Can you offer any advice? I am also concerned that introducing this type of legality could hurt our business partnership before we even get started?

Answer:
You owe a big “thank you” to whoever told you to get a Buyout or Partner Agreement. It is absolutely critical. It’s great that right now you both get along well and you share the same vision about running the business and what the exit strategy may be down the road. However, the reality is that things change in life, and do not always go as planned. What if one of you gets sick and cannot work in the business? What if one of you isn’t contributing, or wants out? What if the business goes through some difficult times and cannot support both of you? What if when the so called time comes to sell, one of you doesn’t want to? There are a hundred “what ifs” I can give you that could change your situation.

The beauty of a proper partnership agreement is that you get it drafted and never have to look at it again unless there’s a problem or dispute. This way, everything is pre-determined from how to value the business, to what happens if the business needs money and one partner cannot afford it, what happens in the event of the death of one partner, etc., etc.

Let me give you a perfect example. My brother and I owned a business for many years together. He and I have a very close relationship. I would trust him with my life, but he and I both agreed that if anything happened to either one of us, the last thing we’d want is having the other’s spouse as our new partner. Plus, we knew that despite our admirable intentions initially, businesses sometimes do not turn out as planed, and we absolutely did not want to allow a business deal to alter our relationship or tear apart our family. And so it just made perfect sense to lay it all out as best we could before we began, with the hope that we’d never have to revisit the document. The business was incredibly successful and luckily we never had to pull out our original agreement, but if we did, it was already done for us.

If you and your partner are 100% compatible, and feel completely confident that you share the exact same vision, then introducing a legal remedy to cure any problems should not in any way negatively impact your relationship. If it does, then you both may need to question your business partnership altogether.

As a final word, you should know that these agreements can be fairly standard, and there’s no reason to spend a ton of money on an attorney to draft one but you definitely should have it done by a professional. In fact, you and your partner can probably engage an attorney together, tell them your wishes and let them draft it for both of you (there may be some legal issues here about who the attorney represents so just double check this with them). There’s no need for this to be a controversial transaction. The whole idea is to have something that is fair, acceptable and equal to both parties.

Buyer's Attorney is a Potential Deal Killer - Should buyer heed lawyers advice and require Non Disclosure Agreement from seller before giving personal financial statement?

Question:
I’m talking with a seller who has a business broker involved in the deal. I have signed their non disclosure agreement and have seen their financials and tax returns. They have requested my personal financial statement listing my assets and liabilities. My lawyer told me that they must sign a non disclosure agreement or something like that prior to me giving them this information. Actually, he says without it, I should find another business. Is he correct?

Answer:
I completely disagree with your attorney! Feel free to send him a copy of my reply as well.

So why am I being so harsh? Most attorneys, by their very nature and training, want to eliminate every possible risk for their client and this is understandable. However, one must consider the environment and particulars of each situation or you risk taking positions that simply do not make sense or put every deal in jeopardy. On the other hand, the good transactional attorneys protect their clients and once they know that the client wants to get the deal done, they make it work.

Let’s look at this situation: the seller/broker has provided you with internal financials and tax returns which are extraordinarily confidential documents. They obviously have faith in your sincerity and ability to execute the deal. All they have asked in exchange is a list of your assets and liabilities. They have not requested bank statements or any other pertinent back up data. They simply want to see that you have the financial capability to complete a transaction. If you are interested in this business then I would provide this information to them without question and forget about getting a non-disclosure from them. Above all, I certainly would not adopt the “take it or leave it” strategy that your attorney has suggested.

As a secondary note, while having an attorney on your team is paramount to any transaction, unless I’m mistaken, you really may want to reconsider this individual because there will ultimately be some points where you will have to be flexible in order to get this purchase done. Of course you must be properly protected, but the goal is to also buy a business and my gut tells me that this particular attorney will find a way to undo every deal.

As a final note, I must say that I’m glad you’re not taking you attorney’s advice without seeking someone else’s opinion. In fact, it’s a great sign of someone who can make decisions and this is a key aspect to being able to pull the trigger on a business down the road. Well done!

Do I Need to Hire an Attorney?

Q: Do I need to hire an attorney to check for any liens on the business or taxes owed? I'm already in the final stages of a purchase on a franchise. It is an existing one and I know what I'm getting into and have done all my due diligence. I would need the attorney to look over the buy/sell agreement, but won't any liens and judgments come up at escrow? It would be less expensive because the lawyer runs at 300 dollars an hour.

A: Personally, I'm not a big fan of most attorneys I have met in my lifetime, but that's another story. However; you need them to complete a transaction, and you absolutely must hire your own attorney to do a lien search. They may not necessarily all come up at "escrow", and why take the chance? The amount of money you'll spend compared to the size of the deal and the potential aggravation and legal expenses you will face down the road should you overlook something is meaningless..

Buying a Business in the USA - Immigration Issues - Issues that may come up if you plan to move the U.S. to buy a business

Q: I am interested in buying a business though I'm living overseas. I am planning on moving to the USA and I was wondering whether it is possible buying a business from overseas. Would I be able to get a green card and a loan? I am particularly interested in a child care centre or kindergarten as I am a fully qualified kindergarten teacher myself with leadership qualities. What deposit will I need for a business? And how will transactions and training by the seller work. I would be very grateful if you could answer my questions.

A: You raise some excellent points. Let me address them individually. The first thing you must do is contact and engage an immigration attorney. At the very least, get them to provide you with some general parameters regarding how to go about obtaining entry to the US. There is a ton of information on the Internet when searching: "US immigration information". As for your other points:

• It is very difficult to by a business remotely; impossible in fact. You need to be here, meet the sellers, evaluate the industry, competition, conduct a financial review, etc.
• Immigration law does not allow you to finance the purchase. You will have to pay cash for any business you acquire. You will also need to be here for a while to establish your credit rating.
• Seller training is a negotiated item. You can generally get the seller to stay for a reasonable period post closing (around 30 days or so) at no cost to you. Some businesses may require a far greater transitional period. Again, you can negotiate this part of the deal.

Protecting Yourself During A Business Purchase - Clauses in the contract can help alleviate some risks

Q: I'm considering the purchase of a distributor business I've seen and like. My only worry is that one of their customers generates about 40% of the business. How can I protect myself?

T. Jones - Aurora, CO

A: The seller has to guarantee that this client will remain on board for a least a year. That's why seller financing is key: if the customer disappears then you can have a clause to lower the balance of sale. As an example, let's say you pay 2 times Cash Flow. And this client represents $50,000/year in CF. If they stop buying within a year then you reduce the Balance Of Sale by 2 times the $50,000 or $100,000.

Your other option is to include an earn out clause whereby you agree on a total price of the business, but "x" amount is not paid at closing and only is awarded to the seller after certain contingencies are met during an agreed upon time frame. For example, after the first year, if the clients is an active customer, the earn out amount is considered to be earned. Also, try to negotiate this earn out amount to be paid as part of the existing or new seller note.