Barbara Taylor and her husband Chris are the founders of Synergy Business Services, a business brokerage company. She’s a regular blogger on “You’re the Boss,” a feature of the New York Times’s Small Business section, which is where I discovered her. Then I learned that she lives and works in Northwest Arkansas.
I posed several questions to her:
1. At what stage-if at all–should you ask for a lawyer’s assistance in purchasing a business?
I see some clients – most of whom are sellers – get an attorney involved as soon as an offer to purchase is presented by a buyer, which is typically done in the form of a non-binding Letter of Intent or Term Sheet. However, I’d say it becomes mandatory to get attorneys involved as soon the LOI has been signed and both parties have moved into the Due Diligence phase of a deal.
More often than not it’s the buyer’s attorney who will be drafting the Definitive Agreement (either an Asset or Stock Purchase Agreement, depending on the situation). As a buyer, you will more than likely want your attorney to help you draft an LOI to present to the seller. Once an offer is accepted, ask your attorney to start drafting the Definitive Agreement right away.
If you’re a a seller, I recommend that you send the first draft of the Definitive Agreement to your attorney immediately, and keep him or her involved throughout the remainder of the ownership transfer process (from Due Diligence through Closing). In my opinion, no one should buy or sell a business without counsel from a qualified attorney and a CPA.
2. How can you tell if a lawyer has the right temperament and skills to be helpful in a business transaction?
When it comes to buying or selling a business, assembling a team of professionals is critical to a successful outcome.
Make sure you engage the services of an attorney whose practice specialties include Corporate Transactions. Don’t be fooled into thinking that your friend’s nephew who practices family law is the right person for the job.
An attorney who handles the purchase and sale of businesses should also be “deal-minded,” meaning they understand that– in addition to protecting their client’s interests–they have some obligation when it comes to facilitating and completing a successful transaction.
It’s easy to put up road blocks during negotiations. Find an attorney who will help minimize and resolve them.
3. What distinguishes business brokers from real estate brokers?
Good business brokers have a high level of business acumen, which includes being able to read, interpret and normalize financial statements. Many of them have professional backgrounds in financial services, or have owned and sold businesses themselves.
Business brokers are also well-versed in the predominant methods of business valuation, and have a thorough understanding of the entire ownership transfer process. As mentioned above, business assets need to be transferred on documents that are drafted by legal counsel, not boilerplate real estate contracts. Real estate agents can also be at a loss as to how to sell your business under the strictest confidentiality.
If you’re buying or selling a business that is primarily a real estate investment –like hotels, motels or bed-and-breakfasts–a commercial realtor will be able to do an adequate job. However, if you’re selling a light manufacturing enterprise that does $2M in annual gross sales, has $500K worth of industrial equipment, $150K of inventory, owns five patents and leases 10,000 square feet of commercial space for its facilities, you’re going to need the assistance of a seasoned business intermediary.
4. I see many people in their mid-40s to age 60 who are owners of their own businesses for the first time. I assume that you do also. Do you have any insight into figuring out which of them is likely to succeed?
Yes, I see these folks buy businesses all the time. Many of them retired early, then got bored after a year or two. I’d say they need the same qualifications that I see in most successful business buyers:
- Industry experience and/or strong interest in the type of business they are purchasing
- Ability to create a business plan and/or have an idea of how they will grow the business in the future (if that is a goal)
- Adequate financing for the purchase, including working capital
- Humility, and willingness to start out as the “low man on the totem pole.” This one may sound odd, but I am always wary of arrogant buyers. In most cases, the employees will know more about the business than you will after you buy it. You need a willingness to listen and learn BEFORE you start putting your own mark on the business. The rule of thumb is to not make any major changes to the business for six months to a year after buying.
- Have an exit plan! Your next step may be retirement, and the business you own may very well be your most valuable asset. Understand how to operate the business in such a way that you can maximize that value when the time comes to sell.