What You Need To Know Before Buying or Selling a Business

By: Lori T. Williams, Esq.

This week’s legal profile features business law attorney, John T. Carter. For nearly 18 years, John has been assisting Michigan businesses with various commercial transactions.  His focus has been helping entrepreneurs build “win-win” relationships with their customers, suppliers and contractors, and representing both “buyers” and “sellers” when purchasing the assets or equity of existing businesses.  He is a currently a Partner at the law firm of  Witzke, Berry, Carter & Wander, PLLC, located in Bloomfield Hills, and works mainly with small to mid sized businesses throughout metro Detroit.

Q.  What made you choose this area of practice, John?   

A.  Since I was born into a family of entrepreneurs, I have always been passionate about serving entrepreneurs and Michigan businesses.  I enjoy helping business owners overcome legal obstacles while providing them with the necessary “legal tools” to launch and grow their business.

Q.  What would you advise businesses these days, when it comes to buying or selling a business or its assets?

A.  In today’s market, sellers need to take the necessary steps when preparing to take their business to market or entertain realistic offers, and buyers need to be equipped to properly evaluate a prospective seller and lead the purchase process through completion.

From the “sell side” companies need to ensure that all of their financial documents and records are accurate and up to date. Specifically, that their financial statements and tax returns are consistent and that their earnings and cash flow are significant enough to justify the initial asking price. Also, it’s a great idea for prospective sellers to have their assets valued by an independent “certified valuation analyist” prior to listing. This process enables sellers to determine the “real value” of their business and flags any potential financial issues that may arise during the negotiation of the sale.

From the “buy side” purchasers need to determine “what” they are purchasing. This generally includes the “assets” or “stock” of a prospective seller.  They also need to determine “how” they want to structure the deal. It is generally more favorable to purchase the business “assets” since the buyer can “cherry pick” the specific assets that have the most value, while only assuming those “liabilities” that are necessary to operate those assets. This enables the buyer to determine how the assets will be purchased, over what period of time they will be purchased, and how they will be used to benefit the buyer.  Next, the buyer should commence a thorough “due diligence” and review the Sellers assets, operational processes, customer base, and other tangible and intangible interests to validate the purchase price and verify that the deal is worth pursuing.

Q.   What tips would you offer a prospective seller of a business or a portion of its assets?

A.   I’d suggest all of the following to sellers:

• Maintain accurate and reliable financial and operational documents to ensure simplicity and accuracy when negotiating the specifics of any deal and responding to future requests.
• Update all company records and documents to reflect changes in personnel, ownership, products, services, or other significant changes that impact the business.
• Have the business “valued” periodically (generally every 2-3 years) to make sure owners are aware of the fair market value and are prepared to entertain purchase offers.
• Have qualified resources capable of conducting “due diligence” for the buyer.
• Establish agreed to time-lines for each phase of the purchase process so that buyer and seller can be held accountable for their responsibilities prior to closing.
• Maintain good communication between the parties in the event there is any change in the buyer’s or seller’s condition or ability to close the sale.

Q.  What current trends exist in this area of law?

A.   Unfortunately, most transactions tend to take longer today, due to changing market conditions that impact the seller’s value, cash flow problems related to the buyer, and ownership requirements related to either party.  The upside is that deals that get done tend to be better transactions from start to finish.  The downside is that the parties don’t invest the time to conduct adequate due diligence and cost becomes a larger consideration. Also, less forethought is given in terms of how the business will be managed and transitioned after the closing. As a result, the parties need to be well informed and prepared to “move to close” or “bail” given the information discovered and circumstances that exist.

Q.  Are there any common misconceptions about buying or selling businesses?

A.   The main misconception around buying and selling a business, is that it occurs “easily and quickly”.   Completing a thorough and complete transaction requires time and skill on both sides, and a willingness to compromise, while making sure the original goals and objectives of both parties are achieved.  In order to reach this result, it generally takes longer and costs more than originally anticipated.

Q.  What should buyers and sellers look for when considering hiring a lawyer to help with the purchase or sale of a business?

A.  Whether you are the buyer or the seller, you should make sure the lawyer you are considering retaining, has experience addressing the many business and legal issues that can “derail” the transaction, and that they have experience in all phases of the transaction.  This includes due diligence, negotiation, drafting the closing documents, and handling all post closing issues. Not all business lawyers are experienced in facilitating commercial transactions. Do your homework!

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Lori T. Williams is a 23 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.