A Practical Checklist for Buying or Selling a Small Business in Colorado
| Publication year | 1986 |
| Pages | 2171 |
| Citation | Vol. 15 No. 12 Pg. 2171 |
1986, December, Pg. 2171. A Practical Checklist for Buying or Selling a Small Business in Colorado
There are many issues an attorney whose client 6ants to buy or sell a small business must consider to ensure that the client's goals are met. This article outlines these issues to help practitioners understand particular transactions. However, because of the variety of businesses, assets and transactions in Colorado today, it is incumbent upon practitioners to consider this checklist as a starting point only. Attorneys must be aware of the peculiarities of each transaction in deciding how best to document the transaction and protect the client's interest.
This article discusses the threshold issues and describes the elements of a garden-variety buy-sell agreement and other documents that may be needed to complete a transaction.
The attorney must understand the client's goals to determine how best to help his client reach them, as well as understand the essential elements of the transaction so he can draft an appropriate and comprehensive buy-sell agreement.
When an attorney is informed that his client wishes to buy or sell a business, the attorney usually begins to investigate the nuts and bolts of the transaction and tries to figure out how the transaction can be documented as quickly as possible. This action stems in part from a desire to limit the attorney's time involved in the transaction and the resulting fee. However, the attorney should first inquire into the client's objectives in buying or selling a business. This often helps the client to clarify his willingness to carry through with the transaction and the terms upon which he is willing to complete it. This in turn dictates the negotiating position the client is going to take.
In some cases, an initial discussion of objectives can convince the client that he should not be considering buying or selling the business at all. Even if the client has given goals and objectives some thought on his own, the attorney should have this initial discussion to get a feeling for where the client stands in terms of this particular transaction and the client's bargaining position.
If it makes sense for the client to buy or sell the business, the next logical step is to determine a fair purchase price. In most situations, the client is the one best able to gauge the value of the business because it is in an industry in which he either currently operates or expects to operate. At a minimum, the attorney should inquire whether the client has carefully reviewed comparable businesses that have been purchased recently. An independent appraisal may be either necessary or desirable.
It is more difficult to determine a fair purchase price when the business owner has died. In that case, the owner most likely had a good feeling for the worth of the business, but cannot provide guidance. Consequently, the personal representative of the owner's estate often must make a difficult judgment call. In this situation, an independent appraisal by someone who is knowledgeable and qualified is absolutely essential to protecting the fiduciary in the exercise of his discretion. The estimated value of the business will dictate the cost and required complexity of the appraisal.(fn1)
Each party must make sure the terms of the transaction are reasonable. Also, each party must consider whether the terms reasonably allow payment from the income generated from the business or the buyer's other assets. In a cash transaction, the seller's worries are eliminated (at least after the closing), but the buyer's concerns remain. Further, the buyer probably will borrow money from a bank, or from investors, who then take over the seller's concerns about whether the transaction has any economic viability.
If the seller and buyer are, respectively, the owner of the business and a long-time employee, the parties obviously know a good deal about each other. However, many transactions occur between parties who are not familiar with each other. In those cases, from the outset it is wise to be concerned about each party's intentions, integrity and ability to follow through with the transaction. In the case of the buyer, this includes not only his ability successfully to operate the business (particularly if carry-back financing is involved), but also his financial strength.
Before agreeing to anything, the client should always be aware of the possibility that the other party is merely hoping to attain a superior bargaining position or a position where he can cloud title to the assets without ever really being required to perform. A common example of this is where the buyer attempts to obtain an option that he can use to tie down the seller without putting any substantial amount of money at risk himself. The seller needs to be especially cautious in situations where the buyer is a shell corporation, has no assets or is otherwise immune from judgment.
Unfortunately, many clients do not contact their attorneys regarding the purchase or sale of a business until the principal provisions of the agreement have been set, at least informally. At that point, it is difficult for an attorney to renegotiate the transaction. However, it is not uncommon for the client to expect that the attorney can somehow make the transaction better.
It is helpful at the outset for the attorney to discuss with the client the terms that have been agreed upon and the terms that may be the subject of future negotiation. Prior to negotiating further, the attorney and client should choose a principal negotiator. Sometimes clients have strong personalities and are better negotiators of their position than their attorneys. In other cases, clients may not be effective negotiators. The earlier attorneys can get involved in the decision-making process, the more chance they have of being helpful in determining who is best able to negotiate, as well as how the negotiations should be handled.
Traditionally, negotiating techniques have often been thought of as skills that are acquired almost by instinct over years of practice, rather than skills that can be acquired through study at seminars or similar educational programs. However, currently, an increasing number of educational programs are available in which the tactics of negotiation are frankly discussed.(fn2) These programs may be helpful in preparing both the client and the attorney to confront the psychological aspects of setting up and working through a transaction.
It is always wise to be cautious before signing anything, especially a "letter of intent."(fn3) All too frequently, clients rush into hasty agreements, assuming that the details will be worked out later. It is a rare transaction indeed that must be done today. It is an even rarer transaction where the other party will make substantial concessions after the papers are signed. The client must clearly understand, before signing, that he may be stuck with non-performance or unsatisfactory performance by the other party, or with a written agreement that covers only a portion of the deal the client thought he had made.
Even if no formal documents have been signed, the parties already may have a "handshake deal" which is enforceable as a binding contract. In a recent highly publicized case, Getty Oil and Pennzoil issued a press release announcing an "agreement in principle" for Pennzoil to acquire Getty.(fn4) The parties had not signed anything and the press release specifically stated that the acquisition was subject to the approval of Getty's shareholders and the execution of a definitive merger agreement. Nevertheless, a Texas court determined that Pennzoil had entered into a binding agreement with Getty.
Under the court's analysis, Getty was stuck with the deal with Pennzoil and unable to accept a subsequent higher bid from Texaco, Inc. In addition, Texaco was guilty of inducing Getty to breach its existing contract. The net result of this case, and others like it, is that the attorney must analyze whether the client is already bound by the negotiations to date. Attorneys representing a buyer must also be aware that if the seller previously entered into negotiations with another potential buyer, the seller already might be bound under a "handshake deal" with the other buyer. Consequently, acting with the wisdom hindsight brings, a court might find that the client induced the seller to break this existing agreement.(fn5)
After the client's goals and tactics have been identified and the major points of the transaction have been negotiated, the nuts and bolts of the transaction can be set forth in writing. Most of these items trigger actions by the buyer and the seller toward a full exchange of information, with the desired end result that an informed purchase and sale can occur. Obviously, the extent to which certain items can be required of the buyer or the seller depends on their familiarity with each other and relative bargaining positions, as well as the complexity of the transaction. At a minimum, the following items should be considered in a buy-sell agreement.
It is important accurately to describe the transferred assets in the agreement...
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