Bucky’s Blurbs

Each month, I write a short piece on a legal issue which I hope will be of practical interest.

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DIY for Buying a Business

At gbtlaw, we do deals for clients buying or selling a business: lots of deals, big and small. Fact is, small deals are often more complex than big deals. One thing for sure, our clients in very small deals (say less than $500K) just can’t afford to pay us to do what we usually do for clients on big deals. Plus, clients doing small deals are often less experienced, so we find much of our time is spent helping these clients climb the steep learning curve of how to do deals – what they should do, what we should do, processes and timing, etc.

So, in an effort to bridge the urgent need for competent legal advice and services by small deal buyers or seller, we have created this Guide to doing a deal (buying a business). This will not eliminate the need to hire a qualified lawyer to protect your interests, but we believe it will pull you well up that learning curve. We would be very grateful for your criticisms, suggestions and comments.

Pre-Deal Stuff:  First Things First

Consider 3 key questions:

  1. WHY are you buying an existing business? Why buy an existing business instead of building your own new business or buying a new franchise? Is the higher price (for goodwill/reputation, existing systems and clients) worth the difference in price? Would you make more money sooner by starting from scratch?
  1. WHAT are you expecting to get for your money? 12% ROI? $200K per annum in salary or dividends? Or, put another way, how did you calculate the price or the value to you? (e.g., I will pay 4 times normalized earnings). Put your answer in writing as a note to yourself. If you don’t know what the heck we’re talking about, talk to a CPA.
  1. WHO is buying? You personally or thru a corporation? If “neither”, you probably need legal and CPA advice at the outset – or you need to simplify things.

If you can’t readily answer any of those questions, you should pause before giving any seller an offer. Figure out your answers before proceeding with any deal.

Now, more literally, let’s return to the second question: what are you buying: the shares of a corporation or the assets from a corporation? Or, is the business a sole proprietorship, or worse, a partnership – that is, the seller is not incorporated? Find out at the outset, it makes a big difference.

Advisors say buyers should buy assets to reduce risks and increase depreciation deductions, and they say that sellers should sell shares to get huge tax savings thru exempt capital gains for small business share sales. There is no correct answer. It depends on the details of buyer, seller and the assets. If you don’t have an easy answer, you need to consult a CPA to advise you.

If it seems like we’re promoting the accounting profession, well, sort of. As with lawyers, not all accountants are good deal and tax advisors. So, you have to do some homework to discover a qualified, ethical, competent CPA – not a financial advisor. It isn’t easy to do this, so ask your friends, business colleagues and even your lawyer, if you have a good one, for a referral.

And that is the first segment of the Guide. We will follow-up with the next segments in the deal making process. Cheers!

DIY – It’s Your Choice

Like everything else in this world, the internet is rapidly changing the practice of law, even business law, and this is mainly a very good thing. It is a gross understatement to say that most very small businesses and startups are not well served by conventional law firms. We know that. Corporate and commercial law needs are disproportionately high in the early stages of a new business, before there are big revenues to pay for them. There are ways to deal with this upfront lump of legal costs, but many owners don’t want to negotiate amortized legal fees for some reason I don’t entirely understand.

Understandably then, entrepreneurs feel compelled to go online to incorporate and to create various forms of contracts: NDAs, project agreements, assignments, consulting and employment agreements – whatever they may need. I think this is terrific; it really improves access to the law for those firms with a limited budget. It doesn’t take billings away from our firm, as we don’t seek out one-off incorporations or contract jobs. We seek ongoing working relationships with firms that have increasing business law needs over the long term, and are able to pay as they go in order to get a reasonable amount of assurance and assistance.

Problem here is that the online services don’t provide any legal guidance to prevent the user from making very costly, sometime irreversible mistakes, mistakes that will cost a multiple of the savings from not using a competent lawyer in the first place. Also, the online resources may reflect U.S. or U.K. law, or the law of another province. It can make a huge difference.

And, something that DIYers never seem to understand, is that there is no such thing as a standard or perfect agreement for any application. It depends. Savvy lawyers have at least two versions of every type of contract: one is biased to one side and the other is drawn mainly for the benefit of the other side. This is not plumbing or electrical engineering; there is no objectively correct version, it depends. This important distinction is totally missed or inadvertently subsumed in using an online template without legal guidance or extensive research.

I’ve seen fatally flawed incorporations (no share capital created, or incorporator was a partnership) and dead in the water statutory amalgamations (cancelled retrospectively) that cost the clients thousands in remedial legal costs to fix. I’ve recently seen a dreadful assignment of lease taken off a website that totally missed the real goal of such document: to get the assignor off the hook. Sometimes, we can fix the problem, and sometimes, we can’t. Not a pretty picture in either case.

So, by all means use online resources to conserve cash when incorporating a new corporation or creating business agreements. But, I recommend that you read up on the task – there is so much good free info on the Web from law and accounting firms – before you press “Submit”.

Those Ole’Rules Still Good Rules for New Deals

OK, you might consider me to be an Old Fart, having practiced business law and doing hundreds of deals since 1978, in large and small law firms and as inhouse counsel. Though my hair is white, I thrive on innovations that enhance efficiency and reduce costs to my small business clientele. But, not all changes are wonderful improvements. I want to talk here about deal practices that are new but not wonderful betterments. Then, I’ll tell you why the Ole’Rules for deals are still the best practices.

How to Buy a Business

…while avoiding quagmires

I’ve been doing the buying and selling of businesses for 33 years, and I’ve learned a thing or two that can help buyers and sellers.

Legal Specialization & the Myth of General Practice

I’ve recently had the extreme displeasure of doing purchase and sale of business transactions (the selling or buying of shares or assets) with non-business lawyers acting on the other side. I’m talking about lawyers who are general practitioners, though most of them seem to do litigation and real estate, mainly, and unfortunately for all involved, they dabble in corporate and commercial law when it comes in the door. Some even do family law in between forays into business law.