Bucky’s Blurbs

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

I welcome your comments and questions Click to E-mail.

Hiring a Lawyer to Sell Your Business

For the past few decades, most of my business law practice has focused on the purchase or sale of businesses, aka M&A. Assets and shares. Big and small. Please let me share some of my thoughts on this area for the consideration of business owners.

Selling your business is a tough, emotionally draining process. You’re proud of what you have built over many years; it’s your baby, but all grown up now. In your heart, you actually don’t want to sell, but perhaps you must sell for one or more reasons: your health, spouse’s health, age, weariness, new competitive pressures, bank “demarketing” your loan, and so on.

Most owners are not serial entrepreneurs, and selling is a last resort. You’ve grown the firm from the ground up, learning all the skills and doing all of the tasks needed to survive and thrive. Very often, owners don’t have a close working relationship with a lawyer or law firm, either because they’ve not had much need for legal advice or maybe because they’ve bounced from lawyer to lawyer for each legal matter or deal. Now, they realize they need a lawyer, and a damn good one, to get the deal done and protect their interests.

Purchasers and their legal counsel are more and more aggressive, and due diligence has become increasingly intrusive and microscopic – many because there is so much fraud going on in M&A transactions. And, the stakes are very high for the selling owner; the stakes couldn’t be higher. A mishandled deal can create significant ongoing financial or legal risks, or the deal may even fail to close at all.

So, how does an owner go about hiring their lawyer for this once in a lifetime deal? Here’s some ideas for owners about to hire a lawyer to sell their business:

First and very much foremost, hire someone who knows what the hell they are doing, ie, a specialist in M&A/business law, not a G.P. or dabbler in commercial transactions. Would you go to a handyman to install a new bathroom? A GP to carry out heart surgery? The day has long passed when lawyers can be generalists, things are just too complex and quickly changing. And, never hire a litigator to do a deal: they love to argue and polarize issues endlessly, or at least until you say “uncle” to the fees and delays.

Next, do some first-hand research: talk to a few lawyers after reading their website. Many will be happy to discuss their approach for an hour or more without charge.

Ask for referrals – from your CPA, your financial advisor, or other owners who have recently sold their businesses.

Understand that you will get what you pay for. If you hire a counsel with the lowest hourly rate, you will inevitably get lower expertise and maybe efficiency. If you hunt for the lowest fixed fee quote, good luck. When your discount lawyer hits the quoted amount, they will likely stop answering your calls or emails, devote their time to paying files or delegate your deal to an inexperienced junior lawyer or student. Law is a business.

Hire someone that you respect and trust, someone that you can get along with during rough times that will arise in a sale of a business that goes on for several months.

Hire someone who will not be a cheerleader or order taker, someone that will give you independent, practical, creative advice even if it’s not what you want to hear all the time. You have one chance at getting this right.

I prefer to do M&A work because it’s really interesting, every deal is different, and I am called upon to offer creative, practical solutions to thorny issues that arise – and something always does. It’s problem solving with a happy result – closing – after a few or several months of challenging questions and pressures. Hopefully, this article will assist you to engage an M&A counsel that will serve you well as a selling business owner.  Your comments are always welcome.

Does Boilerplate Matter?

Plain talk advocates accuse lawyers of padding their contracts, thereby needlessly increasing their bills, by the inclusion of what is derisively called “boilerplate”.

In this context, “boilerplate” refers to standardized provisions at the front or back of agreements. These provisions are rarely discussed between attorney and client during the preparation of the contract, and they look the same from agreement to agreement.  But, boilerplate provisions often save the day for one or both parties.

Here are some examples of typical boilerplate clauses:

– choice of law

– entire agreement

– successors and assigns

– notices

– force majeure

– interpretation, definitions

– counterpart execution

– time of essence

– further assurances

– gender

– amendments

– waiver  and others…

Are these provisions really necessary? Why? What would happen if we just left them out?

Well, the best rationales for boilerplate provisions are:

1.         they aid interpretation of the agreement in ways that are well established thru caselaw – such as defining key terms to avoid debate and uncertainty;

2.         they wrap around the core business terms of the contract to provide valuable terms that  don’t need customization or negotiation – such as the method of giving notice;

3.         the wording of boilerplate is standardized – this avoids the cost of preparing something special (re-inventing the wheel) every time you do a deal;

4.         often, a particular boilerplate clause has evolved into common usage because there was a gap or problem created elsewhere in the contract, leading to a dispute, even a court case – so boilerplate is aimed at keeping the parties away from litigators and the courts.

Imagine: one group of lawyers – solicitors – trying to reduce the workload of another group, barristers! Strange but true.

Each type of boilerplate has a specific purpose to make the agreement function. In this series of Bucky’s Blurbs, I will go thru some boilerplate clauses to explain their history and function. You might not love pages of boilerplate after this series, but at least you’ll have a better appreciation of their value.

The first one I will look at is the snake in the grass, “Choice of Law” or “Governing Law” provision. I may regret taking on this one at the outset, because it is one of the most complex and controversial provisions. These provisions determine what laws must be used to interpret and enforce a contract, and often specify that any action or other dispute resolution process must take place physically in that jurisdiction

Let’s start with a simple principle: if the parties and the performance are all within Ontario, you probably don’t even need a Choice of Law provision.

At gbtlaw, we find that more and more of our clients’ dealings involve cross border elements, where our client is in Ontario and the other party or service is somewhere else. Or the contract is performed outside of Ontario. Or both parties are outside of Ontario.

Where there is even one element of the deal that is outside Ontario, you will need to have a Choice of Law clause. If you are in Ontario, then you want to choose Ontario, because your lawyer is qualified to give Ontario law advice, only. Most smaller law firms are qualified only in the province of their office location. Be wary of legal counsel who downplays the importance of this issue to hold on to work they are not qualified to do.

But what if the other party is in New York? They will want New York state law to govern. If they win that debate, your lawyer won’t be able to advise you on New York law. It might be very similar to Ontario law, or not. You don’t know, nor does your Ontario lawyer know what the differences are. To appreciate what the differences between New York and Ontario law are, you must be qualified in both jurisdictions. Otherwise, as Donald Rumsfield said as Secretary of Defence, “you don’t know what you don’t know”.

In larger international deals, two parties will sometimes choose a third jurisdiction as the choice of law, eg, an Ontario and a Delaware deal might choose New York law to govern as a compromise – but this does nothing to eliminate the problem of the lawyers being qualified to advise on New York law.

Usually, the more powerful party, the party with the most leverage, insists on their jurisdiction as being the governing law and the place where the parties must go to resolve any disputes. This means the Ontario party must hire a New York lawyer and fight the issue in New York if there is any dispute, be it arbitration or court litigation. Ideally, if the stakes are high enough, the Ontario party will hire New York counsel to advise on the contract before it is signed, and it must do so later on if there are problems.

The thing is, the world may be smaller or business may be more global, but most lawyers and law firms are still only qualified and insured to practice in their home jurisdiction.

There is no one-size fits all solution to this issue. Every contract situation is different. A good start to resolving the problem is to appreciate that it is a real issue with real risks and costs. At the least, ensure your legal counsel addresses the pros and cons with you.

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.