Buying A Business
Business buyers are very bad at estimating risks. Valuation professionals, who are paid to calculate these things, usually estimate that a business with $10 million or less in sales is worth 3-5 times the annual profits it can generate. Owners usually think their “legacy” is worth at least ten times gross sales. Buyers either love the place, and think they can make billions, or get so gun shy after two or three bad negotiation experiences that they never get around to making a decision to offer, or never finish the six month process of due diligence and dickering needed to conclude a sale. You need professional service partners in your search who will help you to neither panic nor give up.
What a lawyer can do is to reduce the uncertainties involved in buying any business. A few examples:
Strategic overseas buyer, seller with a big business law firm to draft “American” style contract terms: In purchase of a metals business, price and market were not the questions for our client, a company with nine successful acquisitions in the last few years. Their problem was the asset purchase contract their seller offered, which tried to limit the usefulness of representations and warranties of title (we own the place), of inventory (what you are buying is in stock), of liabilities (no lawsuits or judgments pending), and of taxes owed by limiting them to a certain percent of the purchase price, and to no more than one year from the date of sale. We started improving these over several email drafts, and finally stayed up negotiating until after midnight at the conference room next to the Detroit Lions stadium where the seller’s lawyers laired. In the end, we made them guarantee that there was no tax liability with no percentage limits, that they owned the place (ditto), and several other usual and customary promises, though we did accept limits on some matters where our client could estimate the risks. A post-closing argument still resulted in some tax error based loss to our side, but only up to a 1% of total deal “de minimus” claims limit, which both sides had agreed to, since it was cheaper than litigation.
“Cash flow” business buyer: A former futures trader decided to cut his risk levels and buy a car wash in Chicago’s western suburbs. Unfortunately, he was dealing with some Arab brothers. When there were issues with the financials, my buyer asked for more detail, and Brother One told him Brother Two had the books they showed the IRS, which might help resolve things. When those were still problematic, Brother Two offered to contact Brother Three, who had the “real books”, which they used inside the family. My advice, on hearing this from the prospective trader client at our first meeting, was to run away from the deal, not walk. I also provided the IRS manual on auditing car washes, which depends on records of volume of water pumped through the systems and amounts of shampoo used on the cars, not the somewhat more slippery numbers a cash count represents. The client fired me for having a “negative attitude”, for which I was very grateful. If there had been a deal, and I was the last apparently solvent person in the room once the real business started to lose volume that next December, my malpractice insurer would certainly have had to help me deal with a claim.