Law News and Tips
Fred L. Vilbig © 2017
Sometimes my clients just get too emotional! What do I mean? Read on.
In my last column, I wrote about some of the general issues involved in selling your business as a part of your retirement plan: who are your buyers; how do you value your business; and how is the sale financed? These are all kind of objective questions that can be very deliberately considered. But many times, they’re not.
Where I run into problems with clients is when they are overly anxious or excited. They let their emotions get the better of them.For instance, when buying a business, you need to be careful to make sure that you are actually buying what you think you are buying, nothing more and nothing less.This is called “due diligence.”
A good example of this would be real estate. Property titles are transferred though deeds that need to be recorded to be effective.You and I think about land in terms of property addresses.However, real estate is conveyed using legal descriptions.The legal descriptions can be lots in subdivisions or what are called “metes and bounds” descriptions – that’s the kind of thing that says “143.3 feet SSW from the old iron rod in the middle of Min Street.”Out in the country, you might have a legal description that reads like “the NW ¼ of the SW ½ of Section 1, Township 35, Range 13.”If you can tell me where that property is, you are much better at real estate than I am.
Real estate also brings with it other questions. How do you know what the environmental status of the property is? Do you really know that the seller owns the property? Are there any mortgages or liens on the property? Are the buildings in good condition or are the problems just patched up? And if there are buildings, do you know if they are built to code?
With regard to vehicles and equipment, you have similar questions. How do you know the condition or whether there are liens against them? You need to ask for maintenance records, and if there aren’t any, you need a thorough inspection.
The business may have a lot of “good will.” This basically means it is not asset heavy but still has a good cash flow. A law practice or an accounting firm is a good example of this. In that case, you have to rely on financial statements. Do you know if they are compiled, reviewed, or audited, and do you know the difference?And even if the financials are reliable, can you understand them?People go to college to learn how to read them.
On the Seller’s side, there is a different set of concerns. Sellers basically want to get their money and get out of town (sometimes literally). But buyers want all kinds of proof regarding the assets they are buying.The seller will probably have to dig into his or her records to prove all kinds of things.The problem with this is that you will be disclosing all of the warts of your business (and all businesses have warts). You need to make sure that the buyer has to keep that private and that they can’t use that information against you if the deal falls through.You need to get a non-disclosure agreement (commonly referred to as an “NDA”) from the potential buyer even before you start sharing information.
As I mentioned in the last column, one of the biggest problems a seller may have to face is where the buyer can’t come up with financing. If a bank is unwilling to make a loan for the entire amount or the buyer can’t get a loan at all, the seller may have to finance some or all of the purchase price. The first question is whether the buyer is credit-worthy. IF you trust the buyer, how do you make sure you will continue to deal with him or her? Is the obligation assignable? You could end up having to rely on someone you don’t even know. Even if the contract is not assignable, what happens if the current buyer sells his or her business, so again you are stuck with someone you don’t even know.
Then there’s the question of how to secure the loan.This is like the mortgage on your home. No bank is going to lend you money without having something backing up your promise to repay. You shouldn’t either.
But like I said, clients can be the worst. They get blinded by the opportunity – whether it’s the business itself or the prospect of getting bought out – and they throw caution to the wind. As I’ve mentioned before, a client’s business is often his or her retirement fund. Clients need to be very careful to protect themselves. If something seems too good to be true, it probably is. It is hard to keep emotions in check, but an emotional sale is a bad sale.
Caveat emptor! But also, Caveat venditor!
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