Selling Out: Lawyer's Role

April 13, 2006

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Along with your accountant, your lawyer needs to play a key role in your plans to sell your business, and in drawing up the legal documents that will carry out those plans.

Many small business owners have established a relationship with a business lawyer over the years, and as a matter of course decide to have this lawyer handle the sale. If your business is a small one or your attorney is very experienced in all aspects of transition plans, this may very well be a wise course of action.

However, realize that your present attorney has a built-in incentive to dislike any deal you may propose: if you sell your business, he or she will probably lose a client. Consequently, whether they realize it or not, some lawyers who represent small businesses may tend to "pick apart" a deal by finding so many roadblocks that your deal falls to pieces, or drags on so long that the other party loses interest.

For that reason, you may decide to use an attorney who specializes in mergers and acquisitions and who actually enjoys putting a deal together. Most larger law firms have M & A specialists on staff, though these experts don't come cheap. However, when you're talking about a once-in-a-lifetime deal, it's well worth it to get the best legal advice that you can afford. If your deal will be too small to interest a high-profile attorney, he or she might be able to recommend an associate who would be interested.

If you are working with a business broker or M & A agent, he or she may be able to recommend an attorney who's successfully guided other businesses through a sale; however, in most cases, it's best to hire the lawyer first so he or she can examine the broker's listing agreement before you sign it.

As with any professional, the best way to find a good lawyer is through word of mouth: ask your current lawyer, accountant, other business owners, or retired owners if they liked the attorney they used. Once you've collected a few names, interview them to see whether they can take on your case, what the fee schedule is, and most importantly, whether you feel comfortable with their knowledge, experience, communication style, and level of integrity.

Retainer agreements. Ordinarily, your lawyer will expect you to sign a retainer agreement and to pay some substantial portion of the fees up front. It's to your advantage to sign such an agreement, since it will lay out the scope of the services the attorney will provide, and put the fee arrangement in writing.

The two key parts of the retainer agreement are the statement of the attorney's services and the fee arrangement. The contract should state the attorney's hourly rates (many charge a higher rate for court time or other specified services), or the flat fee if you're paying on that basis. If a flat fee is involved, it's very important that the agreement specify what services are included for that fee. The contract should also specify whether you'll have to reimburse the attorney's costs in addition to the flat or hourly fee. It may state the billing schedule (for example, that you pay an up-front retainer of several thousand dollars against which hourly fees are charged; when the retainer is used up, you start paying monthly bills), and whether and how much interest will be charged on unpaid balances.

Whom does the attorney represent? The agreement should also define exactly whose interests the attorney is looking out for. Theoretically, all parties to the transaction (i.e., each individual partner or shareholder of the business being sold and each individual purchaser, plus the business entity itself if incorporated) should have a separate attorney. Obviously, this can get very expensive and impractical if there are a number of shareholders, so many attorneys will agree to represent more than one party if proper waivers are signed.

For example, the attorney may agree to represent you individually as majority shareholder and to represent your corporation as well, provided you sign a disclosure document. The document will state that you recognize the potential differences between your interests and those of your company, but you agree to the dual representation anyway.

However, we don't advise that you go so far as to have only one attorney representing both the buyer and the seller — that situation presents a real conflict of interest, rather than just a potential difference, and few attorneys would agree to such representation anyway. Any time there is a real conflict of interest, the parties in conflict should retain separate counsel (for example, if some shareholders want to sell but others do not).