Engaging legal counsel during purchase or sale of a business is a crucial step in the transaction, but it’s not necessary to break out the heavy lumber during early stages of the game, says Jim Newman, a partner with Holland & Hart.
Bringing your lawyer to an initial meeting to tentatively discuss terms of sale and purchase may be overkill, Newman said last week at a business breakfast sponsored by Holland & Hart, Northern Nevada Business Weekly and Great Basin Federal Credit Union. The rule of thumb, he says, is that it’s fine to discuss terms between seller and buyer without legal representation — just don’t sign anything without first seeking legal counsel.
“Have as many meetings as you want, talk about it all you want, but until it’s on paper and it has ink, none of its really matters,” Newman says. “Before you sign and obligate yourself, before you do the letter of intent, it is so important (to meet with legal counsel),” Newman says. “If it is the only thing you spend money on, you would be doing yourself a favor.”
Discussing business transactions actually may be more forthright without lawyers in the room, Newman adds. However, it is equally important for buyers or sellers to meet with legal counsel prior to those early-stage discussions to determine the best strategy to pursue. The way companies are structured and the way deals to buy those businesses are put together can make a huge financial difference for both parties. Engaging counsel prior to the table-setting discussions about buying or selling a business can provide a buyer or seller with high-level knowledge of that company’s tax or debt obligations.
For instance, the way a company is structured is of utmost importance due to tax liabilities. The difference between a S-corporation and a C-corp. could mean the difference between paying 15 or 65 percent in taxes on proceeds in some instances.
Often the price to be paid for a business already has been determined before an offer sheet hits his desk, Newman notes. That valuation may be based on the company’s assets, but typically it’s a multiple of a measure of the cash the business generates for its owners. If a business owner is considering selling a company, it’s important to keep sensitive information and conversation under wraps by limiting the number of people to which the due diligence team is exposed. Sellers are expected to produce clean records of the company that accurately represent the company’s ownership history, debt obligations and financial history.
“Every company has warts — be thorough,” Newman says.
Third-party consent is another key aspect of a merger or acquisition, he adds. Longstanding contracts that a company has in place, such as its lease on a building, usually can’t be transferred to the new ownership without third-party consent.
“Every contract that your business has has to be looked at in diligence to see what the assignment provisions say,” Newman says.
Transactions that involve purchase of a company’s assets typically require more third-party consent than other types of deals, he notes. Under Nevada law, a company’s board of directors also has to approve of the disposition, recommend it to the majority of the company’s shareholders, who also must approve the deal. When a buyer purchases a company through a merger, the buyer assumes all of that company’s assets, liabilities and operations, so be sure to identify any pending claims or litigation, he cautions. Mergers also require filings with the Nevada Secretary of State office.
The next breakfast to be sponsored by NNBW and Holland & Hart looks at the effects of medical marijuana in the workplace.
It will take place from 8 to 11:30 a.m. on July 9 at the Atlantis. Panelists include Anthony Hall of Holland & Hart, Cindy Davis of Strategic HR Partners, Dennis Rochier of Renown Regional Medical Center, John Skowronek Jr. of Square One and Ed Alexander, owner of Common Sense Botanics, a firm moving through the permitting process to dispense medical marijuana in northern Nevada. Cost for the breakfast is $99. Registration fee includes a year subscription to NNBW. For information email Eli Zeiter at ezeiter@nnbw.biz.
