The Cost-Benefit of Engaging Business Counsel – Part 2
Written by: Tyler Blaser, Esq.
Part II: Securing Your Transaction
Secured Transactions. The success of every business depends on its ability to drive revenue through securing payment of amounts they are owed. My social media feed is full of memes with lofty inspirational quotes about how everyone should love what they do. I’m not here to advocate against anyone loving what they do, because I think that is important both in terms of maintaining commitment to your craft, and your overall enjoyment of life. I am here to underscore the importance of ensuring you get paid for the goods and services you provide. At the end of the day, we are all in business to make sure we can financially provide for ourselves and our loved ones.
Contrasting Approaches. Ensuring that you secure payment for the goods and services you provide is arguably the most surefire way to fulfill those financial needs that drive you to work in the first place. This article explores the cost-benefit of obtaining legal advice as it relates to securing your payments, while again considering two hypothetical business owners engaging in significant transactions for the sale of their business assets and real estate:
Owner A has run a successful business for the past thirty years and is ready to move on from the day-to-day stress of running a business and managing employees. Luckily, Owner A is approached by a potential purchaser (“Buyer”), who makes a bona fide offer to purchase Owner A’s commercial real estate for $2 million and its business assets for another $1 million. Buyer proposes to pay $600,000 of the total $3 million purchase price at closing, and the remaining $2.4 million pursuant to a standard five-year promissory note with interest at the applicable federal rate. Owner A runs the numbers with their accountant and has determines that this will be enough for Owner A to retire comfortably.
When Owner A receives Buyer’s letter of intent, the proposed terms appear simple and straightforward. Owner A has known the Buyer for a long time and trusts that the Buyer will stand by their word. Owner A does not believe a lawyer is necessary in this situation and has never liked paying for one the past, so Owner A decides to negotiate the deal, execute purchase agreements, and proceed to closing – all without consulting legal counsel.
Owner A is initially ecstatic that they have negotiated and sold their real estate and business assets for a decent return, all without paying a lawyer. Buyer makes payments on the outstanding $2.4 million, pursuant to the note terms for about a year, until the Buyer’s business goes under due to circumstances outside of its control. Buyer is eventually unable to continue to pay their debts when they become due and files for bankruptcy. Owner A is therefore forced to jockey with several other creditors of the Buyer for the position to receive some reduced amount of proceeds from the liquidation of the Buyer’s estate. Eventually, after a lengthy bankruptcy proceeding, Owner A and the other creditors are forced to settle the significant balances they are owed for pennies on the dollar. Owner A’s claim to approximately $2 million is legally extinguished at the conclusion of the bankruptcy proceeding, and Owner A has paid more legal fees for representation in the bankruptcy proceeding than they “saved” by not speaking with a lawyer.
Because Owner A did not initially consult with a business lawyer, Owner A has no choice but to try and start their business back up from square one to make ends meet. Owner A’s livelihood depended upon the Buyer’s obligation to pay the $2 million, which has now diminished into thin air.
Owner B starts in the same position as Owner A and is approached with an identical offer from the Buyer, a life-long and trusted friend. Owner B is also cost-conscious. All that said, Owner B understands they can benefit from the advice of other professionals, and perhaps more importantly, appreciates the gravity of negotiating the transaction for the sale of their life’s work. Owner B sets up a free consultation with VFN business counsel, and engages VFN’s legal services to review and negotiate the transaction. VFN provides these legal services and recommends that Owner B require the Buyer to execute a security agreement and deed of trust to secure full payment of the purchase price as a condition precedent to closing. If the Buyer defaults on the note, the deed of trust and security agreement allows Owner B to recover the real estate and business assets, respectively.
VFN negotiates other appropriate modifications to the letter of intent, purchase agreements, security agreement, and deed of trust, and counsels Owner B on the risks involved with a transaction of this nature. VFN recommends Owner B consider applying the $2 million of real estate proceeds, which would otherwise be subject to a 15% capital gains tax, into a 1031 tax-deferred exchange to acquire another investment property, which will incidentally generate passive income throughout Owner B’s retirement.
When the Buyer’s business goes under after just one year of payments, the deed of trust and security agreement allows Owner B to recover the real estate and business assets that they sold. While Owner B would have preferred to receive payment instead of recovering the real estate and business assets, Owner B is happy that they are in the next best financial position, situated to retake title to the real estate and assets which Owner B may choose to sell, lease, or borrow against as needed.
Owner B paid a total around $10,000 for VFN’s legal services over the course of its representation, but in doing so, saved ~$300,000 in tax liability on the real estate exchange and avoided life-altering financial exposure down the line.
The Lesson. From a cost-benefit perspective, a good business lawyer will always save you money. While these are simplified hypothetical scenarios, anyone who has sold a business can attest to their lesson: invest to engage legal counsel to manage risk on the front end, to avoid financial and legal disaster on the back end. You will thank yourself.
Consult with an Experienced Business Lawyer. Remaining in contact with an experienced business attorney is the most simple, sure-fire way to assure your business is positioned to thrive. While this article focuses on securing transactions in a business sale, a business attorney is also valuable in the context of negotiating and navigating issues, involving
- business formation and corporate governance;
- commercial lending, corporate offerings, and financing;
- commercial leases, land use and zoning;
- customer and vendor agreements, terms and conditions; and/or
- shareholder/member disputes regarding decision-making and distribution rights.
This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer