The Value Of A Lawyer When Buying A Business
A few months ago, I received an assignment from an individual who had just acquired his third business. His first business was a retail store that was quite successful. He operated it for three years and then sold it for a profit. He took the proceeds from that sale and acquired a rental business. He operated that business for a number of years and even purchased the property it was on, which included a number of other buildings that he leased out. He eventually sold that business for a profit and proceeded to invest the entire proceeds, into a plumbing contracting business. With the first two businesses that he bought and sold, he dealt with sellers and buyers who negotiated in good faith and fair intent.
In both cases, a common lawyer was utilized to avoid increased expenses to either party (this is something I am definitely against under any circumstances, it is penny wise and dollar foolish). After closing, in the first two cases, there were some discrepancies and disputes but they were resolved, without much effort and to both parties mutual satisfaction. The third acquisition, the plumbing contractor turned into a complete nightmare. This individual naively believed that he and the seller were using a common lawyer, but it turned out that the lawyer was representing only the seller and that meant that the buyer did not have any legal representation whatsoever. The agreements and documents were all drawn up to leverage the seller?s interests and any safeguards that are normally in a buy/sell agreement to protect the buyer were nonexistent. Every time a new discrepancy or dispute arose the buyer would say things such as; ?it is not fair?, ?that was not my understanding? and ?that is not what the agreements say?, and I kept having to point out that it may not be fair, it may not be what you understood but it is exactly what the agreements say, and you signed them.
I cannot stress the importance of good, independent legal representation when acquiring a company. Just because you may have been successful previously without legal council does not mean that you will be successful every time. An analogy would be that you have driven for twenty years without having an accident hence you may as well cancel your car insurance. Having a good lawyer is the same as having an insurance policy, you hope that you will never need to fall back on the safeguards placed in any of the agreements because of an attorney?s efforts, however you will be very thankful that they are there if you ever do need to utilize them.
When choosing a lawyer, do not forget the old adage that you get what you pay for. If one lawyer charges you $100 an hour but takes 10 hours to do the same thing as a lawyer who charges $150 an hour but only takes 5 hours to do the same amount of work, which way are you better off?
Lawyers are specialists, they all have their areas of expertise, do not hire a real estate lawyer to provide legal expertise on your business closing agreements and documents. After all, you wouldn?t go to a podiatrist for heart surgery, yet they are both qualified doctors!
There are other advantages to using a qualified lawyer:
· A lawyer can be the intermediary in a tough area of negotiation. If you have to deal directly with the seller, you may develop animosities towards one another during the acquisition stage. If you then need to contract with the seller for a period of time to transfer his inherent knowledge of the business and/or to train you in its operation the animosity developed during the negotiation stage may make an on-going relationship very strained.
· Having your lawyer request the list of due diligence material required places a buffer of what might be considered pettiness.
If you are comfortable with doing the due diligence on the business on your own that is quite acceptable. You may still want to have your lawyer request the information on your behalf.
· It is best to have your lawyer do title searches, to confirm that there are no liens or chattels on the assets. Your lawyer can also check for outstanding lawsuits. He can also ensure that corporate, sales and withholding taxes have been paid to current dates.
· The lawyer is the best individual to determine that the articles of incorporation are valid, that any dba?s (doing business as) and/or fictitious names are valid, that the bylaws allow the business to operate and be sold in the manner that is being negotiated and that the minute books are up to date.
· You may want your lawyer to verify that the wording within any contracts that the current business has with vendors and/or customers allows them to be assigned or transferred to new owners. Many contracts contain clauses that do not allow the contracts to be transferred or assigned without the consent of all parties.
If there are customer or vendor contracts that have to be renegotiated, I highly recommend that you renegotiate them, not your lawyer. You are the person who will have to deal with the other party, now is the perfect time to introduce yourself.
· Should your investment require a partnership agreement then your lawyer is the best person to draft it. Your lawyer will ensure that as many safeguards as possible are placed within the agreement.
· When entering into the acquisition of a business it is wise to determine what happens to the ownership of the business should something happen to you. In other words, it is time to update your will.
If you currently reside in a different State than the State where the business is located or incorporated, it is best to consult with a lawyer who is licensed to do business in the State where the business is located. He can explain how the laws of your State may vary from the laws of the State the business is actually registered in.
Corporations can be registered in one State and do business in another state. Your lawyer will verify all jurisdictional issues as part of his due diligence process on the corporate entity.
To reduce legal expenses you should make a list of exactly what items that you want to discuss with your attorney before you visit him in person. Lawyers charge by the hour, the more efficient you are, the more efficient your lawyer will be, the less time you will take and hence the less money that you will spend. Read all documents sent to you by your attorney, make sure that you understand what all the documents say. Lawyers are not perfect and make mistakes as well. Make changes and corrections in batches. In other words, read all draft documents sent to you, make all the corrections that you require and make a list of items you don?t understand or feel are miss worded. Then contact your attorney to discuss the changes and corrections. Taking this route will save you time and money.
Always remember that a lawyer is there to give you legal advise ? not business advise. If you need business advise then contract with a business consultant.
This article courtesy of http://www.mentzlaw.com.
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* Government Statistics on Legal Verdicts and Jury Awards - $ U.S. district courts terminated approximately 512,000 civil cases during fiscal years 2002-03. Nearly 20% or 98,786 of these cases were torts in which plaintiffs claimed injury, loss, or damage from a defendant’s negligent or intentional acts. $ Of the 98,786 tort cases terminated in U.S. district courts in 2002-03, about 2% or 1,647 cases were decided by a bench or jury trial. $ An estimated 9 out of 10 tort trials involved personal injury issues C most frequently, product liability, motor vehicle (accident), marine, and medical malpractice cases. $ Juries decided about 71% of all tort cases brought to trial in U.S. district courts; judges adjudicated the remaining 29%. $ Plaintiffs won in 48% of tort trials terminated in U.S. district courts in 2002-03. Plaintiffs won less frequently in medical malpractice (37%) and product liability (34%) trials. $ Eighty-four percent of plaintiff winners received monetary damages with an estimated median award of $201,000. $ Plaintiffs won more often in bench (54%) than in jury (46%) tort trials. The estimated median damage awards were higher in jury ($244,000) than in bench ($150,000) tort trials.
April 2006 - A Jury in New Jersey found last week that Vioxx significantly contributed to a 77-year-old man's heart attack awarded him $9 million in punitive damages yesterday, raising Merck & Co.'s liability in the case to $13.5 million and intensifying pressure on it to settle such lawsuits.
Example of Personal Injury Case 2004 : Ford Explorer rollover-prone and roof not crash safe and worthy- CASE TYPE : Product Design Defect, Auto Truck Vehicle - SUV,
Motor Vehicle – Rollover CASE : Buell-Wilson v. Ford Motor Co., San Diego Co.,
Calif., Super. Ct. GIC 800836 Los Angeles, Calif.
JURY VERDICT: $369,000,000 (369 Millions Dolalrs
2005 - In what may be one of the biggest massive medical malpractice tort verdicts in the state of Texas, a state jury awarded $606 million - including a remarkable $ 600 million dollars in punitive damages - to the family of an 82-year-old patient who had cancer and then who died after receiving an overdose of chemotherapy drugs.
2005 - In the 9th big loss for Ford in SUV Explorer rollover cases, a Florida jury awarded $61.2 million to the parents of an 18-year-old boy who was killed in a 1997 (wrongful death & Product Defect and Product Liability Issues)
Example of Personal Injury Lawyer Case 2004 : Dodge Caravan seatback collapsed on baby in a car-seat - CASE TYPE : Automobiles, Products Liability -
Product Design Defect, Wrongful Death, Motor Vehicle -
Rear-ender, Motor Vehicle - Passenger, Motor Vehicle - Minivan
CASE : Flax v. DaimlerChrysler Corp., Davidson Co., Tenn., Cir. Ct. O2C-1288
JURY VERDICT : $105,500,000 (105 Million Dollars
2005 – Billion Dollar Verdicts - In one of 2005's largest verdicts to an individual plaintiff regarding financial fraud , a Florida jury ordered Morgan Stanley Broker Dealer to pay $1.45 billion to investor Ronald O. Perelman for defrauding him in the sale of his camping gear company - Coleman.
2005 - February, a prominent Houston law firm and a Texas bank were SMACKED and Beaten with a $65.5 million verdict in a highly complex estate planning case that involved major problems and conflicts of interest. (65 million dollar jury award)
2005 – 3 years after a jury acquitted a company in Florida of manslaughter and criminal charges, a Florida civil jury SLAMMED the outdoor advertiser with a $65 million jury award verdict for the shock and electrocution of a sixth-grade boy.
Age Discrimination - In December, a Los Angeles California jury found that PrivatAir - an aviation company focusing on private airline services - wrongfully fired Captain Doyle D. Baker on the basis of his age, defaming him in the termination process and causing extreme emotional distress.
Punitive damages serve a number of important functions which—despite a few horror stories, which are themselves either apocryphal or overturned in the courts, the functions remain valid and in the public interest. Persons causing great harm—persons deliberately or with gross negligence causing great harm should not view paying damages as merely a cost of doing business, a cost that might fit neatly into a risk analysis of wrongdoing. That is what happened in the Ford Pinto case in which the cost of paying claims to victims of a known deadly hazard was deemed less than the cost to retool the assembly line, and thus the hazard was maintained knowing full well that further people—more people would be injured or killed.
This is the purpose of punitive damages, to punish this kind of egregious wrongdoing, and to deter, to be a deterrent to such conduct. It is not immediately clear why a deterrent—or the necessity of the deterrent should bear any great relationship to the amount of actual damages in a given case. There is nothing wrong and indeed something highly desirable in maintaining this disincentive to wrongdoing in an appropriate relationship to the harm and the conduct of the tort-feasor. This trend has led one commentator to suggest that ''[p]unitive damages have replaced baseball as our national sport.'' Theodore B. Olson, Rule of Law: The Dangerous National Sport of Punitive Damages, Wall St. J., Oct. 5, 1994, at A17. See also Malcolm E. Wheeler, A Proposal for Further Common Law Development of the Use of Punitive Damages in Modern Products Liability Litigation, 40 Ala. L. Rev. 919, 919 (1989) (''Today, hardly a month goes by without a multimillion-dollar punitive damages verdict in a product liability case.'').