Ep 254: Buying & Selling a Business: The Legal Playbook Every Owner Needs

I talk about it all the time.

Part of my practice is that I help owners of businesses to make their businesses more valuable and to prepare them for being sold.

Now, today we have a special treat because we're going to talk about the actual process of buying and selling a business, some of the legal issues that you need to be dealing with, and some ways that attorneys will help you.

So this should be really interesting if you are considering selling your business at any point in the next few months, few years.

Welcome to the weekly wealth podcast.

I am certified financial planner David Chudick.

I spend most of my days talking with business owners, the mass affluent and the high net worth about their money.

We talk about their financial dreams, we talk about their financial worries, and we talk about the decisions that they know they need to make.

That is what this show is about.

All right, everybody, here is the disclaimer.

Anytime that I have an attorney on the show, I I want to just make sure this is not to be construed as legal advice.

This is general information.

And make sure that you contact a licensed attorney in your state if you have any specific questions about any legal matters.

All right, we got that out of the way.

Let's get the episode going.

This one is for the business owners.

In my practice, I work with business owners to help them to make their businesses more sellable and more attractive to buyers.

And today we're going to talk about the actual process of buying and selling a business.

We have Jordan Goway with us, and Jordan's an attorney who really specialize in these types of transactions.

Hey, Jordan, how are you?

Hey, David, thanks for having me on today.

I look forward to discussing this topic with you.

Yeah, no, this is going to be pretty cool.

And I know that you and your firm also host a podcast, which is pretty exciting, and we'll have that in the show.

Notes.

I believe that knowledge is power, but I also believe that in all of our journeys, we need help.

And in the age of ChatGPT and Google and sometimes it might be tempting just to go to AI and ask a question, but I think oftentimes like going to that lawyer and actually getting the same question answered is a better thing to deal with a deal with a human being.

Tell me a little bit about your legal practice.

Do you do everything or what are some of the things that you do?

And if someone were looking to buy or sell a business, like, what should they look for in an attorney to represent them?

Yeah, David, so I'm a shareholder at Thomas, Fisher and Edwards here in downtown Greenville, and everyone at our firm, our practices are all essentially the same within our firm.

And about 50% of our practice is estate planning.

But on that estate planning side, we end up working with a lot of high net worth individuals who are business owners, and that is where their high net worth comes from.

And then the other 50% of our work is doing business work for those individuals and business owners.

So that includes setting up businesses, it includes buy sell agreements between business owners, and then it also includes selling business when the appropriate time comes for that right business owner that decides to sell their business.

And as far as what someone should look for in an attorney who is going to help them with the business sale, one, they want someone who is experienced with business sales.

Because it's not just the legal understanding of how a sale works, but it's also understanding the life cycle of a business sale, understanding what the market dictates, understanding market terms and the typical flow of things, and then also being able to negotiate on their behalf, but also negotiate in a way where everyone gets along in most cases, because oftentimes it is an ongoing business relationship between buyer and seller.

And so you don't necessarily want someone who's going to come in and mess up that relationship.

You want someone who's going to help the seller through the process and get them out on the other side in a way that they are able to either move on to the next thing or continue to help running the business that they sold.

If that's part of the transaction.

Gotcha.

So I guess maybe the moral of the story is you're a licensed attorney, but there are probably some legal problems I can come to you with and you would give me some version of dude, that's not my area.

I don't handle that.

Maybe you'd make a good referral to somebody who does.

But just because somebody is a licensed attorney does not necessarily mean that they are the right person to represent you in the purchase or sale of a business.

That's exactly right, David.

We use the phrase around our firm.

We don't play outside of our sandbox.

We think we're good in our sandbox, but we don't like to play outside of that.

We deal with high net worth clients and I have a degree in finance, but I don't try to advise my clients on financial matters.

I leave that to folks like you.

And, and the same thing applies to other types of legal matters.

The first thing that often comes up when I tell someone I'm an attorney is they say, oh, I might need a good attorney because I've got to go to court.

And I tell them that, look, if you see me in a courthouse, it means that something has gone terribly wrong.

That's not my area, that's not my sandbox.

And so I try to stay outside of that.

I wanted to give a really 30,000 foot level view of the entire process from start to finish of when somebody maybe is looking to sell their business.

What are some of the first legal documents that are dealt with?

So, yeah, let's start from, from stage one.

What happens?

Maybe I'm looking to sell my business and there's an interesting interested buyer.

What happens then?

And the first thing I'll note, David, is that ideally I like to be involved with the business owner before there even is an interested buyer.

Buyer, ideally I'd love to be involved with a business owner before they even start their business because we may be able to set it up in a way where it's easier to sell later.

For instance, with the most recent tax legislation, the One Big Beautiful Bill act, qualified small business stock under section 1202 is very attractive now.

And so potentially setting up a business as a C corporation rather than an S corporation may be attractive if you plan on selling in a relatively short period of time.

And so in an ideal world, I'd get involved very early, before a business is even set up.

That's not always realistic.

And so in any event, I do like to be involved as early as possible.

So maybe a year or two before a business is going to be sold.

If a business owner feels that they have some potential buyers sniffing around, then I'd like to be involved at that point in time because it's often helpful.

If we can clean up corporate records, if we can clean up the books and records of the entity, clean up who the managers are, clean up who the members are, how the interest is held, how everything is taxed, make sure that everything is clean, then that is often helpful because it makes a business more attractive to a buyer.

But at the very least, if I don't get involved at either of those stages prior to a sale, then I do really like to be involved at the letter of intent stage, which is probably the earliest stage that most people think of when they truly think of the cycle of a business sale.

And that is when a buyer has approached the seller, has offered to purchase their business, and they're typically going to make an initial proposal in a non binding letter of intent.

And not to say that I wouldn't get involved past that point, but that is the latest point that in an ideal scenario, I want to become involved in a transaction.

So does a letter intent, letter of intent, does it have a purchase price or maybe a range of prices?

What are some of the items that are addressed in a letter of intent?

Yeah, so it's going to depend on the transaction and hopefully if it's one that I get to work on at the letter of intent stage, I want it to address a lot of things.

But one thing that I would note is that the buyers are positioned in a completely different manner.

Buyers do not want the letter of intent to address very much.

Typically it is going to address the purchase price.

But to your point, David, it may just give a range of purchase prices.

It may say that the purchase price will be based on a three to five times multiple of EBITDA as determined by us, after we've done quality of earnings reports and all sorts of other caveats.

And so a buyer very much wants to get a seller under a signed letter of intent as quickly as possible and with as loose of terms as possible because they want to negotiate as they go and, and as they get access to more and more information.

Whereas the reason that I like to be involved at that stage is I want to get as many of the, what I consider important deal terms.

I want to get as many of those negotiated at that letter of intent stage as possible.

Because in my opinion, the seller has the most bargaining power at that point, as they do in the entire process.

And do the buyer and the seller.

Both of them would typically retain legal counsel.

Typically.

So the buyer, if they are a repeat player, if they're a larger company, that maybe they're rolling up a lot of similar businesses, then it could be that they have a general counsel who's helped them through things, maybe an in house attorney.

Sometimes they may pull on outside counsel as well, but typically they're at least going to have some sort of legal documentation that's been prepared by an attorney, even if it's not specific to this transaction.

They've probably used a form, letter of intent and similar transactions in the past.

And I think oftentimes they hope that when they make that offer to the seller and they throw an attractive purchase price or range of purchase prices out there, that the seller will sign the letter of intent and then go reach out to an attorney later because they think letter of intent is non binding.

I don't have to worry about this too much.

I can just go and get an attorney later.

But ideally, yes, I think both parties should be represented at that letter of intent stage.

And again, that's where I really like to come in and help the sellers understand the importance of that letter of intent, even with it being non binding, because it does set the tone for the entire transaction at that point in time.

Okay, so letter, intent, letter of intent is signed.

What happens next?

What's the next deal?

Because the deal doesn't close the day after a letter of intent is signed.

That's right, yeah.

The letter of intent is really just the kickoff stage.

And at that point in time is typically when you will start the due diligence process.

Now sometimes, sometimes a buyer may do some initial diligence prior to the signing of the letter of intent.

They may ask for some of the books and records of the company, maybe get some financial statement information and things like that.

And by the way, as I mentioned that I should say that even before the letter of intent, a seller should always be sure to have a non disclosure agreement signed prior to providing any of that sort of information to a buyer.

You certainly don't want a buyer who may be a competitor being able to get access to your balance sheets, your income statements, your employee information and so on.

And so getting that non disclosure agreement even before the letter of intent is negotiated is important.

But anyway, that, that may be some initial diligence that's done prior to the letter of intent, but after the letter of intent is signed, that is when you then begin the due diligence process, which is the most painful process of the entire transaction.

That is essentially going to be the buyer asking a number of questions about the seller's entity, asking about tax information, asking about employment information, asking for backing information for all of that records, tax records, employee records.

If there's a 401k, they need to see records on that.

If there's a health plan, they need to see records on that, insurance and so on and so forth.

It's essentially like a questionnaire that you would fill out when you go to a doctor's office where it asks you about everything that's ever happened to you in your life that is medical related, but related to your business instead.

And so it's a very detailed process.

And the difficult part is that usually your seller is a person who is still running their business at this point in time.

So they're running their business.

They're used to being a business owner.

They're probably putting 60 or 80 hours a week in running their business.

But then they also have to find the time to provide all of this information to the buyer.

And then the buyer is going through that information and basically just flagging issues.

And every time they flag an issue, they are typically going to then want to address it in an ultimate purchase agreement down the line or perhaps even beat the seller down on price and say, oh, your business might not be worth as much because we've found all of these minor issues that may add up to something more major.

Now, are you in your office performing the due diligence or is the actual buyer themselves?

And I'm talking like a Main street business, we're not talking multinational corporations.

Sure.

And typically, David, that is something that is buyer driven.

If it's a larger sale, the buyer may have outside persons who are assisting them with it as well.

There are people that specialize in due diligence, but typically it's going to be the buyer and the buyer's attorney who are providing the request list and then looking at the document that are produced.

Now, on the seller side, I do like to keep an eye on the documentation as it's being produced because I want to one make sure I'm advising my client as to what the requests actually are because they may not understand it, it's often written in legalese.

And so maybe I can help them produce the things that they need to produce and make sure that they are making complete productions.

But also I like to look at things as they're being produced just because if I can identify an issue prior to the buyer identifying it, then I may be able to work with the seller to resolve that issue before the buyer ever even noticed that it exists.

So I do like to be involved.

But it is largely a buyer driven side of the process.

And obviously the buyer or the seller, they don't really know what to ask.

Right.

So there's going to be guidance in the due diligence process on what even needs to be asked and looked for.

Correct.

The 401k.

Who would think that you need to verify an almost performant audit on the 401k transactions?

But that needs to happen.

That's correct.

And like one example that almost always comes up is that my seller will get asked, do you have any contracts?

And they think of maybe one or two contracts that they have that are written contracts with outside parties.

But then I start talking to them.

Well, how about all of the oral contracts?

You have the garbage man that picks up the garbage at your entity every day and you do that on a handshake agreement where you pay him $500 a month.

But that is a contract even though it's oral.

And so we have to be sure to disclose that.

And it's really thinking through what all of that, those diligence requests means and thinking of how to best provide that in an efficient manner and get everything over to buyer so that buyer can't come back later and say, hey, you didn't tell me about this thing that I deem important.

Let's step away from the podcast for just a moment.

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And okay, now let's get back to the podcast.

And how long typically can due diligence be?

Is it a month?

Is it a year?

Is there a typical time frame?

Yeah, depending on the buyer and seller.

For a smaller deal, as you said, like a Main street deal, then, then it could be something that's only a few weeks.

If it's a larger transaction, tens of millions of dollars and big entities and private equities involved, then it can be a couple of months.

And then it also depends on the type of entity.

If you were a, if a law firm was being sold or a financial firm or someone where you basically just work on computers all day, that's a little more straightforward.

Whereas if it's a manufacturing company where they are producing some sort of widgets every day, and we may have to do inventory counts, we may have to examine all the machinery, we may have to see how some of the nuts and bolts work, then that can be a longer process just because of the, the complexity of, of assets involved.

So we're moving through due diligence.

There have been some issues that were addressed this processing forward as, as we're going through deal of due diligence.

Yeah.

So, you know, typically once you get through the initial part of the due diligence period and everyone feels like everything's moving forward at some point running in tandem with the due diligence buyer's attorney to provide a draft of the purchase agreement to the seller's attorney.

And that purchase agreement is going to be based on the letter of intent.

So again, hopefully we've Negotiated things like indemnification, purchase price, employment agreements, and all that sort of stuff in the letter of intent, rather than waiting to negotiate all of that at the purchase agreement stage.

But in any event, it is, it's typically true that the buyer will be the one that proposes the initial purchase agreement to the seller's attorney, and then the seller's attorney begins going over that purchase agreement.

And so typically what I do is I review the agreement, I mark up changes that I think need to be made to one, make it consistent with the letter of intent, if it's not already consistent, but also just to clarify the language in ways that hopefully benefits my client some.

And then I also use this as a stage to, once I've gone through the purchase agreement, sit down with my client and explain everything to them.

And that's something where I think having an attorney like me or like someone at my firm, where we're also estate planning attorneys, I think it really helps us because we're used to talking to people and talking to them about their problems and things like that.

And so the ability to sit down and explain a purchase agreement to a client and explain to them why all of the legalese is in there and what it means and how it actually affects them is very helpful in my mind.

But that's the next big step of the process, is going through that purchase agreement.

Okay.

And then there's typically going to be some back and forth between attorneys, buyer's attorney and seller's attorney, and probably some facts will be changed or it's probably almost never accepted on the first go around.

Right?

Yeah, I would say there's usually going to be some back and forth.

I always use the example with my clients of a football field.

And usually when that, when that buyer's attorney proposes the initial draft, they're going to propose it over on the seller's 20 yard line and the seller's got 80 yards to go.

Yeah.

And then when I propose it back to the buyer, I try to push it to the other 40 and then we usually bounce back and forth between the 40s and you always end up roughly around the middle.

Usually maybe someone feels like they, they won five yards here or there, but you end up around the middle.

But there's usually a couple of turns of the agreement back and forth to, to work out the language.

There's always some compromise and again, ultimately everything should end up about where we were at the letter of intent stage.

Unless there was something notable found during the diligence process that changed the transaction in Some way, shape or form.

Okay, so both parties, attorneys have gotten involved and we've worked through and we're somewhere around the 50 yard line, maybe 48 yard line on one side or the other.

What happens then?

Is there a big meeting in your conference room or is it like a closing for a real estate deal?

What does that process look like?

Yeah, so once we get an agreed to agreement, it sometimes is a simultaneous sign and close where we're going to sign the agreement on the day that the deal closes.

If it's a larger deal or if there are more moving parts, there may be a signing of the agreement and then a scheduled close 15 or 30 days later, similar to what you may have if you've ever closed on a house.

And what that does is it just allows for some period of time for us to get all of the closing documents ready.

Because again, depending on the type of business, if it's a, if it's a home builder and they've got a hundred lots out there that they own, we've got to get deeds prepared for those hundred lots.

If it's a company that owns a lot of trucks, then we've got to get title prepared for all those trucks.

If it's an asset sale, if it's a, if it's a stock or an equity sale, then we've got to get new stock certificates and stock powers and things like that prepared.

And so there's a lot of closing documents that need to be prepared at the very end of the process.

And so there's some time period for preparing all of those.

It's also a time period to close any loops as far as any third parties who may be involved, such as if the seller has a lease for the building that they operate out of, we may have to get a consent from the landlord.

And that has been something that has held up deals in the past when we may not find out that there's a landlord consent needed until the day before closing and the landlord's out of town, we've got to go find the landlord so that we can get that consent so that we can close.

So again, those are all things that you hope you catch early in the process.

And you increase the odds of catching things early in the process by involving counseling early in the process and giving them information.

But still, oftentimes there are a few things that show up at the end of that process that you have to get cleaned up in order to actually get ready to close.

Because you typically can't close the transaction until all of that is squared away, all the third party consensus are obtained, all of the actual transition documents or the assignment or bill of sale type documents are completed and then you're able to close the transaction.

And then to your point, I think historically it may have been everyone meet up in a conference room somewhere.

Now I would say the vast majority of deals that I work on end up being signed over DocuSign.

And then usually what we would do is we would exchange signatures, buyer would send us all of their signatures, seller will send buyer all of their signatures.

And then we typically have a zoom call similar to this podcast that we're on the, that all of the important parties will be on attorneys for both sides, owners for both sides.

And if everyone is satisfied with all the information that they have at that point in time, then we will release the signatures that have been held in escrow to that point and close the transaction at that point in time.

And then very importantly is when the seller or the buyer rather initiates the wire and we start watching the bank accounts and looking for our seller to get paid.

I like that.

So to close it, start wrapping it up.

I work with business owners and I may work with a business owner and they may say, I have my ira, I'm saving some money, but I really don't need to save that much because I'm going to sell my business for $50 million.

And that may or may not be an accurate number.

And there are some ways to get past that.

But let's talk a little bit about some of the expenses that will come out of that $50 million.

Obviously you don't work for free.

Um, who are some of the other professionals that may have been involved then?

Of course, let's just say a boatload of that is going to go to taxes in one way shape or form as well.

I think you can.

In most cases, you're probably looking at about a quarter is going to go to taxes.

If you assume that a lot of what is being sold is going to get capital gains treatment.

If there's going to be some ordinary income treatment on some of the, the sale, then it could be even higher than that amount.

So $50 million deal, you're into the, into the 30s just there.

By taking the taxes out, you're probably looking at tens of thousands or even hundreds of thousands of dollars of legal costs, depending on the size of the transaction.

I typically use 1% as a rough estimate of what it costs for me to work on a transaction.

And if you're going to get a business broker involved to Help you go out and find a seller, they charge even more.

So they're often, I've seen anywhere from 3 to 10% on, on the broker side with respect to their fees.

So a lot of that comes out of it as well.

So that sticker price is not what it's all about.

And then also just thinking through how exactly you're going to get paid, is it $50 million all cash at closing?

Because there's a big difference in that versus $10 million cash at closing and 40 million that maybe you can earn, depending on how the business does over a period of time after the sale, which is what we refer to as an earn out typically, or if there's a promissory note involved, which of course has the risk of non payment.

So there's a number of things beyond just the sticker price that will affect what that seller ultimately walks away with.

And it's important that they talk with, with their financial planner, with their attorney about how all of that works.

And I think that's where for any business owner it helps to get all of the people in the same room because none of us have all of the knowledge.

But if we could get David in a room with me, with the accountant, then all of those heads together give you the maximum amount of knowledge that's needed to really think through what is needed in order to sell this business in a way that the seller is going to be happy with.

What states are you licensed in?

And let's just hear if anybody you know is in that business sell plan.

How might they get in touch with you if they feel like you're the guy for them?

Yeah, so I'm licensed in South Carolina, North Carolina and Tennessee.

Our office is in Greenville, South Carolina.

And then we also have an office in Spartanburg, South Carolina.

But I really serve clients all over the state of South Carolina as well as North Carolina and Tennessee.

And I've had a number of clients that I've worked on business transactions with in other places throughout the state.

And that's pretty easy to do, especially with Zoom capabilities and DocuSign capabilities and so on.

As far as how someone can get in touch with me again, I'm at the law firm Thomas, Fisher and Edwards.

And my email, which I'm sure you can put in the show notes, is jgoway@tfelawfirm.com or our phone number here at the at the firm is 864-23-20041.

And so anyone is always welcome to reach out and touch base with me if they are thinking about selling a business or just want to hear what that process is or see if we could be a good fit.

And I'm happy to talk them through all of that.

Super exciting.

It's really evident that this is what you do and this is your part of the loss.

I appreciate your expertise.

Now, this is the weekly wealth podcast, and we have one question that I didn't tell you I was going to ask you.

So we talk about the mindsets, the tactics, and the strategies that can help you to build and maintain wealth.

Jordan, what does wealth mean to you?

What does wealth mean to you, your family, and the people in your life that you love and care about?

That's a tough question.

I think wealth is really something that's holistic.

It's not just about money, but it's about being able to feel that everyone in your life is taken care of and that whether that's just emotionally, physically, financially, but just that everyone is going to be okay and that you have good balance in your life.

And yeah, that's a little bit of a scatterbrained answer, but you threw me a curve ball there on that one.

You know, I like it.

But when you say everybody being, quote, okay, sometimes, like, your kids can be okay if you give them a hug, but sometimes they need money.

There are things that you have to buy when they're hungry, you gotta buy food, and that takes money.

That's that money.

Part of how we handle our money should make our lives better.

Yeah, it certainly does.

And it certainly gives you more flexibility.

I think I'm fortunate enough that I'm never worried about, like, where my next meal is going to come from or where my child's next meal is going to come from.

And that's certainly something that that money helps with.

Money can also hurt in some ways if you don't learn how to use it properly.

And I think having people like you that help people plan for their money and plan effective ways to use it is very valuable as well.

So if you had a large bank account, but you've got no ability to use it in effective ways, then you may not be as wealthy as the number on the computer screen.

Absolutely.

And we like to look at qualitative financial planning and quantitative.

Quantitative is like the actual numbers that we can measure.

But sometimes qualitative means, you know what, let's earn less money.

Maybe one spouse doesn't work because that would give a better quality of life for that specific family.

So it's an art and a science, but I think it's just so important.

Yeah, man.

So I really appreciate having you on.

I'd love maybe later on this year to talk about some estate planning.

I think that's something else that, that people just.

You just.

Who wants to think about dying and succession and those kind of things, but you gotta deal with it.

But if I'm taking away, one thing from this podcast is that don't go it alone.

There's way too much that can be that can happen in error in the sale of a business.

So get a trusted attorney and make sure that you have wise legal counsel.

Any parting words for us?

No, I think that's exactly right, David.

And I think small business owners often look at their businesses like a family member because they have grown it from birth all the way until the end when they sell it.

And so I think you're exactly right.

It's way too important to go it alone.

Get your financial planner involved, get your attorney involved, get your accountant involved, and make sure that one transaction, which is probably the single most most important transaction that you'll ever enter into in your life, other than perhaps your marriage, and make sure that transaction gets.

Gets handled properly and that you have all the right people assisting you with it.

Excellent.

Excellent stuff.

Great message.

All right, everybody, check out Jordan if you're even thinking about selling a business.

And until next episode, I wish everybody a blessed week.

Thanks, Jordan.

Thanks, David.

The information contained herein included but not limited to research, marketing, valuations, calculations, estimates and other materials obtained from Parallel Financial and other sources are believed to be reliable.

However, Parallel Financial does not warrant its accuracy or completeness.

These materials are provided for informational purposes only and should not be used for or construed as an offer to sell or a solicitation of an offer to buy.

Any security.

Past performance is not indicative of any future results.

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