Expert Answer

Lance Hood:               Say I want to assess the viability and long-term prospects of the specific business that I'm looking at and the industry in which it's in. How would I go about doing that?

Richard Parker:           It is actually simple. It is just really by conducting independent research, checking out competitors, knowing the customers, and the marketplace in which the business operates. That is exactly what we take people through. I mean, it is not overwhelming, it's just got to be laid out effectively and it boils down to research and gathering information.

Lance Hood:               So what are some of the legal issues to consider when protecting yourself?

Richard Parker:           Typically there are around 54 clauses that we cover in the material that people need to consider when putting together an agreement. But for the sake of time, here are a couple of them that are important; non-compete clauses which obviously prevent the former owner from becoming your competitor for a certain period of time and certain distances. Earn out clauses when there's customer concentration issues involved so that you protect yourself to make sure that the business does sustain itself. The ability to set off - the word is set off any note that you have with the seller.

So for example, if any issues come up or there are any problems that arise that the seller didn't disclose while you owe them that money, for example there are bills that may have come into place or a claim made even though you're buying assets, not stock of the company; if for whatever reason there is something that you have to settle with a third-party, then that money comes out of the seller note, so you have a right of set off.

There's ability for inventory adjustments. When you negotiate the deal there's going to be X amount of inventory if it is a product oriented business that is going to be included in the deal, well, what happens if between the time you negotiate that and the time that the business is going to close, or the deal closes, the inventory drops by 50%? Well, there's got to be a mechanism to lower the purchase price by 50% of what was valued for the inventory. So inventory adjustments up or down.

The business must be operated by the seller in the same manner until the deal closes. So you reach an agreement today, you may not close that deal for 60 days. Well, in between that time that seller has to run the business properly and can't make any crazy decisions, can't fire the people, can't do anything crazy. So there's provisions in the contract to make sure that he or she does that.

And another point would be that the seller must provide adequate representations and warranties about disclosing material issues. That is a legal point, the attorney's will take care of that. But the seller makes for certain representations and agrees to provide certain warranties related to information. It's not like - it's somewhat like a warranty that you'd get on an appliance, but they're representing that certain things have or haven't happened, that nothing - for example, even though you're not taking over the liabilities of the business in most cases, one of the warranties or representations they may make that there is no lawsuits that are pending against the company. That even though you, as the new owner, will not be responsible for, it could hurt the business or that there is nothing material that they're aware about in the industry that is looming.

For example, looking at a business recently with a buyer that was related to the telecom industry or telephone industry and providing access to telephones, landline telephones for people that have credit challenges. And one of the material representations that the seller would have to make in that case was that they know of no looming threats within the industry.

Well, the truth is as I dug into it with the buyer we found out that there's legislation that's pending right now that could adversely affect that entire industry, deem it and render it completely obsolete. Well, if that deal progressed to the closing, if that seller knew about it he would have to make representations that he knew about that.

But above all you really want to make sure that you have a really top notch terrific attorney. You want to have them review anything before you sign it. There's a standard clause in many template agreements that really fools buyers. I mean, what it does is it states that the parties, buyer and seller, have X number of days to review the contract after signing it. And buyers get fooled by sellers and brokers who tell them, "Go ahead and sign it and then you can give it to your attorney to review." But these clauses only allow changes to language and format, not to substance. So you want to be very careful and don't sign any agreements unless it is nonbinding letter of intent, and even then so, don't sign any agreements until your attorney blesses it.

And you always want to have a no shop clause, which we talked about earlier. That really ties up the seller until you decide to rescind the deal. And this has worked wonders for me in the past as a buyer. It basically grants the buyer exclusivity on the business for a certain period of time. And as long as it is reasonable you can negotiate it, in our course really has the exact language that you want to use. It really works like a charm.

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