Armando (0:00 – 1:06)
Hello, founder. You’ve built a successful business. Now it’s time to think about that once-in-a-lifetime exit from your business.
You’ve come to the right place. Here, you will hear business exit professionals involved in the buying and selling of companies talk about what you should know before you exit. If you’ve never sold a business before, this podcast can be super helpful to you.
I’m Armando, host of the Founder’s Guidepost. Enjoy. But first, a quick disclosure.
Opinions expressed are those of individual professionals. The Founder’s Guidepost is provided by Axiom Founder’s Family Office, Inc., a registered investment advisor licensed or exempt from state registration in all states in which it operates. The Scottsdale Founder’s Forum is a biannual live event for the founder considering exiting in the next five years.
More information available at ScottsdaleFoundersForum.com. If you like this information, please subscribe and share. Hi, Armando Roman here, host of the Founder’s Guidepost with Tabitha LaVoie, with LaVoie Law Firm here in Arizona.
Tabitha, good morning. How are you?
Tabatha (1:06 – 1:08)
Good morning. How are you, Armando?
Armando (1:08 – 1:54)
Doing great. Doing great. Tabitha, I’m really excited to have this conversation with you.
We work with founders at different stages of their business, and they often don’t know what they don’t know. So the part that excites me about having this conversation with you is that that’s what you do. You help those business owners, those founders understand what they need to make sure they’re doing correctly, and especially as they get towards the latter part of the business cycle and they’re going to sell or sell to an adult child or sell to their business partners or private equity, any of that.
So if we can have a conversation that’s going to help that business owner, that’ll be fantastic. Maybe first, though, you can just talk a little bit about yourself, your firm, and why you really enjoy doing what you enjoy doing.
Tabatha (1:55 – 2:13)
Sure, absolutely. So I have to start, as you know, I’m an attorney, so I have to do a little disclaimer. Basically, I just need everyone to know that this is just general information.
I’m not providing any sort of legal advice or a legal opinion. And that’s just to get that out there first.
Armando (2:13 – 2:14)
Certainly, certainly.
Tabatha (2:15 – 3:10)
Great. So I’m an attorney in Arizona. I’m licensed to practice in Arizona.
I’ve been practicing for about 23 years. And I started my practice in the corporate side of the big law firms. And that evolved through time into commercial real estate.
And with that also came a technology, you know, software licensing, things like that. So it has sort of evolved, but it’s still three core areas, corporate, commercial real estate, and technology. And with that, you know, I’ve come along with a lot of businesses that I’ve represented.
We’ve, you know, my goodness, manufacturing to software development to, you know, golf clubs. I mean, it’s, it’s great, because I enjoy it. It’s, it’s very different, you know, every time I get a new client, new industry, new product.
It’s, it’s really fun. I think I mean, anyway, that’s why I enjoy it, right?
Armando (3:10 – 3:11)
Right, right, right.
Tabatha (3:12 – 6:02)
So but yeah, so I, you know, I don’t always get the clients that are starting their business, you know, I do get a fair amount of those that want to tell me, okay, so we want to start this business, what do we do, which I think is great, you know, because then you get them at the beginning, right, and your guide and stir them in the right direction so that eventually, if they want to sell their business, they’re in pretty good condition, right.
But no, sometimes I do get the more mature clients that, you know, have their businesses. And when I say mature, I mean, their businesses are mature. Yeah, and so they come to me and they say, okay, you know, it’s either we’re looking for succession planning, or we’re looking to do something with the business, whether it’s sell it, you know, do an merger or some something else, some other stage that we’re entering into.
Succession planning, as you know, you know, is a more of an internal process, right? So we’re going to figure out, that’s an internal document, partnership, what you know, who’s coming in here? Is it your son?
Is it your daughter? What are we doing? You know, how is it going to move forward in the future?
That’s kind of, you know, it’s different. And in that case, we do bring in the estate attorney, the different financial planners. So that’s a little different than selling your business.
So when we go into, you know, now we’re going to sell the business, someone comes in and says, okay, you know, we’re, we have an opportunity, we have a potential buyer, or they say, you know what, we want to look at the market, we want to look to see if we can actually sell the business, because we don’t want to do it anymore. We’re tired, we’re going to retire, whatever the case may be, then, you know, that’s a different conversation. So my conversation there starts with what are, you know, what are your corporate documents?
And that’s just my basic conversation, because inevitably, we’re going to know that there’s stuff missing. It just is that is, that is part of the small business, the family owned business, that is what we run into. So, you know, I start with that.
And what I want to know is, do you have articles? Yes, we have, you know, a registered entity. Great, that’s a good start.
Do we have, you know, what kind of entity is it? Are we looking for bylaws, shareholders agreement, a partnership agreement, operating agreement? You know, who knows?
I don’t know. So I have to ask the question. Sometimes when it’s just one owner, they’re not going to have more than the articles, right?
Because they haven’t really thought, well, do I really need to have an agreement with my wife? You know, as to the ownership of the company? That’s a good question.
And you know, sometimes you don’t, sometimes you do. So, you know, I kind of just want to know what are we working with?
Armando (6:03 – 6:15)
Yeah. And that makes a lot of sense. Better that they find out with you before they get too deep into the sale, where then they find out maybe they don’t have things where they should be.
And maybe it derails that whole buyer altogether.
Tabatha (6:16 – 8:11)
Because that buyers, you know, so I’ve been lucky enough to represent people on both sides of the transaction. I’ve represented buyers, I’ve represented sellers. So I know what to look for on either side.
And if you’re looking, you know, for buyers looking at your company, they don’t want to know that they’re going to have problems after it closes the transaction. They don’t want those problems. So it may be a, oh my gosh, they’re very unsophisticated.
They don’t have these, you know, basic documents in place. We don’t know what they’ve been up to. Do we really want this?
Right? And so you’re now all of a sudden, instead of going down this path of, oh, we are going to get, you know, the letter of intent. And then we’re going to, you’re bringing up question marks, right?
Question marks in the buyer’s mind as to whether or not they even want to go down this path with you. So you want them to go down the path with you, right? Because that’s the point of selling your business.
You want to say, you know, here’s what we have. Even if it’s not a lot, you at least look like you’ve organized yourself and you can present your company well. So that’s, that’s my path.
And, and when I asked for these documents, what, you know, what I’m really doing, what I’m looking for is anything that needs to be cleaned up, any potential issues. I will tell you, like, for example, you know, I had client that came to me and they want to sell their company and great. You know, so I get the information I get that’s public.
So, you know, Arizona corporation commission, they give me some documents and I’m going through the documents and they don’t match. And I’m like, okay, so who are the owners? For whatever reason, the husband was left out of the paperwork.
Armando (8:12 – 8:12)
Oh no.
Tabatha (8:13 – 8:42)
Right. So on paper, it looks like the wife owns a hundred percent of the company and they were already in conversation with a buyer. And I’m thinking, okay, so that’s a little awkward because it doesn’t match up.
And so we, you know, we had to fix that. And like, you know, we need to make sure we, you know, we’re presenting what we think we are. So you think you’re a company’s owned by both of you.
Well, we need to present that. And so we had to, you know, do a little bit of cleanup.
Armando (8:43 – 9:28)
Yeah. And what you’re touching on there is consistency. So that as the buyer is looking at you from a brand new lens, they want to see that, that what you said is consistent with the documents, that what you’re doing is consistent with what you said for your business model.
And anything that is off, that is not consistent causes questions. It might cause doubts. And all of that is going to help to erode, possibly erode that sales price, or just maybe even end with the whole transaction not ever happening in the first place.
So it sounds like what you’re helping them do is bring all those pieces together so that when they do get in front of that buyer or prospective buyer, that it makes sense to the buyer and they don’t have surprises along the way.
Tabatha (9:28 – 11:28)
That’s right. You know, along with the asking for corporate documents comes, you know, what contracts do you have with your employees? What contracts do you have with former owners or former employees?
There’s all these, I mean, it’s a large scope that I’m asking for, right? Because I want to see if there’s any gotchas. You know, I have a client that had an agreement with a former member.
And so it was an LLC of the company. And they’re getting ready to sell the company. And it the sale of the company triggered a clause in that contract.
So that was sort of a okay, you know, do you really want to do this? You know, there is this triggering event. And are you prepared for that?
Is this the right timing? Those I mean, it’s important to look at that whether it’s a triggering clause or whether you have a son who is in the business and he’s working and he thinks he owns a percentage of the company. That’s another conversation that you need to have.
Well, if he thinks he owns a percentage of the company, do your documents reflect that? Because if they don’t, one, you’re presenting, you know, an ownership structure to a buyer that is not correct. Or you’re creating a potential claim that they are entitled to a piece of whatever you’re getting.
And that may cause a lawsuit. Now, one thing I will tell you, buyers do not like lawsuits, they do not like problems. They do not like that, you know, someone now may be preventing a closing of a transaction, because there’s an issue.
So those are all important. I was gonna say, there are also clauses, you know, about whether your contracts are assignable. That’s why, you know, I need to look at those contracts to see this buyer, is he taking on these contracts?
Or are these contracts not going to be assignable to them?
Armando (11:29 – 11:35)
Are you thinking of the customers of the business or vendors of the business?
Tabatha (11:35 – 13:29)
All of that there, you know, you could have a vendor contract that says, you can’t. Oh, I love these, I’m going to get into these. I’ll tell you in a minute.
But yeah, you’ll get these, you know, contracts that say, you can’t assign it without our consent, or without providing us notice. Well, now we need to do that, you know, and some of them might have a time like 60 days before you close or 90 days before you enter into a contract. Well, we need to know that upfront.
And this is all part of due diligence. And the buyer is going to do this due diligence, but you should know, since it’s your documents, what’s in them. But yeah, so, you know, one of the lovely things about these contracts that we get into as business owners, is the contracts that say, you can’t do a change of control.
And a lot of commercial leases do that. You know, they have the provision that says, if you sell, you know, 50% of your business, or 49% of your business, you have to give us notice, or we have to consent to that. Of course, I don’t like those clauses, because typically I’m representing the tenant, sometimes I represent the landlord, but it’s rare.
But so I don’t like them, because now you’re getting into our business. You’re the landlord is kind of popping into our business and saying what we can and cannot do as far as our ownership, or maybe we need to, you know, sell a piece of our business for financing purposes. You know, you get the silent partner that wants to come in and give some money.
So yeah, I mean, all of these clauses, I mean, I know we’re kind of heading in a different direction than the focus of selling your business, but they are, they all come relevant. They’re relevant to what are we looking at? What is the, you know, scope of what we need to prepare?
And we need to be aware of before the buyer tells us that’s a problem.
Armando (13:30 – 13:59)
And so Tabatha, what are some of the, you know, for the business owner who’s had the company 20, 30 years, they’ve never sold a company before, never having a conversation with you, and you’re helping to navigate that, helping them to get things together, kind of your own due diligence, I suppose, to help them build this strong, solid package of a company. What are some of the common things that you find or some of the ahas to that business owner when they’re having that conversation with you?
Tabatha (14:01 – 14:36)
You know, the most common one is just that, you know, they don’t have a partnership agreement or some kind of structure to their ownership. The other one is they don’t typically do minutes. You know, small businesses, family owned businesses don’t do the annual minutes.
And if you have an LLC or a partnership, they’re not really, you know, you don’t, they’re more flexible with the state as in you don’t have to file your annual report. If you have a corporation that in Arizona, you have to file your annual report and sort of keeps you aware of, you know, the fact that your company you have reporting requirements.
Armando (14:37 – 14:56)
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Tabatha (14:57 – 18:24)
So what I, you know, what I find is that we don’t really have minutes. And so you don’t have documented that you entered into a loan transaction and that that was approved and that was in the best interest of the company. You know, it’s corporate formalities that it’s, they’re very simple, but most of my clients in that area, they, you know, they don’t, they’re not worrying about that.
They’re worrying about their business. You know, they’re worrying about selling their service or their product. So it’s always good as corporate attorney when I, you know, when I’m engaged, I come in and look at those things and minutes are not difficult for me to do.
And it at least makes them, you know, more in compliance with that corporate formality that makes them more presentable and makes them, you know, look good. So, so we do that. We do that.
And we look at, you know, what licenses do you have? Are they, you know, transferable? It’s more of a cleanup, you know, to try to, you know, prepare for that presentation, you know, for lack of a better word to a buyer.
That’s liens actually that liens are another one that it’s an aha moment that sometimes they’re not even aware that there are liens against their assets, even though they, they, you know, they entered into a loan or some kind of, you know, lease, they sometimes are not aware that that means that now your assets have a public lien on them. And so when, when we go and do a UCC search, you know, to see what’s there, there are either liens or notices, right? And so a buyer is going to know that a buyer will do that due diligence, but unfortunately, sometimes the owners forget that that’s there.
The other potential, I guess, issue that I can say deals with title to property. So when you’re selling your business, one of the conversations we’re going to have is what is, what is the structure? What are we selling?
Are we selling the assets or are we selling the equity? Right? Cause those are two choices.
And we can either sell the equity, which is the ownership and the buyer will take everything. You know, they’re taking everything with them or we’re selling the assets. And of course each one has a tax consequence.
So that’s where I work with CPAs on that piece to figure out what is the best structure for this client. You know, if there’s a tax issue they might, they might prefer to go through an asset transaction. And that means that we now have to identify which assets are we selling?
Are we selling all the assets? What does that mean? So a, one of the sort of aha moments or gotchas is the title to all these assets.
Sometimes title is not in the name of the company, you know, because as an owner, sometimes it’s easy to go, well, yeah, I’m just going to buy this car. I’m going to use it for my business, but I’m going to put it in my name, not in the name of the business or register. Yeah.
I’m going to register for a domain and I’m going to put it in my name, not in the name of the business. Or I have an employee who I’m going to tell to go sign up for a domain name, you know, so I can have a website. And this happened many years ago and they put it under their name, but they’re no longer with us.
Armando (18:26 – 18:28)
That sounds like a problem.
Tabatha (18:28 – 18:50)
Oh, it was, it was a big problem. So I had a client and this was not a small client. It was a big client who came to me and said, you know, we were getting ready to sell the business and they were kind of freaked out about the fact that their domain was in the name of an, you know, former CEO and the CEO was let go.
Armando (18:50 – 18:51)
Oh no.
Tabatha (18:51 – 19:37)
So that’s an awkward moment. Cause you’re like, okay, so now you have a hostile employee who may or may not give you. It was a problem.
So we got a little creative and, uh, you know, started looking at all the documents and thank goodness they had, you know, they had some documents, maybe not the best form, but you know, they had documents in place that he had signed like a confidentiality, non-disclosure agreement, which, uh, you know, someone thank goodness thought of sticking in their language that said, you know, if we can’t locate you, you give us a power of attorney. So that saved us completely.
So we use that to regain control of the domain name.
Armando (19:37 – 20:07)
And, and, you know, you, you, what comes to mind is to say that is, you know, a business owner who’s had this company for 20 years, they don’t remember what they did 20 years ago to set the business up. They were just getting started and they didn’t know what they didn’t know. They just, yeah, just go ahead and do that.
And now we are 20 years later trying to sell. And these companies have grown into really great companies worth millions of dollars, but that little thing during the whole startup mode could cause a hiccup. That could be a big problem.
Tabatha (20:08 – 20:33)
It could be, you know, because now you have to learn how do you transfer that domain using a power of attorney with a company that frankly may not care to do it quickly. Or they may say, you know what, we have to check this out and we don’t know that you’re really authorized. And so that that’s a whole other process.
And that could cause a delay. You know, if you’re thinking of closing in 30 days, that’s not going to happen.
Armando (20:34 – 21:04)
Wow. What do you see that that’s you bring up a lot of good points about the assets and how to sell it. Is that the entity, the equity of it, or is the assets themselves?
When you’ve talked about the domain name, it made me think about intellectual property. Do you see things with an intellectual property? Let me rephrase that.
What do you normally see in that whole intellectual property space that you’re having to provide some guidance and some cleanup to get it in sale ready condition?
Tabatha (21:06 – 23:59)
You know, in the intellectual property world, which I play in a lot, we have to figure out, we have to make sure that the assets are free and clear, right? Sometimes we think they are. And then we forget that we got a loan 10 years ago.
And that part of the collateral was patents or intellectual property that we have. And we forgot that the financing company filed liens with the USPTO. Not something that you usually check, but I do.
So yeah, so I’ve had to check if we have patents, if we have trademarks, if we have copyrights, anything like that, you do a search to figure out, are these free and clear? You know, they’ll come up, if you do a search for liens in general, you’ll see that maybe you have a company that did place a general lien on your assets, but then they might go further and file it not just with like in Arizona, the lien would be filed with the Secretary of State’s office as a UCC, but then they could file it with the USPTO, which is the United States Patent Trademark Office. And that is something that I’ve come up against that we were like, okay, what happened here?
What, you know, I thought you paid off this loan and it’s showing that there’s still a lien. And so we have to go through that process to get those liens released so that they are free and clear. We’ve had, when you say intellectual property, you wouldn’t think that telephone numbers are intellectual property, because they’re really not registered as intellectual property.
But that’s another thing is transferring that telephone number. People don’t think about that. It’s like you have a website, there’s a telephone number on there.
It might not be a fax number at this point, right? Because faxes are sort of, what is that? But yeah, domain names, telephone numbers, the website.
If one thing I can tell you as far as intellectual property is we hire people to do our websites, but not a lot of people have that contract. You know, they don’t want to bother with the attorney reviewing the website contract where you’re paying someone to develop your website. Well, that’s important because as a developer of a website, these are people that are sort of artistic.
So they have rights to what they do, to what they produce. And if you don’t put the right language in there to have those rights be assumed by the company, technically they could claim ownership. So that’s another area that we just need to make sure that, you know, we have all the rights that we want to the artwork, the look and feel of the website.
It’s not just the information, you know, there’s more to it. There’s whatever they developed. And you just want to make sure that that developer gave you those rights because you own it, you paid for it.
It should be yours.
Armando (23:59 – 24:32)
So it sounds like some of this cleanup could take quite a while to get cleaned up. So ideally, when that business owner is, when he or she is thinking, I’m going to sell, say in the next three to five years, at what point does it make most sense for them to see you and come have a conversation with you to begin some of that looking into the company so that this stuff doesn’t come back to bite them when they’re now working with a potential buyer and they’ve got some kind of a contract they want to get going?
Tabatha (24:32 – 30:27)
Yeah. So ideally you should come talk to me two years before the transaction that you’re thinking the transaction, but that’s not going to happen. I mean, that’s ideally in a perfect world.
It sounds really nice. But that doesn’t happen. You know, what happens is that you’re going along and all of a sudden someone approaches you that they think your business is worth something, or you decide, you know what, I think we’re going to retire.
And that doesn’t usually come two years before, that comes within maybe 12 months, maybe six months. Sometimes it’s quickly. So we may not have all of the time.
Some things may already be in place. Some things may require some post close. I mean, this is where attorneys get creative, right?
I’m pretty creative. So I will tell you that sometimes when we have these issues, we know we’re going to get it resolved. You know, you’re going to get that assignment or consent or transfer, whatever it is.
So we negotiate. So that’s what I really have transactions that are very simple. I have transactions that are very complex.
So that’s where some of the complexity comes in. We negotiate post-closing items. We’re going to close the transaction and in good faith, we’re going to work on getting these other things closed within 30 to 60 days later.
If we can, if we can’t, we’ll agree to extend. Hopefully the parties are working together to close the transaction and move forward. I’m not a litigator, so I’m not here to blow up your transaction.
No offense to litigators, but I’m here as a transactional lawyer. I’m here to see what we can do to put this transaction together and to make it happen. So there’s negotiating that happens throughout the transaction, even once you sign the definitive agreement, because typically once you sign that agreement, the buyer’s going into due diligence mode.
They’re finishing up their due diligence. There might be, you know, some steps in between the signing to the closing. And so you’re still sort of negotiating a little bit, maybe not on price, but that happens too.
You know, sometimes they come back and say, well, we found this or that, you know, we don’t really think that the price is right. You know, when you’re talking about price, it’s, it’s a little tricky. I know that as an owner, you know, a lot of owners want to believe that their company is worth a lot of money and, you know, sweat and effort and tears go into that.
And of course that, that is where you want to be. But sometimes, you know, you have to make adjustments because of things that you have in your history, or maybe the potential going forward of that company or litigation that comes up there, you know, there’s, there’s some adjustment that has to be made. You know, I have a company that their value is in the know-how, which is very, very difficult, you know, because it’s not tangible and it’s not a tangible asset.
You know, you’re not creating a widget and then assigning a value to that widget. And then you have good, you know, goodwill that is not tangible. And a lot of the intellectual property goes into that, you know, category, so to speak.
You have know-how. Know-how isn’t intangible. You know, how you do your business, the system, the functionality, the process, there’s nothing tangible.
So that’s hard. And when you have a client and they believe that that is, you know, valuable to a really high level price, that’s where you have to bring in your financial advisors and do a business valuation and try to figure out how do you justify that value? Because the buyer is going to question it.
I mean, one thing’s to enter into a contract with someone and put a price on it because you’re going to provide a service and that service has that value. You have the know-how, the ability to get it done in the way that you get it done. But another thing is to actually sell the company for a value of something that only maybe you can do or you can train someone to do because that is something that you have in your head.
Know-how. That’s a challenging one. You know, I’m still sort of struggling with that one as to a high value.
But sometimes we get creative, you know, we have to negotiate. When you’re dealing with that as the asset, you have to have a transition period, right? So now you have a sale that is bringing on the buyer or the, sorry, the owners into the buyer’s organization to transfer, to do that sort of technology know-how transfer.
And it’s not going to be, you know, most definitive agreements that I have worked with where there’s some kind of transition period. Typically it’s a short period, you know, it’s 30, 60 days, maximum 90, you know, it’s not a transition period of years. But in this case, it might be, you know, we might be talking about 24 months to transition all that know-how process relationships, how you do this or how you do that, training of staff, training of the new owners, that this will be interesting, but it is a different one.
Armando (30:28 – 31:21)
Wow. Wow. So ideally, like you said, it doesn’t happen, but ideally if they came to see you two years before they were thinking of selling, you could help them, of course, navigate that more effectively.
And it sounds like what you also said is that the owner has a certain number in of a price or a value of the company. And that value goes up and down based on all these little things that happen along the way. And that price might drop when things cause doubts in the buyer’s eyes, but it might go up if things look great.
And I’m thinking of the things that you mentioned that may be inconsistent, maybe contracts not signed and just, but it sounds like that whole price really can fluctuate based a lot, or at least a little bit each way based on those little things that need to get resolved.
Tabatha (31:22 – 31:25)
Yeah. Armando, I’ll be honest with you. I have not seen that price go up.
Armando (31:29 – 31:30)
You know, I think that’s my optimism.
Tabatha (31:33 – 32:00)
Typically, you know, your seller’s going to say based on hopefully some kind of valuation, some kind of third party that came in and gave them that value, here’s where we are. And, you know, and they’ve thought through all the, you know, potential negotiating it down and things like that. So they have, hopefully they’re proposing a solid number knowing that it could go down.
Right. I don’t, I have not in my experience seen it go up.
Armando (32:01 – 33:00)
So let me, let me ask you when you’re going through and working with the business owners that as you’ve done so for years, what I’ve heard a lot in our Arizona marketplace is that many, many business owners do not work with an investment banker or any independent third party. They somehow get connected with that buyer and then they strike a deal with the buyer and they sell to that buyer rather than going through an investment banker. And I’ve heard different numbers, but what I seem to hear most often is that at least in Arizona, about 80% of sales do not use an investment banker or a business broker or anybody who’s in that category.
So that means that the seller, the person who is on the seller side is you and or the CPA of that business owner. If they don’t have an investment banker who’s helping them go through this, does that sound about right?
Tabatha (33:01 – 33:51)
That sounds about right. I have to tell you, I don’t, I don’t think I’ve run into investment bankers being involved in the sale, unless you’re talking about a, you know, larger type of company not, not larger in value, like price value, but larger in size. You know, you’re talking about multiple employees, multiple locations.
I think they’re more sophisticated and they have teams inside already. And maybe in that situation, there is a bigger team involved. I don’t know why though.
I mean, I, I, but that is the reality. I guess that’s all I would say is that it sounds correct to me.
Armando (33:51 – 34:55)
Yeah. And what I’ve heard about that also from the investment banking community is that Phoenix is a, is a, we’re a big city. Yes.
But we’re still, we’re not the Chicago or New York or Boston that’s been doing things for so many, many years that they have a whole infrastructure built and that it’s just what people do when they sell. That here in Phoenix, in Arizona, we’re a younger community, a younger business community, and that we just don’t have that robustness. That’s probably the wrong word, but people just don’t, maybe they just don’t know that they can or should have a conversation with that investment banker or that business broker.
They just, as you said, they get a, they get a call and then solicited offer and they say, Hey, that sounds great. Yeah. Let’s have a conversation.
And that leads to them selling their company versus them saying, wait a minute, I should probably talk with somebody who buys and sells companies to make sure I’m getting a good price. That often just doesn’t seem to happen.
Tabatha (34:56 – 37:17)
I would agree with you. So I have a client that moved to Arizona within the last, oh boy, it’s been a while since I’ve represented him. So maybe five years.
And he came from the East coast and he does use investment bankers and brokers. And it was a, it was really interesting working with him because he can, you know, he controls that piece. I don’t get involved.
And so he was referred to, but he’s, he’s, he was a buyer, you know, he’s wearing, he’s wearing both hats, but in that, in the role as a buyer, he was working with brokers and he was working, you know, to find opportunities to buy companies and things like that. But I’ll tell you what, I mean, he bought a company in Texas, you bought a company in Arizona. And there is something about, and maybe, I don’t know, I mean, maybe it’s a culture thing, but there is something about business owners wanting to deal directly with other business owners and not middlemen.
Right. So when I work with my clients and, you know, everybody works differently in this area, but when I work with my clients, you know, I am here to support them. I’m here to negotiate for them if they need me.
And so I kind of leave it up to them, you know, they’re business owners. They’re also smart. You know, they’re smart people.
They know what they’re doing. They’ve been successful for a reason. So I really kind of leave it up to them to tell me, where do you want me to be?
You know, what do you want me to do? You know, I don’t need to negotiate with the buyer if you don’t need me to negotiate with the buyer. Now, when the buyer brings in a lawyer, then, you know, there’s no other choice.
Now I have to step in to have those conversations. I do leave it up to my clients, though, you know, because a lot of them do like to deal directly with the other business people and not have, whether it’s an investment banker or a broker or a lawyer involved in that conversation. And I think it’s sort of like, you know, they’re wanting to feel each other out as to, you know, what are you going to do with my business, you know, going forward?
Are you going to gut it or are you really going to continue the business as I have built it for the last 20 years?
Armando (37:17 – 38:11)
Right. And I would agree that a lot of business owners, they’ve been in control for so long. They’ve built that company from blood, sweat and tears, and they want to be part of that sale process of understanding who is the owner.
But then also it depends what the business owner wants. If they want, if one of the primary concerns is take care of my people, then I can see why they would want to know who that buyer is and what their plans and intent is with the company going forward. But I also wonder with, you know, having the intermediary or investment banker as part of that picture, as that newer client you mentioned, he’s been through these ropes before.
For him, it sounds like it’s a more efficient process to have that independent party come in and do a lot of that due diligence, tire kicking for him so he can get more done in a shorter time.
Tabatha (38:11 – 39:44)
Yeah. And I think, you know, sometimes maybe it’s not knowing, you know, that there are these people out there that can do some of the work for you and trusting that. And also, you know, being maybe informed as to the value that they provide.
And maybe it’s just lack of understanding that relationship, you know, as a business owner and as an attorney that knows other business owners when, you know, you think about, okay, now I’m going to insert this person into this negotiation. You know, what value are they bringing to it? Do I need them?
Do I really need them? Or, you know, I can do this myself. So maybe it’s that.
Maybe it’s just, you know, understanding and providing more information about the benefit that investment bankers or brokers provide and knowing that, you know, they’re there not just to, I mean, it’s like anything, you have real estate agents, right? So real estate agents, you know, are there to help you, but they’re also getting commission. So sometimes, right, as business owners, we’re kind of like, okay, so, you know, what are you doing for that commission?
You know, what is it that we’re getting out of this? And that’s, you know, that’s why I don’t do real estate in the, you know, in the private sector with the homeowners, because sometimes it’s a little tricky and they’re getting the commission for that work. But, but then I do, because I have East Coast clients that come in and want to hire me for their transactions.
And I’m happy to do that.
Armando (39:45 – 40:16)
So what about Tabatha, what about partners? When a business owner has partners, you can have, of course, as it seems like often here, anyway, there are husband and wife partners where they both run the company. They’ve been doing this 20, 30 years, but when the partner is not a family member, not a spouse, and you’re going through that sale process, are there unique things that you see or that you help navigate with those two partners leading into that sale or through that sale?
Tabatha (40:17 – 42:10)
Yeah. So partnerships are, you know, can be tricky. And hopefully you have a partnership agreement that outlines how each person votes in a, when a, when there’s a potential offer, you know, you, you can get very creative and you can get provisions and partnership agreements that may either help or hurt you in these types of scenarios.
You know, I’ve had partnership documents that, and hopefully you have a partnership document. Let’s start from there. The assumption is that there’s a partnership document because sometimes you don’t, you know, sometimes we’re partners and okay, well, where does it, you know, where does it say your partners?
Oh, well, in the articles. Okay. So what’s the ownership, you know, each person has, and you know, that’s, that’s not a good conversation to start with, but, you know, sometimes you have to have it, which is good that we’re going to now document that relationship.
But yeah, sometimes you have partnership agreements that will, you know, require unanimous consent for a sale of the business and both partners have to be on board. You know, you, you, unless you have a operating agreement that says you only need 51% and you own 51%, you’re going to need the other person to sign off on that transaction. And that can be tricky if they’re not ready to sell.
You know, if your partner is the working partner that wants to continue to work or thinks that the company is going to increase its value and they can get more out of it in three more years, that’s a tough transaction right there.
Armando (42:10 – 43:51)
Right. So I met with a couple just recently who has a business that had it for about 20, just over 20 years. And he told me, the husband told me that when they started this company or when they bought this company, he didn’t have any money.
So he went to somebody who had money and that guy became the silent partner. And so 20 years later, and a competitor offered about 30 mil for this business. And it sounded pretty enticing, pretty attractive.
But the agreement with the silent partner wasn’t clear. And so the conversation, the questions I asked were, well, what is the silent partner going to get from this sale? And the response was, well, I, I, I think I’m going to offer him five mil.
I think that’s fair. Well, okay. What does he think?
Well, we haven’t had the conversation yet, but it gets to your point that if it’s not documented, if that agreement isn’t clear and written down, and now there’s a potential sale with some significant money, it can be a, it can be a, it can get ugly real fast. So that’s not the best situation to be in, but that does happen. And to head that off on day one is best.
Like you said, when they, when they come in and they start the company brand new, clean and fresh with you, you can put those in the documents, but if they’ve already had this business 20 years, and now you’re trying to help them clean up, then you’ve got to navigate. You’ve just got to navigate that as best you can to get to the right place for them.
Tabatha (43:51 – 44:46)
Yeah. Unfortunately, you know, that, that isn’t the best scenario in a lot respects. Just, you know, one of the things that I’m thinking is you’re now negotiating, not just with a potential buyer, you’re negotiating with your partner, you know, and, and that makes things very complicated because now you’re, you have a buyer.
Obviously you’re telling your partner, we have a buyer. Well, your partner is now, doesn’t really have a lot of incentive to be reasonable. You know, they have an incentive to say, well, you know what, you know, maybe I’m entitled to more than I really, you know, you think I’m entitled to.
So yes you know, negotiating those things at the beginning or somewhere before you get to a point where now you have a buyer is important because now you’re in a really tough situation where you’re probably going to have to give up more than you wanted to give up.
[Speaker 3] (44:47 – 44:47)
Right.
Tabatha (44:48 – 47:16)
Because you don’t have that documented as to what happens, you know, a silent partner probably should get a payout based on whatever their ownership is. You know, and if it’s an LLC, you have that whole, you know, situation where you have to look at how much they put in, what have they received out? What are the capital contributions?
What are the distributions, you know, and hopefully you can structure it so that, you know, you’re the money coming in pays for a lot of different things before it’s actually distributed to the owners, you know, because that’s the way it should be. But yeah, negotiating with your partner at this point is not ideal. And hopefully your partner can be reasonable.
I don’t know what to say about that Armando. I mean, you know, I would be put in that situation where now we’re like, okay, let’s sit down with your partner and, you know, let’s figure out what was the understanding that you had along, you know, somewhere along the way. And has he been paid anything for that investment that he made?
I mean, also you’re, you touched on something that not a lot of owners realize when they enter into a partnership. One, you’re stuck with that partner, unless you have an agreement that says that at some point you can expel that partner for whatever reasons, or there’s a triggered automatic buyout, which, you know, are really good provisions to have. And not only are you stuck with that partner, but when you’re offering ownership in your company, I think a lot of owners don’t realize that you’re now playing in the securities world.
Okay. So because an ownership of a company is a security, you know, whether it’s an LLC, a corporation, or a partnership, it is a security. And with that comes disclosure.
So what I tell a lot, you know, a lot of my clients is, look, if you’re going to offer any sort of ownership, let’s just make sure that, you know, we have all those disclosures in there, you know, that, you know, there’s a risk, you know, that you can lose it. You know, you’re, you know, you’re this type of investor. You just want to make sure you’re kind of crossing your T’s and dotting your I’s on that one, because what you don’t want is some partner that you brought in because you needed money to come out years later and say, you know what?
I have a securities claim against you now. Not fun. Not a good scenario.
Armando (47:16 – 47:19)
That sounds like it could be a total surprise to many business owners.
Tabatha (47:21 – 47:56)
Well, let’s hope not. But you know, I’d like to, I just like to, you know, tell people if you’re bringing in anyone into your business as an owner, know that you’re bringing in someone you’re going to be stuck with and getting them out is going to be very difficult. And it’s very, you know, these conversations are not easy when everyone’s in the honeymoon spot, you know, where everyone’s like, oh, I like this person.
They’re going to give me money. And you know, they’re such a great person. Well, maybe, but you know, I’m a lawyer, so I have to look at the negative side of that, which is okay.
So how do you get this person out if you don’t like them anymore?
Armando (47:56 – 49:39)
Yeah. Yeah. So you, we started the conversation, you mentioned succession.
And then you also mentioned about that, that, that client you’ve got that has all the know-how in his head. And the goal, the idea is that the company will be sold and that know-how will stay in the person’s head for two years after sale, because he will stay as part of that company. And that’s part of the succession, I suppose, for him, but because the knowledge was in his head and not with his team or in his documented processes and procedures, the only way for him to have that succession is to stick around for a while and then teach the people around him for the new, for the new owner of that business.
That’s probably, I would think maybe the more unusual way for succession to really happen. Often it’s, you’ve got key people or key management, or maybe there’s an adult son or an adult daughter, or a couple of siblings, adult children of the owner. They are going to be the apparent heirs to the business.
And there’s that whole succession that way. Tabitha, when there’s a family succession like that from gen one to gen two, there’s the whole family dynamic that gets into play that can, that can be very tricky to navigate. And yet, as the attorney, you want to document, obviously, so that it’s nice and neat and clean and less disputes.
How do you get that balance? How do you help that business owner navigate that process? What should they be doing to make that a more successful gen one to gen two transfer?
Tabatha (49:41 – 49:43)
Wow, Armando, that’s a loaded question.
Armando (49:43 – 49:43)
It is.
Tabatha (49:44 – 51:39)
Well, relationships are not easy. So it is a delicate balance because I certainly am not going to be coming into a relationship and causing more problems. That’s not my role.
So what I tell business owners when they come in, first, who do I represent? Is the big question. Do I represent you as the owner?
Do I represent the company? Typically, I think the, although it’s great to represent the owner and it makes sense at times, sometimes I come in as corporate counsel in that scenario, because then I represent the entity. And so now I’m acting on behalf of the entity to just document and guide the individuals through the process.
Do I make recommendations along the way? Sure, I can. And if I’m asked to, I will, but I don’t represent neither the son nor the father, not trying to get religious there, but the daughter or the father.
But I approach it in a very logical and rational way, which is this is a business transaction. So trying to get away from the relationship, whatever that might be between them and focus on the benefit of the company going forward and hopefully help them put their understandings into a document that will last going forward. I agree with you that having that knowledge in your head and then also now trying to transfer that to a buyer is not common.
And I don’t recommend it because it is difficult because if you die tomorrow, that knowledge goes with you.
Armando (51:39 – 51:40)
That’s right. That’s right.
Tabatha (51:40 – 52:08)
So is it good to do succession planning before a sale of a company? Absolutely. Because now you have someone that you trust, that you trained, that all of your knowledge and how you do things, they’re going to acquire.
And hopefully they’ll also train someone else after them so that that company’s success going forward continues. Because if you don’t, then success steps with you.
Armando (52:08 – 52:57)
Right. Right. And we’ll often, as we talk with the business owner and talk about succession, we’ll tell them you will die, period.
You will die. We just don’t know when. We don’t know when that’s going to happen, but we know that is going to happen.
So at some point, your business will transition to somebody else or it will also die when you do. So let’s take some active steps now so that you can help get the framework together for succession so that it succeeds you the way you want it to, the way you think is best for your family and or your employees. But let’s actively think about that, talk about that, and begin some steps in that direction because inevitably the owner is going to pass.
It’s just a matter of when.
Tabatha (52:58 – 54:11)
Right. And doing the planning, although painful and perhaps somewhat expensive in some cases, it leaves a level of certainty for your family. It leaves a level of certainty for those that come after you in that they have, you know, security and support going forward.
And it’s all, you know, in a night, hopefully, right. A nice little box with a bow on top. But we can all hope for that.
I think that all we can do is try to do our best in that area. And yeah, I mean, I would tell anyone that if there is an opportunity to do some planning and to try, you know, for the long term, you are going to die. I mean, right.
That’s just part of nature. So yeah, I agree with you. It is important to get individuals to try to do a little bit of planning, not saying, you know, do a full blown out, you know, tens of thousands of dollars, you know, not necessary, probably.
But do a little planning and do a little transfer that at least assures you that once you’re gone, your business and your family will be okay.
Armando (54:12 – 54:40)
Right. Right. You do your best to at least do something to addressing that.
I’m just looking at my notes here. You mentioned about corporate documents, title of property, business valuation and business appraisal. I don’t know that we touched on that.
Anything you’d like to add about valuation or appraisal on the business, either as it’s going through that sale or intending to sell any thoughts on that from your perspective?
Tabatha (54:41 – 55:45)
Actually, you know what? It’s funny that you I was thinking back at the comment that I made about I haven’t seen the price, you know, increase. I have to correct myself on that point.
You just mentioned valuation. You know, one of the things that that we deal with on valuation is when the buyer wants a non-compete. So then there’s an opportunity, you know, for that price to go a little bit up, you know, because I mean, and sometimes it doesn’t.
I mean, sometimes it’s sort of, you know, just part of a transaction where they want a non-compete and it’s their security that you’re not going to sell this business and turn around and then go compete with them. And then it’s sort of pointless that they bought it. But, you know, it does give you sometimes when it’s to negotiate a term, you know, it’s like, OK, well, we weren’t expecting it on compete.
So now maybe it does impact the price a little bit. But those are opportunities to negotiate and figure out where are you on that. But with that comes also non-solicitations and things like that.
Armando (55:46 – 56:35)
OK. Yeah. It sounds like the wholesales contract and all the different clauses and paragraphs that really need to be in there to really make that owner feel like they did the right, all the right steps along the way during that sale.
But then also once the sale is done, that they feel good about it and they’re free to do what they intend to do beyond owning that company. But it sounds like it really comes back to make sure that contract that you’re helping them to negotiate, helping them to get the protections in there for them, that really is important to them so that they can sign when it’s time for them to sign. They get paid for it.
They walk away and they feel good that they did it right.
Tabatha (56:36 – 57:53)
I that’s invaluable. I mean, I have to tell you not to toot my own horn. But yeah, I mean, it really is important.
If you’ve been doing this for as long as I’ve been doing it, you’ve seen a lot of different negotiations. You’ve seen a lot of provisions. You’ve seen how potentially there are backdoor ways to do things or clawback clauses.
You’ve seen enough to know what you need in that document for your client to make sure that they do have that closure and be able to walk away comfortably, even if there is a transition period after the closing, even if there are post-closing matters that need to happen, you have negotiated the contract in such a way that they’re comfortable and it will be hopefully smoothly. But I can’t say that it’ll be 100 percent smoothly because you never know with the buyers. But yeah, I mean, that is something that I’ve always strived to do and knock on wood because, you know, I’ve been fortunate, I suppose, in that area where I have had clients and sold their businesses and I have not heard issues afterwards.
So that is a blessing.
Armando (57:53 – 58:27)
And that’s yeah, that’s probably the best the best kind of outcome there. A question for you, Tabitha. Sometimes I imagine people will a business owner will come to you.
They’ve already signed a letter of intent with a prospective buyer and they’ve already got some terms and their conditions there, but they already have a signed agreement and then they come to you. How how as the attorney representing the seller, what kind of position does that put you in as you represent that seller if they’ve already signed that LOI before they come see you?
Tabatha (58:29 – 58:58)
So I’ll tell you, I’m not a fan of LOIs. I’ve done them, whether it’s an LOI, MOU, whatever you want to call it, but it’s a letter of understanding or memorandum of understanding. I’m not a big fan of them because if they’re done well enough, you’re almost at the definitive agreement, which means you’ve been negotiating that for a long time at that point, you know, and it almost like change the title and call it a definitive agreement.
Armando (59:00 – 59:03)
Meaning you’ve already locked in some of those terms by signing them?
Tabatha (59:03 – 59:38)
You may have already locked in some of the terms. So LOIs are tricky in the sense that, you know, the case law on them is sort of, you know, a little bit all over the place, but they’re non-binding to some extent. And courts are very, you know, it’s very tricky about how many terms or what terms did you put in there that now creates an agreement.
You may call it a letter of intent, but if it has all of the elements of a sale agreement, you’re already there.
Armando (59:39 – 59:44)
Oh, wow. And they might not even know that. The owner, the seller might not even know that.
Tabatha (59:45 – 1:01:25)
The seller might not even know that. So it’s a tricky one, whether a clause is binding or non-binding, whether that’s called out in the actual letter of intent is important, you know, because letter of intents are all over the place. You know, some of them will say, as to these provisions, they’re non-binding, but as to this provision, it’s binding.
They might not even talk about binding. So that leaves, you know, a big question mark as to whether or not anything is binding and why did you enter into it? What was the purpose?
You know, some of them will say, you can’t go, you know, look for another buyer. That’s not great if you are in the market of selling, you know, because now you’re stuck with this transaction or this LOI until it either expires or you terminate it or whatever that clause might be that’s in there. And there may not be a termination clause in there.
So, you know, I hate to be so negative about them, but I would say if you are looking to enter into an LOI, please just have an attorney do a quick look through, because at least you had someone that can tell you, okay, yeah, sure, it’s okay, you know, as far as the provisions that are in it are general enough that you’re not stuck with that, or maybe you do want to be stuck with it, or maybe you need to put that it’s binding, you know, it depends.
They’re, you know, letters of intent, people think that they’re all, you know, cookie cutter. They’re not, you know, they’re all over the place. I’ve seen a letter of intent that’s one page.
I’ve seen letters of intent that are 10 pages.
Armando (1:01:26 – 1:02:26)
Okay. So the message I’m hearing from you is we’ve had a, you know, a good conversation, but the thing that is really sticking in my mind right now for that owner of the business who’s thinking of selling is do not sign that letter of intent. Don’t sign anything until you talk with your attorney first, and have that attorney take a look at it, and make sure they understand what they’re looking at, and I say that because attorneys all specialize, obviously, and you wouldn’t want your divorced lawyer looking at this agreement, at least I wouldn’t if it were me anyway, not that I’ve been through a divorced lawyer, I haven’t, but I’m just saying, making the point that lawyers specialize and get that corporate attorney, that business transactional attorney, that merger and acquisition attorney, someone like you who does understand the buying and selling of companies, have that attorney with that expertise, look at that agreement before you sell, or before you sign, I should say.
Tabatha (1:02:28 – 1:03:01)
Yes, and I would say, you know, if this business is important to you, you’ve been doing it for 20 years, this is the most important transaction that you will have to do, enter into, so why not go have someone take a look at what you’re gonna about to do, because it is in, you know, in terms of an owner, and this is your baby, and you’ve had it for 20 years, this is the most important transaction you’re about to enter into.
Armando (1:03:01 – 1:04:23)
That’s right, good. Tabitha, I’ve really enjoyed the conversation with you, we touched on a lot of areas, you talked about the structure, the entity of the business, getting those corporate documents in place, annual meeting minutes, people sometimes or often maybe don’t keep those up to date like they should, you talked about potential liens that could be out there, you know, liens under a UCC filing, but also with maybe with a patent office, getting the correct title on the assets, title on property in that, really making sure, you know, what are you selling, is it the equity in the business, or is it the assets of the company themselves, ideally they should come see you two years before they’re thinking of selling, ideally, and of course ideal is, you know, ideal, it’s not often reality, but then we also talked about succession planning, and thinking that through, and making sure that you’ve got good documents in place, so that the succession works the way you want it to, and then the last thing we touched on here is that that letter of intent, the MOU, Memorandum of Understanding, whatever it’s going to be called, but I like what you said, that if it has all the elements of a contract in place, you might be actually signing the sales contract in not knowing it, and that’s why you’ve got to get with your attorney before you sign that, so you don’t shoot yourself in the foot without knowing it.
[Speaker 3] (1:04:23 – 1:04:24)
That’s correct.
Armando (1:04:24 – 1:04:33)
Right, so Tabitha, really enjoyed the conversation, if a business owner is listening, and watching, and wants to get in touch with you, what’s the best way that they should reach you?
Tabatha (1:04:35 – 1:04:41)
You know, I’m not a big social media person, so I can’t give you all my little, you know, whatever they’re called, handles.
Armando (1:04:41 – 1:04:43)
However you want them to reach you.
Tabatha (1:04:44 – 1:05:06)
You know, you can shoot me, so I do have a website, it’s, you know, lavielawfirm.com, so l-a-v-i-l-a-w-f-i-r-m.com. My email is tabatha, t-a-b-a-t-h-a, at lavielawfirm.com.
Armando (1:05:08 – 1:05:37)
Okay, so tabatha at lavielawfirm.com, and we’ll write that down below so people can, so it’s easy for people to to reach you that way. Tabitha, thank you so much for the conversation, really, really enjoyed it, and I appreciate the work that you do for those founders out there who, through blood, sweat, and tears, have built some really successful companies, and now they’re about to have that, like, as you said, the most important transaction in that business going forward.
Tabatha (1:05:37 – 1:05:40)
Well, thank you, Armando, it was a pleasure, it was always, always fun talking to you, so.
Armando (1:05:41 – 1:05:43)
You too, Tabitha, very nice, enjoyed it very much.
Tabatha (1:05:43 – 1:05:44)
Okay, thank you.
Armando (1:05:45 – 1:06:16)
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