Understanding When to Use a Business Lawyer or Business Broker – Part 1
Selling your small business is a substantial undertaking. You’ve spent years of time, effort, and money building your business and now want to enjoy the fruits of your years of hard work and dedication. What role can and should a business broker or a lawyer play in this major life decision? Understanding the value these professionals bring can be crucial for a smooth, successful, and legally sound sale.
At Free Vector Advisors, we can help you discern when to use a business lawyer, a business broker, or both when selling your business. Our business lawyers can clarify their roles, benefits, and how they can be used during the sale process to protect your interests and maximize your business’s value.
Ready to sell your business? Call the Palm Desert business sales advisors at Free Vector Advisors. Our team of corporate lawyers can help you with your exit strategy.
The Business Broker: Your Matchmaker and Deal Facilitator
Think of a business broker as your strategic partner in finding the right buyer and guiding the overall sales process. Their expertise primarily lies in the commercial aspects of the transaction.
When to Use a Business Broker
- Valuation Expertise: A good broker will be able accurately value your business using various methods, ensuring you set a competitive and realistic asking price. This is vital for attracting serious buyers and preventing undervaluation.
- Confidential Marketing: Brokers maintain confidentiality by discreetly marketing your business to a wide network of pre-screened, qualified buyers. This prevents disruption to your daily operations and protects sensitive information.
- Buyer Sourcing & Screening: They may actively seek out potential buyers, screen them for financial capability and genuine interest, and manage initial inquiries, saving you time and effort.
- Negotiation Support: Most brokers are commercial real estate agents, which can help when the primary asset or expense of the business involves the ownership or lease of real property. However, most sales involving business brokers use standard commercial real estate forms that don’t address many of the other business and legal complexities and risks of buying, selling, and operating a business.
- Transaction Management: From preparing marketing materials and executive summaries to facilitating due diligence and coordinating with other professionals, brokers act as the “quarterback” of the sale, ensuring the process proceeds smoothly.
In essence, a business broker is invaluable for finding the right buyer, establishing a fair market price, and managing the sale process efficiently and discreetly.
The Business Lawyer: Your Legal Guardian
While a broker focuses on the “deal,” a business lawyer focuses on the “document” and the legal implications. Their role is to protect your legal interests, minimize risks, and ensure the transaction complies with all applicable laws.
When to use a Business Lawyer (and why they’re often indispensable):
- Drafting and Reviewing Legal Documents: This is arguably their most critical role. Your lawyer will draft, review, and negotiate all contracts, including the Letter of Intent (LOI), Purchase Agreement, non-disclosure agreements (NDAs), and any ancillary agreements (e.g., non-compete clauses, consulting agreements). They ensure these documents accurately reflect the agreed-upon terms and protect you from future liabilities.
- Due Diligence: Your lawyer will guide you through the buyer’s due diligence process, helping you prepare and disclose necessary documents while safeguarding proprietary information. Through the due diligence process, your lawyer can help identify potential problem areas and either “clean up” or assist you in the adoption of “better or best” business practices that can reduce risk and increase the value of your business to a buyer.
- Minimizing Liability & Risk: A skilled attorney will identify potential legal pitfalls and structure the deal to minimize your post-closing liabilities. This includes addressing issues like outstanding debts, environmental concerns, employment issues, pending or threatened litigation, and assistance with buyer employment and non-compete agreements post-closing.
- Ensuring Compliance: Business sales involve a myriad of legal requirements, from state and federal regulations to industry-specific laws. Your lawyer ensures every aspect of the sale is compliant, preventing costly disputes or penalties down the line.
- Employee Issues: A lawyer is essential for navigating complex employee-related issues such as existing employment contracts, severance agreements, employee benefits, non-compete clauses for key staff, and compliance with labor laws (e.g., proper classification of independent contractors vs. employees). These can be significant liabilities if not handled correctly.
- Highly Regulated Industries: If your business operates in a highly regulated industry (e.g., healthcare, finance, cannabis, environmental services), a lawyer will ensure compliance with those regulations. They can ensure all necessary licenses, permits, and regulatory approvals are properly transferred or obtained, and identify potential compliance risks that a broker may overlook.
- Environmental Concerns: For businesses with potential environmental liabilities (e.g., manufacturing, industrial sites), a lawyer is crucial to assess and mitigate risks related to past or present environmental issues, ensuring proper disclosures and indemnification clauses are in place.
- Negotiating Legal Terms: For other than the simplest transactions, the standard commercial brokerage purchase and sale agreement forms are not adequate for the purchase and sale of most businesses. A lawyer can help determine and negotiate the appropriate representations and warranties, push for limitations on liability and indemnification, purchase price holdbacks and escrows to mitigate the risk of claims arising after the transaction is closed, as well as negotiate ancillary agreements such as ongoing employment agreements and non-competition agreements.
- Closing the Deal: Your lawyer will oversee the closing process, ensuring all legal conditions are met, funds are transferred correctly, and all necessary documents are properly executed and filed.
In essence, a business lawyer is critical for safeguarding your legal rights, mitigating risks, ensuring regulatory compliance, and meticulously handling all contractual aspects of the sale.
In Part 2 of this blog post, we’ll discuss when using both a business broker or investment banker and a lawyer makes the most sense.
Don’t Skimp on Expertise: Choose the Business Lawyers at Free Vector Advisors
Selling a small business is a complex process with substantial financial and legal implications. Attempting to handle either the market-facing aspects (finding buyers, valuation) or the legal intricacies (contracts, liability) without professional assistance can lead to lost value, unforeseen complications, or even costly lawsuits down the road. Investing in the right professionals is an investment in your successful exit and future peace of mind. At Free Vector Advisors, our business lawyers offer the expertise and experience needed to handle business sales with ease and confidence.
Don’t sell your business alone- choose Free Vector Advisors for the legal and practical guidance required to navigate business sales. Request a consultation today.