How to Choose a Lawyer to Buy or Sell a Business

What Should You Weigh When Choosing a Lawyer to Buy or Sell a Business?

You should weigh five factors together. They are deal experience on your side at your deal’s size, who does the work and how fast, how the fee is quoted, conflicts, and how clearly the lawyer explains your choices. Each one bears on what the deal costs you and how well you understand what you sign. Size and side matter because the documents scale with the deal and differ by side.

A lawyer whose deals look like yours in size, structure, and side has drafted documents like the ones yours will need. That lawyer has also seen the terms the other side is likely to raise.

The last factor has a legal floor. Under Rule 1.4(b) (Minn. R. Prof. Conduct 1.4), “A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” In a sale, those decisions include how the price is paid, how much of it is held back or paid later, and which promises the seller gives about the business.

Why Should the Buyer and the Seller Each Have Their Own Lawyer?

The buyer and the seller should each have their own lawyer because they negotiate against each other, and the comments to Minnesota’s conflict rule limit one lawyer serving both. Comment 28 to Rule 1.7 (Minn. R. Prof. Conduct 1.7), one of the comments that guide how the rule is read, states that “a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference in interest among them.”

A buyer and a seller sit on opposite sides of the price, the seller’s promises about the business, and who pays if those promises prove wrong. Comment 29 to Rule 1.7 adds: “For example, a lawyer cannot under take common representation of clients where contentious litigation or negotiations between them are imminent or contemplated.” Comment 7 uses a business sale as its example of a conflict in a deal, even where the lawyer represents the buyer only in another, unrelated matter.

Where a conflict exists, Rule 1.7(b) permits the representation only if, among other conditions, “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client” and “each affected client gives informed consent, confirmed in writing.” A shared lawyer also carries two costs the comments to Rule 1.7 name. Comment 29 states: “Ordinarily, the lawyer will be forced to withdraw from representing all of the clients if the common representation fails.” Comment 30 states that “the prevailing rule is that, as between commonly represented clients, the privilege does not attach. Hence, it must be assumed that if litigation eventuates between the clients, the privilege will not protect any such communications.”

When one side’s lawyer drafts everything and the other side has no lawyer, Minn. R. Prof. Conduct 4.3 governs. Under Rule 4.3(a) and (b), that lawyer “shall not state or imply that the lawyer is disinterested,” and must “clearly disclose that the client’s interests are adverse to the interests of the unrepresented person, if the lawyer knows or reasonably should know that the interests are adverse.” Under Rule 4.3(d), that lawyer “shall not give legal advice to the unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of the unrepresented person are or have a reasonable possibility of being in conflict with the interests of the client.” The comment sets a condition first: “So long as the lawyer has explained that the lawyer represents a party whose interests are adverse and is not representing the person, the lawyer may inform the person of the terms on which the lawyer’s client will enter into an agreement or settle a matter, prepare documents that require the person’s signature and explain the lawyer’s own view of the meaning of the document or the lawyer’s view of the underlying legal obligations.” That explanation comes from the lawyer for the side across the table.

What Does a Letter of Intent Commit You To?

A letter of intent sets the price, the structure, and the timeline that the purchase agreement later fills in, and the letter’s own words bear on which of its terms bind you. Some letters also contain promises one side expects to enforce, such as exclusivity or confidentiality. I suggest bringing a lawyer in before you sign one, because in one Minnesota appellate case, a disclaimer’s wording decided that such a promise did not bind.

A 1992 Minnesota Court of Appeals decision shows what turns on the drafting. Buyers of a liquor and wine distributor signed a letter of intent with a paragraph titled “Non-Binding Offer,” which stated: “This Letter of Intent shall not be a binding legal agreement, and neither party shall have any liability to the other until the execution of the definitive purchase agreement.” The same paragraph stated that “the parties hereto agree to terminate negotiations with other prospective purchasers of the Assets and work diligently toward finalization of the definitive purchaser agreement.” The buyers stated in affidavits that after signing they “retained an attorney and consultant, sought investors to purchase capital, and negotiated with banks to obtain financing.” The seller later declared the letter null and void after a key supplier would not approve the buyers.

The court affirmed summary judgment for the seller under Minnesota law. It held that the disclaimer “applies to the entire document and no separate contract rights arise based upon a separate sentence contained in the same paragraph as the clear disclaimer” (Hansen v. Phillips Beverage Co., 487 N.W.2d 925 (Minn. Ct. App. 1992)). In a footnote, the court noted that the buyers had not argued promissory estoppel and wrote: “We do not reject promissory estoppel liability on these facts. We decline, however, to address this case on that basis now because it was not raised at trial.” The same footnote noted that “any recovery for promissory estoppel would have been limited to reliance damages.” If you want a term such as exclusivity to bind while the rest of the letter does not, the letter should say so in words its disclaimer does not reach. The court also wrote that the letter “creates merely an agreement to negotiate in good faith” and that “Under Minnesota law, such an agreement is unenforceable where the agreement evidences nothing more than an intention to negotiate in the future.”

You do not need to hire a lawyer for the whole deal to get help with the letter. Under Rule 1.2(c) (Minn. R. Prof. Conduct 1.2), “A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.” An engagement for the letter of intent alone lets you test the relationship before the purchase agreement. If the deal started with an unsolicited offer to buy your business, that page covers the first replies. If you have already signed and want out, my page on whether you can walk away from a letter of intent covers that decision.

What Deal Experience Matters on Your Side of the Sale?

A seller’s lawyer and a buyer’s lawyer protect different things, so I suggest asking each candidate how many of their deals were on your side. The seller’s lawyer limits the promises the seller makes and protects payment of the price. The buyer’s lawyer looks for problems before closing and controls which of the seller’s debts the buyer takes on. On the sell side, approvals come early.

A Minnesota corporation “may sell, lease, transfer, or otherwise dispose of all or substantially all of its property and assets, including its good will, not in the usual and regular course of its business” by board vote, “when approved at a regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote” (Minn. Stat. § 302A.661, subd. 2). The articles can require more: under Minn. Stat. § 302A.437, subd. 1, “If the articles require a larger proportion or number than is required by this chapter for a particular action, the articles control.” Section 302A.661, subdivision 2, also provides: “Written notice of the meeting shall be given to all shareholders whether or not they are entitled to vote at the meeting. The written notice shall state that a purpose of the meeting is to consider the sale, lease, transfer, or other disposition of all or substantially all of the property and assets of the corporation.” Subdivision 2 of § 302A.661 further provides: “Shareholder approval is not required under paragraph (a) if, following the sale, lease, transfer, or other disposition of its property and assets, the corporation retains a significant continuing business activity.” The subdivision then sets a percentage test under which a corporation is conclusively deemed to have retained that activity.

A sale that needs that vote also lets a shareholder “dissent from, and obtain payment for the fair value of the shareholder’s shares,” with exceptions the section lists (Minn. Stat. § 302A.471, subd. 1(b)), and “the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections” (Minn. Stat. § 302A.473, subd. 2). Under subdivision 3 of § 302A.473, a shareholder “who wishes to exercise dissenters’ rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action.” Subdivision 4(a) provides that “After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send” a notice to the shareholders who complied with subdivision 3, and subdivision 4(b) provides: “In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given.” The corporation then remits “the amount the corporation estimates to be the fair value of the shares, plus interest” (subdivision 5(a)), and subdivision 6 provides: “If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter’s own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation.” Check the current text of section 302A.473 before relying on these periods.

An LLC starts from different default rules. In a member-managed LLC, “An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members” (Minn. Stat. § 322C.0407, subd. 2). In a manager-managed LLC, the consent of all members is required to “sell, lease, exchange, or otherwise dispose of all, or substantially all, of the company’s property, with or without the good will, outside the ordinary course of the company’s activities” (subd. 3). In a board-managed LLC, subdivision 4 provides that “The consent of all members is required to” make that same sale, with exceptions it lists. Those defaults yield to the operating agreement: “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter” (Minn. Stat. § 322C.0110, subd. 2). A sale can also stall on outside consents, such as a landlord blocking the sale.

On the buy side, when a Minnesota corporation disposes of “all or substantially all of a corporation’s property and assets” under § 302A.661, the purchase agreement decides much of what the buyer inherits. Under subdivision 4, “The transferee is liable for the debts, obligations, and liabilities of the transferor only to the extent provided in the contract or agreement between the transferee and the transferor or to the extent provided by this chapter or other statutes of this state.” My page on successor liability in an asset sale covers the other routes to that liability.

One of those statutes is Minnesota’s tax successor section, Minn. Stat. § 270C.57. Subdivision 2 provides: “Whenever a business transfers in bulk to a successor the business assets, and an enforceable lien for unpaid taxes has been filed against the business by the commissioner under section 270C.63, at least 20 days before taking possession of the assets or paying the purchase price, the successor shall notify the commissioner of the transfer and the terms and conditions related to it.” The notice “must include the tax identification number of the transferring business.” Under subdivision 1, a “Transfer in bulk” means a transfer, “other than in the ordinary course of the transferor’s trade or business, of more than one-half of all the property of a business at all locations combined,” and “tax” means “sales, withholding, and any tax imposed by chapter 296A.” Unless the commissioner determines the transfer was not at arm’s length or was a gift, the buyer’s exposure turns on the notice. Subdivision 2(c) provides: “If, based upon the information available, the commissioner determines that a transfer was not at arm’s length or was a gift, the successor’s liability under this section equals the value of the assets transferred,” and under subdivision 1(f), “If the parties are related to each other, a rebuttable presumption arises that the transaction is not at arm’s length.” “If the successor fails to give the notice required in paragraph (a), the successor is liable for any unpaid taxes, interest, and penalties due from the transferring business to the extent of the purchase price.” If the buyer gives the notice and the commissioner responds “within 20 days after receipt of the notice” with other liabilities or unfiled returns, the buyer “is, in addition to being liable for the amounts included on the lien, liable for all other uncontested taxes, interest, and penalties as stated in the commissioner’s notice from the transferring business to the extent of the purchase price if the successor pays the purchase price or takes possession of the assets without withholding and remitting the liability to the commissioner.” Subdivision 2 adds: “The successor is liable whether the purchase price is paid or the assets are transferred prior to or after notification from the commissioner.” Under subdivision 2(e), “If the commissioner fails to provide the notice and the 20-day period expires, the successor is not liable for any taxes of the transferring business other than those included on the lien.” A buyer who complies is also not liable for assessments made after the commissioner’s notice, “except for taxes assessed on returns filed to comply with the notice.” Where the parties have already signed an agreement to transfer, subdivision 2 narrows the notice duty: “If an agreement to transfer has been entered into, this notice requirement only applies” in two lien-timing situations it lists. Check the current text of the statute before relying on these periods. I suggest asking a buyer-side candidate how they schedule the lien search and this notice, because the notice comes before the buyer pays or takes the assets.

How Do Staffing and Responsiveness Affect a Deal?

Staffing decides whose judgment shapes your deal, and responsiveness decides whether the deal keeps to its dates. I suggest asking who will draft the purchase agreement, who will negotiate it, and how quickly drafts come back, because diligence, financing, and closing each run on dates the parties set. Rule 1.4(a), Minnesota’s communication rule, requires a lawyer to “keep the client reasonably informed about the status of the matter” and to “promptly comply with reasonable requests for information.” A deal adds its own pace on top of that floor: a lender’s commitment, a buyer’s diligence period, or a closing date in the letter of intent.

At a larger firm, a partner may supervise while associates draft and paralegals manage diligence documents, and the bill reflects each person’s time. A solo lawyer may do every step personally. Either model can work if you know who is responsible for each document and who answers when the other side sends a markup late in the week. I also suggest asking how the lawyer reports progress, such as an open-issues list or a closing checklist, because a written list shows you what is left before closing.

How Should a Deal Lawyer Quote the Fee?

A deal lawyer must communicate the scope of the work and the basis or rate of the fee, preferably in writing, before or within a reasonable time after starting. Minnesota’s fee rule excepts a regularly represented client charged on the same basis or rate. Rule 1.5(b) (Minn. R. Prof. Conduct 1.5) provides: “The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate.” The comment to Rule 1.5 explains why the writing helps: “A written statement concerning the terms of the engagement reduces the possibility of misunderstanding.”

Fee structures for deal work include these two, and a lawyer may combine them:

1. Hourly. You pay for time, so a long negotiation costs more. I suggest asking for an estimate by phase (letter of intent, diligence, purchase agreement, and closing), because the phases differ in cost and the deal can stop after any of them.
2. Flat fee. Rule 1.5(b)(1) provides that “A lawyer may charge a flat fee for specified legal services, which constitutes complete payment for those services and may be paid in whole or in part in advance of the lawyer providing the services.” It adds: “If agreed to in advance in a written fee agreement signed by the client, a flat fee shall be considered to be the lawyer’s property upon payment of the fee, subject to refund as described in Rule 1.5(b)(3).” Rule 1.5(b)(3) provides that “Fee agreements may not describe any fee as nonrefundable or earned upon receipt,” and that if the relationship “is terminated before the fee is fully earned, the lawyer shall refund to the client the unearned portion of the fee.” A flat fee covers only the services it names, so I suggest checking whether it includes the letter of intent, diligence, the disclosure schedules, and the closing documents.

I also suggest asking whether the quote assumes an asset sale or a sale of shares, because the two structures call for different documents and different approvals.

What Conflicts Can Keep a Lawyer From Handling Your Deal?

A lawyer has a conflict if representing you would be directly adverse to another client. A conflict also exists if there is a significant risk that duties to another client, a former client, or a third person, or the lawyer’s own personal interest, will materially limit the work. Under Rule 1.7(a), a conflict exists if “(1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person, or by a personal interest of the lawyer.” A conflict can reach the whole firm under Rule 1.10(a) (Minn. R. Prof. Conduct 1.10): “While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rule 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.”

Three conflicts can arise in a business sale:

1. A lawyer who represents the other side in another matter. Comment 7 to Rule 1.7 states that “if a lawyer is asked to represent the seller of a business in negotiations with a buyer represented by the lawyer, not in the same transaction but in another unrelated matter, the lawyer could not undertake the representation without the informed consent of each client.”
2. A lawyer who represented the other side before. Rule 1.9(a) (Minn. R. Prof. Conduct 1.9) provides: “A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.”
3. The company’s regular lawyer. Rule 1.13(a) (Minn. R. Prof. Conduct 1.13) provides: “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” That lawyer may also represent an owner, but only “subject to the provisions of Rule 1.7” (Rule 1.13(f)). When the company’s interests are adverse to an owner’s, the lawyer “shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing” (Rule 1.13(e)).

I suggest giving each candidate the names of the buyer, the seller, every owner, and any lender at the first contact, because a conflict found after weeks of work costs you that time.

What Should a CPA, Business Broker, or Valuation Professional Do Instead?

A CPA, a business broker, and a valuation professional each handle part of a sale that a lawyer should not be paid to do, while the lawyer handles the legal terms and documents. Comment 4 to Rule 2.1 (Minn. R. Prof. Conduct 2.1) recognizes that “business matters can involve problems within the competence of the accounting profession or of financial specialists. Where consultation with a professional in another field is itself something a competent lawyer would recommend, the lawyer should make such a recommendation.”

Each one fits a different part of the work:

1. A certified public accountant (CPA). A CPA can model the after-tax result of an asset sale against a sale of shares, prepare the closing-year returns, and compute how the price should be allocated among the assets. In an asset purchase of a business, 26 U.S.C. § 1060(a) provides that if “the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate.” The CPA’s numbers and the lawyer’s drafting of that clause work together. The structure decision turns on both tax and legal terms, which my page on taxes on selling a business covers.
2. A business broker. A broker can market the business, find and screen buyers, and run the sale process. Minnesota’s definition of a real estate broker includes a person who, “for another and for commission, fee, or other valuable consideration or with the intention or expectation of receiving the same directly or indirectly lists, sells, exchanges, buys, rents, manages, offers or attempts to negotiate a sale, option, exchange, purchase or rental of any business opportunity or business, or its good will, inventory, or fixtures, or any interest therein” (Minn. Stat. § 82.55, subd. 19(d)). “No person shall act as a real estate broker or real estate salesperson unless licensed as provided in this section” (Minn. Stat. § 82.81, subd. 1). Minn. Stat. § 82.56 lists exceptions, including “a licensed practicing attorney if the attorney complies in all respects with the trust account provisions of this chapter,” an accountant acting incident to the accounting profession on the same condition, and a licensed securities broker-dealer in a business combination. I suggest asking a broker which license they hold, because the statute ties brokerage of a business sale to the license.
3. A business valuation professional. A valuator can estimate a price range before you negotiate, which helps a seller set an asking price and a buyer test one. My page on what your business is worth explains the valuation methods.

A lawyer is the right fit for the letter of intent, the purchase agreement and its disclosure schedules, the approvals, and the closing documents. A seller who already has a buyer and agreed business terms may not need a broker at all, and can hire a lawyer for the documents alone.

What Questions Should You Ask a Deal Lawyer Before Hiring?

The useful questions test four of the five factors (experience on your side, staffing and speed, fees, and conflicts) and how the lawyer works with your other advisors. A lawyer’s answers in the first conversation test the fifth factor, how clearly that lawyer explains your choices, because they are your first sample of it. The question about the other side, its owners, and its lender starts the conflict check before you share confidential details. I suggest these questions:

1. How many business sales have you handled, at what size, and on which side?
2. Have you handled asset sales, sales of shares, or both?
3. Who will draft the purchase agreement, who will negotiate it, and how quickly do drafts come back?
4. Do you, your firm, or anyone at your firm represent the other side, its owners, or its lender?
5. How will you charge, what does the quote cover, and does it change with the deal structure?
6. Can you help with the letter of intent alone before I commit to the full deal?
7. Which parts should my CPA, broker, or valuator handle instead?
8. What approvals or consents will this sale need?

For the first contact, a short description and the names of the parties are enough. What you tell a lawyer in a consultation about hiring is protected, within the limits the rule sets. Under Rule 1.18(a), “A person who consults with a lawyer about the possibility of forming a client-lawyer relationship with respect to a matter is a prospective client.” Rule 1.18(b) then provides: “Even when no client-lawyer relationship ensues, a lawyer who has consulted with a prospective client shall not use or reveal information obtained in the consultation, except as Rule 1.9 would permit with respect to information of a former client” (Minn. R. Prof. Conduct 1.18). The comment adds that “A lawyer may condition a consultation with a prospective client on the person’s informed consent that no information disclosed during the consultation will prohibit the lawyer from representing a different client in the matter.” I still suggest holding financial statements and draft agreements until the conflict check clears, because documents sent to a firm that represents the other side have reached a firm you cannot hire.

Choosing a Lawyer for a Business Sale

The right lawyer for a business sale represents only your side, has done deals like yours on that side, and starts before the letter of intent is signed. That lawyer tells you who will do the work, how fast, and how it will be billed. That lawyer also leaves the tax modeling, the buyer search, and the valuation to a CPA, broker, or valuator where they fit. My sale of a business page describes how I represent Minnesota buyers and sellers. If you are buying or selling a Minnesota business, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents.