In this video, you will get answers to these questions:

  • What are the major terms and considerations in the sale of a company?
  • What are the major terms and considerations in the purchase of a company?
  • What are the fiduciary duties that business owners owe each other?
  • If business owners are fighting, what options do they have?

Video Transcript

When you’re selling a business, you want to make sure you’re getting paid what you think you’re getting paid, and that they can’t go after you later claiming some sort of misrepresentation. So the issue over payment is tricky because often you’re not getting paid all the money up front. It might be partially financed by you, the seller, which means that they are making payments over time out of the proceeds of the business.

What often happens is the buyer will say, “Hey, we’re not making as much money as we thought. We think that’s your fault because you didn’t give us as good a business as we thought. So we’re going to withhold our payments.” So in other words, a good lawyer is going to help you identify how do you make sure you get those payments and how do you make sure they can’t come back after you later for arguments of fraud or misrepresentation. You make it very clear you’ve had a chance to figure out what the business is. You’ve looked at all the financials. There’s no excuse that somehow there is a misrepresentation. That gives you the best position moving forward.

If you’re buying a company, the main consideration is making sure you get what you think you’re getting. They probably have stated certain revenue numbers. You believe certain employees will be there. Certain intellectual property exists. You want to make sure that stays over time. So for example, the key employees can’t leave. You’ve had a chance to review all the financials, and preferably you even have some protection later on, so that if things aren’t as you said they would be, you have an option to go back or maybe withhold some of your payments.

Often part of the money to buy a business is paid upfront and then you’re making payments over time. So you want that right to withhold payments if something wasn’t quite right. That keeps the seller’s skin in the game. So you’re both interested in the company succeeding long term.

Business owners owe each other the duty of loyalty, the duty of care, the duty of honesty. They need to act reasonably at the beginning of the business and over time as their expectations evolve. So what that generally means is being honest and working with each other.

What often happens is trust breaks down, disagreements occur. So somebody decides preemptively, “I’m not going to treat that person with the fairness I used to because they no longer deserve it. I’m going to do a little something on the side to protect myself.” And that runs into trouble.

If a person has been in business with someone who has breached the fiduciary duty or who has acted unfair or outside of what the reasonable expectations were as business owners, they should talk to an attorney about what are their rights as a shareholder or LLC member or a partner.

Business ownership fights can be the most expensive types of lawsuits there are, because not only do you have a lot of money at stake, you have people who used to work together who now feel betrayed and there is a lot of emotion involved. So their options at that point are expensive litigation, which would either be a shareholder’s derivative suit or a direct lawsuit. Or less expensive is arbitration because you have some relaxed rules of evidence and relaxed court rules. Or the best option is some sort of mediation and negotiation where either the parties themselves or with the help of attorneys can negotiate that.

Often though, the attorneys will sign an agreement saying if they can’t work out a resolution, those attorneys will withdraw and other attorneys will litigate it. That helps the attorneys be aligned behind the interest of seeking resolution in mediation, not letting this spiral out of control to expensive litigation.