For almost two decades, I have been involved in numerous transactions involving the sale of businesses, the sale of business interests and the sale of real property. I have found that the vast majority of those individuals involved on either the buyer’s side or the seller’s side of such transactions really do a good job in over complicating their lives. This over complication results in stress and unnecessary liability and headaches. The following is a list of common mistakes and how to avoid them:
1. Do Not Oversell Your Business or Property. Most business owners are entrepreneurs that have invested their own blood, sweat and tears into the formation and operation of a business that represents their vision and purpose in life. It is much like trying to sell your own child, in a manner of speaking. Therefore, many fall into the trap of what I will call “overselling” the business.
Upon deciding to sell a business, the seller is many times still wearing the jaded glasses of seeing only the potential of their ideas put into business form. Many times, they value all of the future possibilities of how the business may be expanded or what can be accomplished in and through the business. I have heard countless times statements of sellers that begin with the words “you could . . .”
Any statement by a seller beginning with “you could” or “you should” are the beginnings of dangerous territory. I counsel clients as sellers that they should avoid these types of statements and/or representations for two basic reasons.
First of all, the Buyer’s interest in the business rarely is in line with the hopes and dreams of the seller. What motivates the buyer to purchase a business is the individual vision of the buyer, not the seller. After all, the seller is getting out. If the seller’s vision is so great, and the potential of the business is so positive, then why does the seller not keep the business in order to capitalize on the seller’s vision?
The second reason is that such statements create and can be construed as warranties, guarantees or representations of the seller as to what the company can do. These types of statements create liability for the seller. I have seen and litigated many cases which were based on the theory that “the seller told me that I could . . .” or “the seller told me that the business would . . . .”
This is equally true with the sale of real property. The unrestrained seller many times represents that “you can build a gas station . . .” or “you could use this property for storage . . .” which are consistent with the seller’s perception of the possible uses of the property. It is much better however, to just remain silent and let the buyer do its own due diligence to find out what the property can or should be used for. I have found that an interested buyer will rarely lose interest or decide not to buy based on the lack of input from the seller. I have, however, been involved in many lawsuits related to suggestions from a seller to a buyer of what certain property can or should be used for.
The best practice is to use an agent in the sale of any business or property, whether an attorney or a licensed real estate agent, and to keep contact with any potential buyer to a minimum. This helps to keep sellers out of trouble and is well worth the minimal fee involved.
2. Believe but Verify. On the buyer’s side of most transactions, the most common problems that I see relate to the lack of due diligence or fact checking. Those selling a business or piece of property always make the business or property sound great. Just like hiring an employee, the resume is intended to show the individual in the best light and many times includes statements what are questionable at best. Therefore, it is incumbent on the buyer to always verify.
Now keep in mind that most business buyers know (or hope to learn) how to run the particular business. Many have no particular background in how to check out the details of a business to verify that they have the true facts. Just as I would recommend that someone buying a car, especially from a private seller, take it to a mechanic for a complete review and inspection, I also recommend that the buyer of a business engage a professional to complete a similar inspection.
Your first and best source of having a business “inspected” is your accountant or CPA. He or she will be able to verify that costs and other expenses related to the business are within your individual parameters and risk tolerance. Take the time to review the tax returns of the business as these will provide, in most cases, the worst case scenario for the business since no one wants to report “fake” income to the IRS. Therefore, if the claimed income of the seller differs greatly from the income reported to the IRS, then you likely have a problem.
As for real property, any investigation or “inspection” should include an appraisal, a survey, a soils test or report and at least a “phase one” environmental report, each prepared by a licensed professional. If you will be financing the purchase of the parcel or parcels of real property, then typically a bank will require all of the foregoing inspections or tests anyway.
The appraisal will obviously give you an idea as to the value of the parcel or parcels of real property. However, keep in mind that an appraisal is really just an opinion based on the value of either the cost to replace the property, the prices for which similar pieces of property have been sold in the recent past, or the income potential of the property. Do not make the common mistake of believing that the appraisal will give you the value of the property. It does not, but rather, it gives you evidence of the approximate value of the property at its highest and best use.
A survey is important as well. Many people think that the seller has shown them the boundaries of the property and that is good enough. However, a proper survey should provide you with so much more information. I cannot tell you how many times I have dealt with legal disputes over where the actual property line is as opposed to where the parties thought the boundary line was. Also, you can avoid the pitfall of many in finding that you have no (or very limited) access to your property for physical access, installation of utilities, easements across the property which limit where or how you can construct improvements, and etc. You cannot rely on the representations of a seller, because many times the seller simply does not know.
Some mistakenly believe that title insurance fixes any of the foregoing problems. Please be aware that every title insurance policy includes language that basically says that if there is a problem which is not disclosed by a simple search of the property records, then it is not covered by the policy. Many types of easements, for example, may not show up on any record.
Soils tests and environmental studies are also a must. Do not assume that you, or anyone else can see what is under the surface of the ground, and these types of problems can be catastrophic in nature. I have been involved in many cases where blue clay has all but destroyed a house or building, causing damage well in excess of the total value of the entire property. Also, in the event of certain kinds of contamination, the owner may be responsible for millions of dollars in clean up, even when they did not own the property until after the contamination occurred.
3. Be Ready (and Willing) to Walk Away. For both buyers and sellers, it is imperative that you be willing to walk away from a deal. I completely understand the exuberance one feels when they have the opportunity to “open that restaurant that we have always wanted” or “finally own our own business.” However, for buyers, you must always remember that there is some reason that the seller is willing to sell.
Now I do not want to talk anyone out of buying a business, or I would be out of a job. All I am suggesting is that rather than go into the negotiations like a love-struck teenager, that you take a step back and really look at the cold hard facts and determine whether or not this is really something that you can do and enjoy.
For sellers, do not approach the negotiations in desperation to the point that you have to make a deal work not matter what. Let’s face it, there are people in this world who are simply not worth dealing with. You need to seek out a negotiating party who is able to look for a “win-win” scenario. We have all dealt with at least a few “I have to win and you have to lose” people. Trust your gut on this, and if you don’t like to be abused, simply walk away. There are others who will ultimately come along. Remember, life is too short to deal with certain types of people, and the last thing you want to do is end up in a contract with someone who sucks the life out of you every time you turn around.
In conclusion, any business or real property transaction is a bit like life. You have to put forth some effort to get what you want. You cannot stand in front of the stove and say, “give me heat and then I will put in the wood.” On the other hand, every business deal should bring a level of satisfaction to all parties involved. Finally, the use of good old common sense is a must. May your commerce be unrestricted and your profits divine.
Barry E. Clarkson, Esq.