Tips For Buyers of a Business to Avoid Costly Mistakes
Business acquisitions are complex transactions that can provide you with an opportunity to realize a good return on your investment or become a financial nightmare. To maximize the likelihood that you will close upon a deal that is right for you, you need to have an experienced business lawyer as part of your team. Because pre-printed forms and amateur advice are plentiful on the Internet, people may be tempted to believe that they can do it themselves. My first and most important advice to you is — don’t!. The purchase of a business is not a “DIY” project and the consequences of trying to do so can be disastrous.
Don’t be “penny-wise and pound-foolish”. If you are going to buy a business, engage an experienced business lawyer. For the purchase of a business to be a successful financial venture, you must have a contract that is tailor-made for you, your needs and interests, and terms and conditions that are favorable, or at the least acceptable, to you. That is why, if you have the opportunity, it is preferable for your lawyer to draft the contract. Yes, it involves more expense, but it also gives you an advantage because then the negotiations begin from your vantage point. The opportunity to gain more favorable transaction terms likely will outweigh the expense of having your lawyer draft the contract.
When assessing a business purchase opportunity, you should expect an experienced business lawyer to assure that certain fundamental issues are addressed. Here are just three examples of the important areas in which an experienced business lawyer can guide you.
1) Due Diligence
You need to make sure you know what you are buying before you sign a definitive purchase and sale agreement, or you may be blind-sided and find that there are serious problems about which you were unaware. So, you must have an adequate period of time in which to conduct your investigation and the seller must be contractually obligated to provide you with all documents relevant to your investigation and analysis. This period of time is know as a “due diligence period” or “feasibility period” and gives you the opportunity to evaluate the seller, its business and decide whether the deal is right for you. Your lawyer needs to negotiate an adequate amount of time for you to conduct your investigation and your right to terminate the deal if you investigation reveals information with which you are uncomfortable.
2) The Escape Hatch
Your lawyer should advise you of the conditions under which you should not close the deal and make sure you have the right to terminate the purchase under those circumstances. What if the business suffers a catastrophic event between the time you sign the purchase agreement and the time of closing? You should not be obligated to consummate the purchase and deal with the catastrophe. What if you are not approved for the loan you need to consummate the purchase and thus, you don’t have the money necessary to fund the purchase? You need to provide for these contingencies. Otherwise, you may find yourself in an expensive and lengthy lawsuit and may be liable to the seller for significant damages for failure to close the deal.
3) Representations and Warranties
You need to require the seller to give you written assurances about the aspects of the business that are important to your decision to buy the business. Often, negotiations over representations and warranties reveal information about the business you may not have discovered during the due diligence period. An experienced business lawyer will explain to you what representations and warranties are necessary for your transaction. If you learn significant negative information in the course of negotiating the representation and warranties, then you will be in a better position to decide whether you want to proceed with the transaction at all or need to negotiate more favorable financial terms.
These are only three examples of important provisions that you need to make sure are part of your purchase agreement so that your promising investment does not turn into a financial disaster. Don’t go it alone. Make sure you have the advice and guidance of an experienced business lawyer.
Is Your Customer List a Trade Secret? Don’t Be So Sure . . .
Customer lists can be an important asset for competitive advantage in many businesses – insurance, real estate, stock brokerage and financial advice – the list goes on. When a person decides to leave his firm and moves on to another opportunity, the customer list often becomes a bone of contention. The departing employee believes that he invested his time, effort and energy developing the customer list and the relationships that followed. The company feels confident that because the customer list was developed while the employee was on its payroll, the customer list is proprietary to the employer.
However, the customer list was developed, the pivotal question really is whether the customer list is a trade secret. And not all customer lists are trade secrets.
Nevada’s Uniform Trade Secrets Act protects information that (1) derives economic value from not being known to the public; (2) is the subject of reasonable efforts to maintain its secrecy and (3) cannot be “reverse engineered” – recreated by legitimate public means. Element 1 is self-explanatory; it is only valuable if it is a secret. Element 2 may be less clear. Did the owner of the trade secret guard the secrecy of the information by labeling any documents “Confidential”, “Private” or “Trade Secret”? If the customer list was on a computer system, did the owner password protect access to the information? Did the owner limit access to the information within the company on a “need-to-know” basis? How widespread was the knowledge of the contents of the customer list within the company?
In this age of the Internet, perhaps the most interesting question is that posed by Element 3: the ease or difficulty with which the information can be properly acquired and duplicated by others. With the plethora of Internet resources that exist today, developing a “leads” or customer list that may mirror very closely the customer list of the former employer may be surprisingly easy to do – in which event, the customer list isn’t much of a secret.
The point of this discussion is that if you want to protect your customer list, you really can’t just rely upon the law of trade secrets. Best practices for a company who seeks to protect its customer list, or any other business process it believes and expects to keep proprietary, is to require anyone who will come into contact with what you expect and believe to be your trade secrets to sign a non-disclosure/confidentiality agreement. A proper drafted non-disclosure/confidentiality agreement requires your employee, vendor, supplier, etc. to contractually agree to what constitutes your trade secrets and thus, does not leave you exposed to the dangers of the analysis I described above.
Better safe than sorry. If you have information you considered to be essential to your business’ competitive, then have a comprehensive, properly drafted non-disclosure/confidentiality agreement.
