“Purchase & Sale Agreements: Not Just Boiler-Plate” with Mark Furman of Tarlow Breed Hart & Rodgers

Jeffrey (1s):
Welcome back Radio Entrepreneurs, everybody who likes to listen and learn about entrepreneurship. My name is Jeffrey Davis. I’m the host of Radio Entrepreneurs. Also a chairman of board, founder of MAGE, LLC management consulting firm in Massachusetts. And every week we like to speak to the other person on my camera, Mark Furman shareholder at Tarlow Breed, Hart and Rodgers, because we need to learn about entrepreneurship and the law. Welcome back, Mark.

1 (29s):
Hey Jeffrey. Great to be with you.

Jeffrey (31s):
Thank you, mark. So what is the topic today, mark?

1 (37s):
So I thought we’d talk a little bit about the purchase and sales of businesses. Something that entrepreneurs are certainly interested in. I hope. And you know, once again, I have to make sort of a plug for how important the agreement is to buy a business or to sell the business from the seller’s perspective. When you get paid, you want to make sure you don’t have to give any of the money back. And there are times that a seller doesn’t get the entire purchase price at the closing.

1 (1m 18s):
Sometimes they’re earn-outs sometimes they were deferred payments. They may be secured by a note, but the last thing the seller wants is a hassle. And what’s in the asset purchase agreement or stock purchase agreement is critically important to decide whether or not you get to keep the money or you get embroiled in lengthy expensive litigation, which is a goal to avoid from the, from the purchaser side. You don’t want litigation in the future either.

1 (2m 0s):
You want to make sure you’ve done an appropriate due diligence so that you know what you’re buying, you know, that you’re comfortable with the financial records you’re provided. And you know, what happens is parties negotiate a purchase agreement. Is there a rep representations and warranties? It seems kind of mundane, but the critically important and heavily negotiated. And please don’t think that they’re just boiler plate. They’re not, there are legal rights, get determined.

1 (2m 44s):
I’ve had cases. One of the things that get negotiated is when a seller makes warranty say about the financials that are provided to the buyer, how long should those representations last forever, five years, two years, one year I’ve had cases where, because suit has been brought after the warranties expire, the seller gets to keep the money. So it’s not boiler play people negotiate and fight for deductibles.

1 (3m 29s):
In other words, if there’s an unexpected, unexpected expense, well, the first let’s call it 50,000, 25,075,000 or a hundred, the buyer, the buyer assumes it’s only unknown claims above a certain amount. Why does the seller want to be nickeled and dimed every time there’s a 200, 2000 or even $20,000 unforeseen expense. And you know, these are intensely negotiated. And when I get cases where purchase agreements are not quite on the back of a napkin, but not negotiated, you know, the, either the buyer or the seller accepts whatever put in front of them, you know, you’re, you’re asking for trouble, you’re not saving money and you’re gonna cause yourself the risk of much greater problems in the future.

Jeffrey (4m 42s):
Mark, I, I always know that transaction is ripe for problems for the seller, especially, have you ever seen a situation where there’s potential performance criteria, where the buyer crawls back and wants money back from the seller to, because I have a feeling just people are not reading their documents closely enough, or really having a competent attorney, read them before everything is signed.

1 (5m 10s):
Yeah. I litigate those cases all the time on behalf of the seller or the buyer. And, you know, are the financials accurate? Are the disclosures accurate there? You know, there should be due diligence, disclosure, representations, warranties, time limits, time limits can operate almost like a statute of limitations that the claim doesn’t, it doesn’t exist based upon that warranty or representation after that limitation period is over.

1 (5m 55s):
What you don’t want is to have someone buy a business within complete information. You want it documented the information that they have, so you can prove it was complete because when allegations get made of fraud or misrepresentation, it’s very important to have a be able to prove not only the accuracy of the information, but it was actually provided to the, to the buyer. You know, so what we do is we create these data rooms for the due diligence where all of the documents that have been disclosed exists, and there’s a permanent record of them.

1 (6m 46s):
You know, when, at least until, you know, long after any potential claim period, a related issue is, you know, buyers always say, well, I’ll, you know, I’m going to employ him for X years or give you consulting agreement and, you know, buyers like that because for one reason, it’s deferred payment. And for another reason, it’s tax deductible, ordinary and necessary business expense to the buyer. Well, it’s just another form of compensation, but like an earn-out or promissory note or a consulting agreement or employment agreement, you run into the situation of, okay, the buyer no longer needs you.

1 (7m 43s):
So they get rid of you. They Trump up some excuse why they have a right to fire you and you end up not getting X, hundreds of thousands of dollars of what you think of as the purchase price. So all of these agreements are critically important. I know I talk about it in every context though, you know, we talk about it, but it’s particularly important. I think in the purchase and sale of businesses for reseller, this may be the most important business transaction of their life. They may be selling a company that with your help, Jeffrey and the help of other advisors, they built over a period of decades and now they’re approaching retirement.

1 (8m 35s):
And this is their opportunity to realize on their lifelong investment of time and money and the, and you don’t want, you do not want to do anything to increase the risk that you’re going to get served with suit papers. And somebody wants to take your retirement funds and had the buyer wants, wants it back in old or in part. So this needs to be treated as a very serious transaction.

Jeffrey (9m 16s):
Well, you know, it sounds like you’re talking about the perils of a PNS and I think this is an issue. And it’s something I see all the time that people usually buying businesses tend to be people who’ve done multiple transactions. They’re sophisticated people, corporations, people who let’s say have family businesses. This is their only transaction of their life. They have no experience with them and you need to surround yourself with competent people because it’s easy to do the wrong deal as you’re showing us in, I sort of punch list. There’s lots of pitfalls in this situation.

1 (9m 53s):
I think you’re right in terms of, you know, if it’s a seller who, you know, if this isn’t the sellers, second, third, fourth, fifth sale, you know, this may be the only time that they’ve done it. But I must say I’ve had cases where the buyer who is very sophisticated, just had done so many deals that they thought they could do it without a lawyer. And so, as a result, I must say, all hell broke loose.

1 (10m 37s):
The deal documents made no sense. And the litigation cost of unraveling that unfortunate arrangement or in the hundreds of thousands of dollars and the savings of 10 or 15 or $20,000 upfront, it just wasn’t worth it just for.

Jeffrey (11m 4s):
So we’re speaking with Mark Furman attorney at Carla Reed, Hart and Rogers about the perils of the PNS purchasing sales mark. Again, I think this is something that every entrepreneur on both sides has to be a little bit more conscientious about. This is not something people can do on their own. As a management consultant, I would never do it on my own. And I’ve seen many of these. If someone wants to get more information from you about how to do these things properly, how would they find you?

1 (11m 32s):
I can be reached at 6 1 7 2 1 8 2 0 2 5 or my email M Ferman, F U R M a n@tbhhr-law.com.

Jeffrey (11m 49s):
And this is entrepreneurship and the law on Radio Entrepreneurs. And we will be back next week with Mark Furman with more stories.