How to Buy a Business - Ignore Problems at Your Peril!
Over the years I have been involved in several business purchases and sales. None have been really large, but the lesson of the small purchase is readily applicable to the large purchase.
When I was acting in-house counsel for a company, another company was interesting is purchasing a division. The division had a good cash flow - but it also had some interesting legal issues and claims that I was working to resolve. This was to be an asset sale. The buyer dutifully reviewed all the financial data, looked at the representations and warranties and agreed to purchase the business. What I found interesting is that the buyer never asked for permission to talk to me, or any other attorney representing the seller to find out what kind of legal problems were common, or recurring, and what was out there that could eventually create a problem for the on-going business. Even though this was an asset purchase, the buyer might want to know what issues were being created by past practices, or the way the business was managed. In an asset sale you usually - but not always - continue on with the same employees. It seems prudent to ask what issues those employees are creating that result in the requirement for a lawyer to get involved. Sometimes claims happen for no good reason or in spite of good management. However, many times claims are caused by questionable decisions by some level of management.
Many businesses do not have lawyers on staff, and never consult with a lawyer, which is an issue by its' self. In that case there is no one to answers the critical questions. But many business have at least a lawyer that they consult on occasion, or retain to help solve problems. When a buyer only looks at financial performance, it is missing a big part of the picture.
When representing a purchaser, why not ask for permission to talk to the business lawyers to find out what issues and problems they see - especially those that have a potential to recur. It seems to me that it would be a good idea to discover that a manager had taken actions that resulted in a lawsuit - or some other claim. Then you can meet with the manager to get the story - after the lawyer has given the buyer his analysis of the issue or claim.
In house lawyers have a unique view of the company. If they have been there awhile they usually know how to get things done, and who is a good manager and who is not. They will see the problems, take calls from the field and get involved in many areas of a company in a problem solving capacity. The lawyer will know which managers will charge ahead without regard to the lawyers comments, cautions or suggestions. Then the lawyer needs to solve the problems created. While lawyers are not alway good business people, many times that are, and their thoughts can be very helpful to a buyer of a business. As a lawyer I would require a written waiver from the seller, and written directions setting forth those areas and issues I can discuss with the potential buyer.
I realize that this puts the lawyer in a tough position, but if I am representing the buyer, this is an interview I want have. If a Seller does not want to grant access and full disclosure by the lawyers as it relates to the selling business, that alone would raise a lot of questions for me. If you are the buyer - it's your money and you might want to understand what you are buying.
