Thursday, April 30, 2009

Legal Misfortune: Accepting the Deal That Is “Too Good to be True” Just May Cost You

We represented a client who agreed to sell his electrical contracting business to a competitor. The price he was to receive for the business actually exceeded the client’s expectations, so he was both anxious to close the transaction and hesitant to raise any issues during the sales process that might cause the buyer to have second thoughts.

Because of the nature and location of the client’s business, the client maintained a very specialized license to perform certain types of sophisticated electrical work. As the negotiations on the transaction progressed, the buyer discovered that it would take several months (if not longer) to apply for and obtain these same licenses and made initial overtures into trying to get out of the deal. In order to salvage the deal, the client wanted to allow the buyer to use his name and license after the closing until such time as the buyer was able to obtain its license. We advised the client that this entailed substantial risks, as he would still be personally liable for the work done on the jobs after the closing by the buyer as if the client were still the owner of the business. However, the still felt that the deal was too good to walk away from and was willing to take the risk.

We were able to convince the client, and subsequently the buyer, that the best way to handle the situation was to have the seller enter into an employment agreement with the buyer for a term to last until the buyer obtained its license or one year, whichever occurred first. This would allow the buyer the flexibility to use the client’s license. However, if the client was terminated for any reason (other than for good cause), the client would have the right to immediately terminate the licenses. We also insisted that the buyer indemnify and hold our client harmless from any and all loss or liability incurred by our client as a result of work done by the buyer under the Seller’s license. In addition, the buyer had to agree to (a) allow the client to have the right to control any corrective proceedings that may be required as a result of any violations that were filed against the license due to the buyer’s conduct, and (b) cover all costs and fees associated with the licenses (renewals, etc.), as well as the costs of maintaining an umbrella liability insurance policy for the benefit of the client.

By having a competent business attorney advise him, our client was able to both salvage his deal with the buyer and minimize his risk going forward after agreeing to an extraordinary concession in the buyer’s favor.

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Tuesday, April 21, 2009

Legal Misfortune: Always Be Aware of Potential Broker Fees

A client was looking to purchase a specific type of business (or, in the alternative, a suitable property upon which to build his new business) and engaged a broker on an exclusive basis in order to assist him in identifying and locating a business or property. According to his agreement with the broker, the brokerage fee was to be paid by the seller and/or any brokerage firm engaged by a seller in connection with the proposed transaction; however, the closing of any transaction was conditioned upon such seller or other broker agreeing to pay the fee.

The seller had also engaged a broker to locate a potential buyer for the property on behalf of the seller. Soon thereafter, the client viewed a business property that he subsequently decided was suitable for his needs. When our client viewed the property, he signed an acknowledgement from the seller’s broker stating that he had viewed the property. The client determined that he wanted to buy the business in question and the seller’s counsel set out to draft a purchase agreement. When we received the initial draft of the agreement, however, there was no mention of the seller’s broker or the fact that they were owed a fee as a result of the transaction. Because of this, there was a risk that the seller’s broker could delay or otherwise threaten to disrupt the closing of the transaction unless and until its fee was paid.

After reviewing the agreement and raising the issue with seller’s counsel, it was discovered that seller was exploring ways to not pay its broker since it already had to pay the fee owed to the client’s broker. Not only did this threaten the closing, but exposed the client to a potential suit after the closing from the seller’s broker. It was decided that the only way the client would allow the deal to move forward was if the seller agreed in the contract to pay all broker fees at the closing and to indemnify and hold the client harmless from any and claims, suits and actions that any broker may bring after the closing seeking to paid a fee as a result of the sale.

Seller agreed with the conditions and the transaction was successfully closed. Without an attorney to review the agreement and advise the client of his options regarding the broker fees, the client may have faced a lawsuit either before or after closing from a broker looking to rightfully receive his fee.

Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit to get a copy of our free mini course.