Five Reasons Why You Should Involve your Attorneys Early in Your Business Transactions
By Patrick S. McCarney – RBE Attorney
Business transactions come in all shapes and sizes. Buying or selling a business (or the assets of a business) are obvious types of major transactions, but business transactions can also include things like entering corporate shareholder agreements, forming a subsidiary, employing new high-level officers or other key employees, entering leases of real or personal property, and making other large capital purchases of real or personal property. Sometimes a single transaction will be comprised of multiple deals and require numerous written agreements. Even deals that are perceived as “simple” may have many moving pieces and may become quite complex. All too often, we see businesses seeking the assistance of legal counsel very late in the process, such as after a binding letter of intent has been signed or while drafting final written agreements. Regardless of the transaction at issue, it is usually wise to involve your attorneys earlier in the process. Why?
1. To Solve Problems in Advance.
Your attorneys can help by proactively identifying and addressing issues that will likely impact the transaction. For example, if a selling business operates in multiple states, any issues with foreign entity registrations, unemployment insurance, and other similar matters can be identified and corrected early. Missed annual registrations and the like may seem minor in the day-to-day operations of a business, but these problems may have consequences in the context of a transaction. For example, most buyers will want to know a business is in good standing in each jurisdiction in which it operates and will expect representations and warranties to that effect. But if an entity no longer has proper authority to do business in a particular state due to a lapsed registration, this could affect the representations and warranties a party can give. Certain issues—particularly those that require the involvement of state-level government agencies—may take weeks or months to resolve, which could delay closing. This, in turn, could give another party the right to back out of the deal or trigger penalties depending on the terms of the parties’ agreement. No matter what the problem is, if it is material to the other party, the consequences could be significant. Even if you are trying to sell your business but do not yet have a buyer, retaining counsel to clean up issues early may help make your business more marketable. In any event, by using attorneys to identify and fix issues in advance, you can, in many cases, speed up the transaction or prevent the need for scrambling to address problems in the days leading up to closing.
2. To Make Due Diligence Easier.
Due diligence and other disclosure requirements may be incredibly frustrating and time-consuming, but your legal counsel can help. In many ways, due diligence and disclosure requirements are like discovery in litigation. Anyone who has been a party to a lawsuit knows just how invasive discovery can be. In the transactional world, due diligence and disclosure requirements may be even more intrusive because there are no objections or third-party neutrals to use as a shield; one side either produces information to the other’s satisfaction or they do not. An attorney can help a client navigate due diligence by working with the other side to ensure the correct documentation is being provided or requested. Further, if you do not involve attorneys with due diligence, serious red flags may go unnoticed because your attorneys would be looking for different things than would your business team.
3. To Reduce Last-Minute Time Burdens on Your Team.
No matter the size of a business transaction, your business’s core officers and employees will probably be involved in one way or another. As the transaction progresses and closing approaches, the amount of time your officers and employees must devote to the transaction will probably increase dramatically. By involving attorneys earlier, you can even out some of this time burden by front-loading the inevitable questions from your attorneys and their requests for information and documents. Moreover, if there were any pre-existing issues with your business that your attorneys addressed early (see Reason 1 above), your attorneys will not have to distract your officers and employees with eleventh-hour requests to gather information, sign forms, issue checks, etc. to solve these problems. Finally, working with your attorneys early may provide peace of mind. The last thing you want for your team is the stress of having your attorney raise serious concerns about the structure or legal impact of a deal after you have already committed to it.
4. Because “Business Terms” are Not Just Business Concerns.
Clients (and attorneys, too) often compartmentalize the terms of an agreement into “business terms” and “legal terms.” A prototypical business term is something like the purchase price in an asset purchase agreement or the compensation package offered to a new corporate officer. But it is an oversimplification to say that the lawyer handles the “legal terms,” while the business handles the “business terms.” Sometimes a “business term” also has significant legal consequences. For example, the compensation and benefits package offered to a new officer could have significant tax consequences for the company or the officer or create compliance issues for the business with the Employee Retirement Income Security Act (ERISA). If the business and its new officer had already reached an agreement in principle before calling attorneys, one or both parties might have agreed to costly legal consequences that neither expected. By involving legal counsel before committing to these “business terms,” there is less risk that material, agreed-upon terms will need to change in the final agreement or that a party will ultimately be forced to accept costly or disappointing unintended consequences. If your attorney is engaged early enough, he or she can help identify alternative deal structures if the parties’ initial plan is not viable for whatever reason.
5. Because Hiring Them Earlier is Probably Not Going to Cost Any More Than Hiring Them Later.
Many clients incorrectly assume that retaining lawyers early on will only increase their legal bills. However, this is only sometimes true, and even when it is, there are usually off-setting cost considerations. For starters, the amount of time your attorneys work on a transaction is typically correlated with the scope of what they are being asked to do and the complexity of the transaction—not simply the duration of time they have been retained. If you have specific concerns about costs or the scope of legal services that will be provided, your attorneys should be working with you to ensure appropriate boundaries and expectations are set. Keep in mind that, in many cases, attorneys will address the same issues and spend comparable amounts of time working on a transaction regardless of whether they are retained early or late. Let’s say you are trying to buy another business, and you are deciding between retaining counsel before or after a binding letter of intent is drafted and signed. If you choose to involve your lawyer beforehand, the attorney will bill for things like drafting the letter of intent, for which he or she otherwise would not have billed if you had delayed his or her involvement. However, the attorney’s earlier involvement will also generally mean he or she can provide more options for addressing any legal issues in advance or proposing a more advantageous deal structure. If, for example, the attorney identifies early-on an issue that would have had significant tax consequences, the added value is clear. By contrast, if you had involved the attorney only after the letter of intent was signed, the attorney will still bill time to review the letter and identify the same issues—but you may be left with fewer (and perhaps more costly) solutions for the same problem.
A good attorney can be a beneficial partner at every stage of a business transaction. While this list is not exhaustive, it represents a few common issues. Regardless of a transaction’s scope or scale, early involvement from your attorneys can add significant and perhaps unexpected value.
Author Patrick S. McCarney
Patrick represents and advises clients in diverse substantive areas, including business entity selection and formation, contract drafting and disputes, municipal law, construction law, insurance defense, and general business litigation.
While attending the Indiana University Robert H. McKinney School of Law, Patrick served as an Articles Editor for the Indiana Law Review and his Note on crowdfunding rules was selected for publication. Patrick also assisted first-year law students with legal writing by serving as a Dean’s Tutorial Society Fellow. Patrick was named to the Order of Barristers in the Moot Court Program and was also a Semi-Finalist in the 2017 Honorable Robert H. Staton Moot Court Competition. In addition, Patrick completed a legal externship with Cummins Inc. where he gained experience in cross-border transactions and intellectual property, including trademarks and trade secrets. Concurrently with his final two years of law school, Patrick completed his M.B.A. from Purdue University’s Krannert School of Management.
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Posted on November 11, 2022, by Patrick S. McCarney