In October 2024, we hosted a webinar in conjunction with Acquiring Minds. We gave a short presentation on the most common legal diligence issues and then answered questions from the audience.
Question Timestamps
- 7:12: James David, can I jump in with a quick question? Wouldn’t it raise a red flag if the sellers aren’t aligned, or, more specifically, if the equity holders in the business being sold aren’t on the same page? Even if the deal can be completed, there are concerns about potential downstream issues like sabotage or bad will—who knows what else could arise?
- 8:13: In terms of gauging whether a deal will go through, it seems there are ways around obstacles, but it’s hard to generalize. As the searcher, how do you know when to push to see if a deal can still be done? If I learn that someone on the cap table doesn’t want the deal to happen, how much should I invest in due diligence? How far should I go to uncover whether this deal can be executed?
- 11:38: Bill, regarding government and big business, are there general rules of thumb about types of industries or contexts where assignability is less likely?
- 14:41: James David, when we talk about liens on assets, does that usually refer to physical assets or real estate? If you’re primarily buying goodwill in the business, are liens less likely to be an issue, or is that not the case?
- 20:01: If I may, a couple of follow-ups here. On the point you just made, Bill, regarding code on a website: many people have hired Upwork contractors to create their websites years ago, and they never received any documents transferring rights to the business owner. How should one address this issue?
- 22:30: Another question would be about risk. If the original Upwork contractor were to resurface and claim ownership of their work, and there’s no coverage for that, what should the seller do?
- 26:12: Is there any general insight into whether it’s good or bad if the seller wants to retain ownership of the real estate? It seems difficult to generalize, as you mentioned, Bill. If the real estate is mission-critical, it might be a risk factor, and you’d likely want to buy that property.
- 36:50: Regarding insurance, one of the acquiring sponsors is an insurance company. Do you bring in a vendor for insurance due diligence? One thing that Oberleaf, the sponsor, offers is assistance in this area. Is that a viable approach?
- 38:52: Let’s discuss stock purchases. What can you do in a stock purchase to avoid assuming any unknown legal issues that may arise later? Of course, the big risk in a stock purchase is how to mitigate it.
- 40:16: Back to taxes and the underpayment of sales tax, James David. I heard you use phrases like “so” and “probably.” There are two parts here: how to handle a seller who’s been neglectful regarding sales tax, and your observations about particular industries where this issue is more or less common. We’ll assume eCommerce is where it’s particularly prevalent. First, how do you manage the situation with a seller who is careless?
- 44:00: Let me ask about another industry common among searchers: home services. Given that customers typically pay on the spot, I assume most home services companies are geographically confined. They likely benefit from a level of clarity regarding sales tax compliance. For example, if I buy an HVAC business in Virginia, it should be straightforward to check if they’ve been collecting sales tax.
- 45:34: I think the question pertains to your point about assignability. You mentioned that if a contract needs to be assigned, it highlights the relationship involved. Previously, the customer may not have been overly concerned, but if they have to assign the contract, they will have to consider it more seriously. Can you elaborate on that? I believe that’s the essence of the question being raised.
- 49:24: On the trademark issue, if you buy a business and discover that its name isn’t trademarked, what happens if you try to trademark it and find numerous conflicts with existing businesses? How do you address that situation?
- 52:14: Should I establish a separate LLC just for my search, and then set up a new LLC for the business when the deal closes?
- 53:39: Related to that question is a debate about what to call yourself as a searcher. Do you use the sophisticated name of your LLC, portraying yourself as private equity, or do you simply go by your own name? This is a strategic question that likely depends on your targets and how you wish to present yourself. For instance, do I want to be seen as Will when approaching sellers, or as Evergreen Industries?
- 55:13: What about the ability to categorize all your deal costs, which can amount to tens of thousands of dollars, as part of the deal? Does the cleanliness of doing that depend on whether you’ve been personally paying these costs versus your LLC covering them?
- 56:02: Someone asked what the “solar tsunami” is. Did they mishear? Were they referring to the “silver tsunami”?
- 56:52: Regarding personal guarantees, are there any legal strategies to avoid having to put my house down as collateral for an SBA loan in Florida? For example, could putting it in a trust and removing my name from the title work? This has become a sticking point with my partner.
- 58:25: A common question arises in this space. Typically, when I interview someone from the lending side, they say you can’t avoid a personal guarantee when securing an SBA loan. They usually soften this, but fundamentally, it’s a core part of the loan product offered by the government. Is your response the same, or do you have a different perspective?
- 59:30: Back to the topic of lawsuits: are you effectively buying a lawsuit? James David, you characterized it as small lawsuits being manageable and large lawsuits not being so. Is there a clear distinction? How can a layperson understand the difference between a major lawsuit and a minor one?
- 1:03:13: When the seller retains the real property where the business operates and hasn’t previously paid themselves rent, how do you protect against the seller not paying the mortgage and taxes?
- 1:04:48: How enforceable is a three-year non-compete clause in an NDA that prohibits buying in the same industry?
- 1:06:33: If you have a well-crafted, reasonable non-compete that a judge would likely consider valid, and your seller competes with you in blatant violation of that agreement, would it be worth pursuing? Or is the non-compete primarily a deterrent rather than a contract you would actively enforce?
- 1:07:59: You mentioned unions. Do you have any general thoughts on unions? I’ve had guests who bought unionized businesses and had great experiences, while others faced significant challenges. How do you react to these situations?
- 1:10:16: Are there common issues you’ve encountered that could be relatively easy to identify before the Letter of Intent (LOI)? What can searchers do from a legal perspective before issuing the LOI to filter out potential problems early?
Workshop Handout
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If you need further assistance or are in the process of negotiating a letter of intent, contact us at info@barlowwilliams.law and we will be happy to discuss your situation.