Succeeding in Your Business: Planning to buy a business without a lawyer? Don’t!
“Two weeks ago, I signed a contract to buy a business. I didn’t use a lawyer because the contract seemed fair, and I felt I understood what it said. I put up a $25,000 deposit to buy this business, and the closing is in two weeks.
“The seller’s attorney has been calling me every day asking me questions about the documents that I am responsible for delivering for the closing. When I attempt to discuss these with him, he tells me he can’t talk to me directly but only to my attorney. I told him I don’t have an attorney. He says I need to have one.
“The big problem I’m facing is that I’m having trouble getting a new lease from the landlord where this business is located. The landlord and I have agreed on terms, but he can’t get the lease documents to me for another couple of weeks. Also, my bank is taking forever to process the refinancing on my house that I will need to do in order to pay the purchase price. I’ve asked the seller to extend the closing so that I can get the lease and the bank loan, but the seller is refusing to do so.
“I have tried calling a couple of local lawyers to see if they will help me with the closing, but they are not returning my phone calls.
“What is going on here? I am starting to feel like I’m being ripped off — that the seller is going to take my $25,000 because I won’t have a lease at the closing. I shouldn’t be forced to retain an attorney if I don’t want to have one.”
By the tone of this email, I am sure this reader is an extremely intelligent person. But he or she has done an incredibly dumb thing.
When you sign a contract of sale to buy a business, you are legally obligated to close by the date set out in the contract. If you are not in a position to close on that date and the seller is not a good person who will grant you an extension of time out of the goodness of his heart, the deal is forfeit, and the seller can take your upfront deposit.
If getting a new lease was a condition that had to be met before closing, that should have been clearly spelled out in the contract, with language put into the contract providing for an automatic extension of the closing date until you get the lease. A good attorney would have known to put that language into the contract.
Here are some other things that should have been in the contract but probably aren’t:
• A clause allowing you to form a corporation or limited liability company (LLC) to act as the purchaser of the business.
• A closing date that is at least 60 to 90 days after the contract date (30 days — two weeks plus two weeks — is not nearly enough time).
• A financing contingency allowing you to get out of the deal and get your deposit back if a bank refuses to lend you the money necessary to pay the purchase price.
• A clause allowing you to get out of the deal and get your deposit back if you can’t get any licenses or permits (such as a zoning clearance) to operate the business at this location.
• A clause requiring the seller to hold some of the purchase price in escrow until you can confirm that the seller doesn’t owe any sales or other taxes to the state or local government.
• A clause allowing you to “do diligence” on the business and get out of the deal if you or your advisors see anything about this business that you don’t like.
A good lawyer could have negotiated these for you, but it’s now too late: You are stuck with the contract you signed.
The seller’s attorney is technically right not to talk to you. He is representing the seller, after all, and cannot make any concessions to help you out unless his client agrees to them. Also, there is a very strict rule of lawyer’s ethics saying that an attorney cannot even speak to someone on the other side of a transaction unless the other person’s lawyer participates in the conversation.
As for the attorneys who are not returning your telephone calls, I cannot really blame them. Few attorneys would want to get involved in a situation like this because you are giving them only a few days to get up to speed on the transaction, and they are likely afraid you will sue them for malpractice if they are unable to get the transaction closed in a reasonable time.
You have learned a $25,000 lesson. Never EVER buy a business without a good lawyer and a good accountant, and be sure to give them enough time to do their jobs.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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