Dan
Welcome to sound business insights. I’m Dan Watkins. This episode is about buying and selling a business. This podcast is not intended to provide legal advice.

Neil
Welcome to the sound business insights podcast. I’m Neil James.  Dan, Today let’s get into the real essence of buying and selling a business. Mergers and acquisitions is one of those terms that just sounds magical, but it’s actually a very common thing in business. What can you tell us about mergers and acquisitions?

Dan
Well, mergers and acquisitions. I would think of it as a, there’s a menu of many ways you can buy and sell a company. You can acquire the assets. You can merge with that company. You can just buy one company. You can buy multiple companies. You can enter into a three party agreement with three companies, four companies, five companies, but the basic way to buy and sell a company is a stock purchase or an asset purchase, or some form of merger or complicated business transaction that I was talking about.

Neil
So with a stock purchase, you’re basically stepping into the shoes of the seller, right?

Dan
A corporate entity that has stock is a living, breathing live thing according to our Supreme court. And so when you buy the stock of a company, you become the owner, the board of directors, you have control of everything and whatever that company did in the past, that’s good is yours. And whatever that company did in the past, that’s bad is yours too.

Neil
We’ll get into a little bit of those risks. In a moment, an asset purchase is quite different from a stock purchase. What’s the difference between the two

Dan
Asset purchases are the most preferred way to buy a company and to sell a company.  There’s some tax advantages to asset purchases, and there’s some liability limiting aspects to asset purchases. So I would say 80 to 90% of our agreements are asset purchases where you’re coming in, you’re going to buy the physical assets and the Goodwill all under a contract written for you by your lawyer. And it’s going to hopefully limit liability from vendors the company used to have that come back out of the woodwork from people that say that the company did something bad a long time ago, that you didn’t know about that come out of nowhere. Those are the kind of issues we look for. And that’s why we like asset purchase agreements a little bit more than stock purchase agreements.

Neil
And then there’s the idea of merging two things together. Tell me what that usually looks like.

Dan
Well, most people think it’s thinks it’s just merging two things, but sometimes we merge companies with locations in 10 different states and eight different entities. So a merger can occur. For example, let’s say you’re buying a company and they have a division of highly skilled workers that you can’t live without, but there are also owners too. So you have to have some type of merger. That’s a combination of a stock purchase and an asset sale. And so when just a basic stock purchase or asset purchase is not enough, and you still want to do business, you want to come to your experienced lawyer that has a menu of multiple different ways of getting the job done and making everybody happy and closing the deal besides your basic stock and asset purchase. Does that make sense?

Neil
Absolutely. Dan, I think another thing that’s important is the Watkins firm has a unique perspective on how we participate in these transactions. We understand the essence of a deal and the art of a deal and the personalities. And can you talk a little bit about how we partner with our clients to make sure that the transaction happens while protecting their interests?

Dan
Well, our transaction lawyers here are experienced lawyers that have been working for 20 to 40 years., buying and selling and merging companies. And as you do that as a lawyer, you become knowledgeable about different types of businesses and what the trend is and what other companies do. So when you’re representing the seller of a medical company, a healthcare provider, and you’ve done that a thousand times over the last 25 years and they come to you and they say, we’re thinking about doing it this way, but we’re worried about that. And you say, you know, I’ve had this issue come up a dozen times in the last 10 years, and this is what the smart people have done. And I suggest maybe you consider doing it this way. And that kind of experience is nothing you’re learning in law school. You learn that by dealing with other people’s problems for decades,

Neil
Dan, what is Goodwill?

Dan
Goodwill? That’s the part of a company that makes the phone ring. That’s the part of the company that has value. That’s the brand, that’s your name? That’s your reputation. That’s your clients. Part of that can be your client list that should be protected. Goodwill can be 20% of your company, or it could be 50% of your company. You’ve got a company that’s done some great things. Been in the news, you know, has a fantastic reputation. People don’t even have to know or hear their advertising. And they’re just going to find that phone number and they’re going to call them and they’re going to hire them and you want to buy that Goodwill

Neil
And preserve that

Dan
… and to do that is not as easy as you might think, because you’ve got new competition coming in every day. And you have to make sure that the people that are selling don’t open up a new company and start stealing your good will. That happens a lot. You have to write it up with significant teeth where the people you’re buying it from, won’t even think about coming back. And also that it’s defined well enough so that a court can stop it. You can even get an injunction from people messing with your Goodwill, your customer list and things. If it’s all written correctly in your agreements and identified as an issue.

Neil
So Dan, how do you protect Goodwill? How do you protect existing sales and customers and even supply channels?

Dan
Great question. We talked about preparing your company for sale. This would be one of the things you’d want to do before you sold your company would be to make sure that your procedures with your sales people and your marketing people and whoever else you do business with at your company are in order so that when you go to sell your number one salesman, doesn’t just walk off with your customer list and all of your business. And you just bought a company and top sales guy walks out. So you have to nail these issues down, have contracts and agreements written, maybe even with the sales, support staff, and cover for those contingencies, you know, a contract is just a series of what ifs we put in order. So you can understand it, but we just write down if this happens, if that happens, if this happens, if this happens, this is what we’re all wanting to be the remedy or the, rules by which we’ll play.

Neil
And then the agreements up front of what we don’t want to happen to preclude that from being possible, correct?

Dan
You will do this and you dare not do that. Yes.

Neil
And when we’re talking about buying and selling a business, what percentage of these deals have employment issues?

Dan
100%

Neil
Wow!

Dan
Employment issues. If you have employees, especially in California are difficult, the law is changing every month. I’m sure, you know, we have this AB five pass and now nobody can be an independent contractor, except for those chosen professions that the legislature allowed. But when they did that, they passed that law, they didn’t think about all the other agencies that depend on the definition of a 1099, all from agriculture to transportation, to worker’s compensation, to disability, to insurance, how you analyze insurance law to unemployment, all these things. They don’t have definitions in the courts or in the legislature that are adequate to cover these things. They are coming up with them. They are being resolved, but there’s so many that when you buy a company that has employees, you better have that part reviewed because the penalties are severe. The legislature decided to pass laws that say, if you’re a lawyer and you want to go head hunting and make a whole bunch of money, just Sue any company with any technical problem with how they handle their employees. And we’ll let you get all the money in attorney’s fees you want,

Neil
Right.

Dan
They put a bounty on these businesses. So when you buy a company, make sure you and your lawyer review to make sure they’re doing everything right. So it’s less likely you’ll get sued because so many companies are being sued right? And left.

Neil
So if a company is built upon a structure of independent contractors, and that’s what keeps the cost low enough to make the business viable, this new law may be very well the reason they’re selling that business, right?

Dan
Exactly. I mean, it’s not easy to maintain proper books and records. And also you have friends and acquaintances that come to you and then say, I can’t take W2 money. I can’t do that. I’m in a certain special circumstance. Can you help me out? I won’t ever tell. And then, you know, four years later, you get in an argument with him and they’re going to a lawyer,

Neil
Right? So basically, would you say that most of the businesses when it’s time to sell every business has warts, right?

Dan
I wouldn’t say warts, but every business has a certain way they got used to doing business that might not be a hundred percent correct. Coming to a lawyer, we sell lots of companies with those problems. We carve out the problem. We negotiate the issue. We disclose it and we solve it. That’s what our transaction attorneys do. They don’t argue about it. They just say, oh, this is an issue. Here’s a solution. So we all agree. And we move on. So it’s sort of like issue spotting. Here are the issues my client found with your business. How do we want to resolve it? And so we propose something for all five issues. If they agree to it, we have a deal. If not, they counter and say, this is what we’ll do in part to solve the problem. And half the time, these issues, we spot are not big enough to stop our buyer, our client from buying, they’ll say, well, you know what? I’ll take the risk to I’ll go ahead and buy it. At least I know about it, right? So it’s not like litigation where you’re just, I’m right. You’re wrong. It’s more like, Hey, these are the issues. You know, the car has a few dents in it, but it’s still got a good engine. Do you want to buy it? And you say, yeah, I’ll, I’ll buy it maybe for a little less money.

Neil
So Dan, as a seller, the Watkins firm can help you to get through whatever things need to be put in order and get more for your business and to put it in a place that you can sell it in an easier fashion. But as a buyer, we’re working to make sure our clients know what they’re getting preserve existing people, protect processes in Goodwill and perform the due diligence to protect our clients against risk or contingent liability. Correct.

Dan
So bottom line buying and selling emerging a business, there is no perfect business. And a lot of times we’ll have long term clients of ours hesitant to sell the business. Even though they want to retire, they want to move on because they know that their business isn’t quite perfect. There may be some things they did that. They think another buyer wouldn’t like, or, or maybe they’re just shy. We solve those problems. We sell over a hundred million dollars in businesses every year. And every single one of them has some issues have some carve outs, have some problems. And as buyers council, we help address those. And we put in clauses for those and agreements. And as seller’s council, we tell the client what to expect. And when the buyer says something about it, we suggest clauses and resolutions. And luckily in the transaction world, we’re able to solve things a lot faster and a lot easier than in the litigation world. So as a buyer or seller, make sure you have the mindset that those people looking around want to buy, or they want to sell, but they’re ready, willing, and able buyers and sellers. So they have a more motivated, more positive attitude when it comes to closing your deal.

Neil
And that’s why if you’re buying or selling a business in San Diego or Southern California, you need the Watkins Firm.

Dan
Right!

Neil
Thanks Dan,

Dan
Your Welcome

Dan
You can learn more about the Watkins firm Watkins, confirm.com or call our office at (858) 535-1511.