Yes, now allow me to explain.
I have seen a number of people lately who are buying businesses from brokers. This is a very common method of finding and purchasing smaller micro-businesses and even some small companies. But many of these folks are coming to an attorney too late in the process. An attorney should be involved from the beginning. If you bring me a signed letter of intent or agreement to purchase, after the expiration of the due diligence period, and after things are already not going to according to plan, then don’t be shocked to learn it is going to be a lot more difficult to get the deal done according to the terms you want.
So why do they delay? I can’t answer that question with any certainty but I would suggest it may be because they are putting too much reliance on the broker.
Understand, the broker is not a neutral third party. The broker does not work for the buyer. In most cases, the buyer will never sign a document that contains any promises or assurances from the broker. In fact, most documents will include clauses expressly limiting the buyer’s reliance on the broker.
Why? Because the broker works for the seller. The broker is hired by the seller to sell the company. The broker gets paid based upon a successful transaction. This means two things: (1) the broker wants to keep the seller happy; and (2) the broker wants to see the transaction concluded.
Neither of those incentives work to the buyer’s benefit.
Now, I do not mean to suggest that broker’s try to cheat buyers or hide information. But the fact is the broker’s incentives align with the seller and not the buyer.
Here are a few more reasons a buyer should retain an attorney for the transaction:
- In many cases, the buyer is buying a business for the first time and has little or no experience in conducting an appropriate due diligence investigation.
- The forms used by brokers are often just that: forms. They are used for each and every transaction and minimal effort is put forth to customize the agreements for a particular transaction.
- Remember, the broker works for the seller, so many of the form agreements are drafted to be pro-seller. For example, many of the representations and warranties included in a well drafted purchase agreement are excluded from broker drafted forms.
- Some brokers use escrow attorneys retained by the broker to conduct a “due diligence.” But if you read those documents closely you will usually find a disclaimer stating that the buyer may not rely upon the attorney’s work. Why? Because he works for the broker, who works for the seller.
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