Selling your business? Don't get ripped off!
PUBLISHED: 10:10 06 September 2017 | UPDATED: 10:10 06 September 2017
There are golden rules to follow when you're selling your business. Simon Birks, of Sherbornes, explains them
Disposing or investing? The best deal is out there.
If you are purchasing something for the first and perhaps the only time in your life and you’re unsure what represents a good deal, then there is a rule to follow:
“Always get three quotes...”
I’ve never thought to question the logic of that rule until recently when acting for a client in the sale of their business.
When it comes to ‘goods’, the landscape changed several years ago with the invention of the internet and the ability to go online and check out exactly how much something costs. Many ‘services’ followed shortly afterwards with things like insurance comparison sites cropping up everywhere and now there are even sites where you can compare the cost of your own funeral service.
However, despite numerous legal fee comparison sites, when it comes to selling a business that you have started, grown and developed over many, many years, you probably won’t have had much (if any) experience of the sale process and you’ll want a specialist on hand to take you through what can be a daunting and challenging journey. For those who have been through it, they will tell you that it’s a full time job to run a business and it’s another full time job to sell one at the same time.
Exactly the same can be said for someone who is thinking of investing substantial sums of money in their first business purchase; with the price often being way in excess of the value of their home, which up until that point, was their greatest ever purchase…and we all know how stressful moving home can be.
Every sale and purchase of a business is unique because no two businesses are the same. From a legal perspective however, there are the basic fundamental aspects of every business deal and whilst of course something could get thrown into the mix that no-one expects to happen, this does not stop us from giving a fairly accurate estimate as to the time and costs involved in the deal.
So you can imagine my surprise when in a regular chat with my client, they explained how they had been discussing and comparing legal fees (with the buyer of their business) and the buyer had accepted a quote which was more than three times the amount that I had quoted for the same transaction.
My first response was “why didn’t they get 3 quotes?” and the answer was “they did”. In fact, the quote that the buyer decided to accept was the lowest of the 3 quotes and the buyer managed to negotiate a further discount; but despite this, they still ended up paying way more than what we thought it should be and indeed what we charged.
Why was this the case? The easy answer is to suggest that the 3 quotes were obtained from very similar sources; firms with so much work that they deliberately attempted to overprice themselves out of the running or firms that were short on work and needed to bolster fees.
I don’t think either of those are correct and I’m confident that those quotes represented the time and effort that those firms were prepared to invest on behalf of that client to get the deal done. However, there was a disconnect between the work that the firms believed was necessary and that which the client actually required.
With everything we buy, we make a value judgment and this should have been no different. Some firms might factor into their quotes, the time taken to oversee the stock take for example - and then the extra time to sign it off (at £300 per hour). Others, like me, take a more pragmatic approach and leave such matters to the buyer and seller to organise between themselves; particularly when the stock is only worth £150 at best!.This results in a lower quote and you must decide how much depth you want your lawyer to go into. But you only know this if you ask the right questions.
Sometimes we are all too afraid and far too ‘English’ to discuss money matters, but don’t be scared to ask the questions that will allow you to make that value judgment:
• Is it a quote (which is fixed) or an estimate (which is not)?
• How has the firm arrived at that quote?
• What has it taken into account and how much time has it allocated to each of the tasks required?
• Can you take responsibility for any of those tasks?
• Who will be doing the work? Is it a partner/director or senior solicitor in the firm or will tasks be delegated to junior members of the firm and if so, which tasks?
• What assumptions have they made? (i.e. do they expect to be fielding and answering all the questions raised about the business when you are more than prepared to do this?)
Also, don’t be afraid to ask friends or acquaintances, who have bought or sold a business in the past roughly how much they paid in fees. They can always tell you to mind your own business (pardon the pun!) but my guess is that they won’t. A simple conversation with a friend or a colleague for the chap on the other side of my deal would have told him that he was paying for a full professional valet when actually his Nissan Micra only needed a quick wash.
And failing all that, even if you are reluctant to challenge or to talk money with friends and acquaintances, there’s still a place for ‘online shopping’…even if it is to reassure you that the quote you would like to go with is in the realms of reality.
Simon Birks is a solicitor in a niche legal practice in Cheltenham focussing on Business law. Prior to joining Sherbornes, he worked as head of legal for a leading Gloucestershire business and naturally thinks like a business person first, and then like a lawyer. Simon enjoys nothing more than a morning run in the forest with his two Labrador retrievers.