Buying a Business – Why Use a Lawyer? Jul 21, 2010

You, or someone you know, is buying a business. The purchase price – your investment – is modest, $50,000, maybe less. You’ve heard legal fees on this kind of deal will be $5,000 to $10,000. That’s 10% or 20% of the investment – it seems too costly!

Before you decide to go it alone, consider the risks of not having legal advice on your business purchase.

A recent experience of this office demonstrates how trying to scrimp on legal advice can cost your entire investment.

The transaction involved the purchase of certain production assets, inventory, goodwill and common law trademarks, as well as the assignment of a lease of premises, at a total purchase price of about $35,000. Sounds like it should be simple. But it wasn’t.

One of the key assets used in the business was leased, a fact that could have been easily discovered by a lawyer conducting standard searches. Since it wasn’t owned by the vendor of the business, it couldn’t be sold to the purchaser. And since it wasn’t assigned to the purchaser, it remained under the control of the vendor. The purchaser obtained, and had, no rights in respect of that asset. So when the vendor stopped making lease payments, and the lessor pursued payment or repossession, the purchaser of the business was in no position to rectify things. The by-then unco-operative vendor refused to make payments, or to assign the lease of the equipment to the purchaser. So that asset, which was essential to the day-to-day operation of the business, was lost to the purchaser.

The second issue that arose concerned the lease of premises. As with any commercial lease, there was a restriction on assignment of the lease, requiring the landlord’s consent. The vendor assured the purchaser that the landlord had orally agreed to the assignment – an assurance which turned out to be wrong, either erroneously or fraudulently. Either way, the purchaser now faced a situation where the landlord insisted that he vacate the premises, as the restrictive provision of the lease had been breached.

So at that point the purchaser had lost the business’ key operating asset, and had no location in which to carry on the business, meaning the business failed and the investment of $35,000 was lost. All because the purchaser felt that it would be too expensive to obtain legal advice on the purchase.

The proper perspective for professional advice, whether legal, accounting or otherwise as may be relevant for a particular business, is that the cost of that advice is actually an investment, just as the acquisition of the assets of the business is. With that perspective, a business person won’t be tempted to cut back on professional advice to save money, but will understand that the advice is essential to the success of the business.