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Lessons From the Trenches

Julian M Izbiky

Lessons From the Trenches

I have handled small business purchase and sale transactions (which, for the purposes of this article, will be defined as deals under five million dollars in transaction value) for decades.  In this article I will outline some of the lessons that I have learned about how to handle these deals.  A number of the points made below will also apply to larger transactions.

Be Cost Effective, Efficient, Practical and Pragmatic

Owners of small businesses are cost-conscious, and they want their lawyers to be efficient, practical and pragmatic.  The business brokers and others who refer purchasers and sellers to lawyers to handle small business transactions also want lawyers to be cost-effective, efficient, practical and pragmatic and not to “over lawyer” deals.  This means that lawyers who want to work in this space should develop concise forms of purchase agreements and other documents, and they should provide comments and redlines that focus on issues that matter.  Lawyers who practice in this space need to recognize that they cannot address every possible issue in their documents, but instead they should focus on the issues that are likely to matter.   

In order to be cost effective and efficient, lawyers should strive not to overreach in their documents and in the positions that they take.  One of the expressions that I use with clients and others talks about that if a purchase agreement should end up in a place that is equivalent to the 50 yard line of a football field, then the first draft that I will send to the seller’s attorney will start at the 45 yard line, which is to be differentiated from the lawyers whose first draft of a purchase agreement starts at the goal line.  What is the consequence of starting at the goal line and making the seller’s lawyer drag the purchaser’s lawyer fifty yards to midfield? First, that makes the deal more expensive.  Second, it aggravates the seller.  And in many small business transactions, the purchaser is buying a business in an industry that the purchaser has never worked in, and after closing the purchaser will need the seller to teach the purchaser how to run the business.  So, a savvy purchaser and purchaser’s lawyer will not want to alienate the seller by having the purchase process be unnecessarily expensive and contentious.

Purchasers’ attorneys should be thoughtful about the schedules that they request to be provided in conjunction with the purchase agreement.  In many businesses the owners will be the only people in the business who know that the business is for sale, and they will need to assemble the schedules themselves without the help of any of their employees.  This will often occur after hours and on weekends.  Purchasers’ counsel should be mindful of this situation and should be thoughtful about how many schedules they request and how burdensome the schedules are.  One of my expressions to purchasers’ lawyers talks about whether the purchaser wants the seller to spend time running the business that the purchaser is going to acquire or whether the purchaser would rather want that the seller spends time assembling schedules.

Attorneys should counsel their clients to take a reasonable approach in negotiations.  For example, some purchasers will want to extensively negotiate every issue.  These purchasers should be reminded that after closing, they are likely going to need the seller to train them how to run the business that they have just acquired.  As I remind purchasers in this context, on the day after closing, the purchaser is going to need the seller a lot more than the seller is going to need the purchaser.

Be Collaborative

Be collaborative, and not confrontational, with opposing counsel. One of my expressions points out that practicing transactional law is not a contact sport.  Roger Fisher and William Ury, in Getting to Yes, their classic book about negotiation, talk about being hard on the issues and easy on the people that you are negotiating with.

I find that it is helpful to get to know the lawyer on the other side of the deal.  In many deals, at some point a difficult issue will arise.  It is helpful, when that issue arises, if counsel have already established a good relationship, as that makes it easier to work through difficult issues.


Not every issue can be adequately addressed by email or text.  There are certain issues that are better resolved by discussion via telephone, Zoom, or even a live meeting.  Sometimes, there is no substitute for meeting in person to address difficult issues.


It is very helpful for attorneys to understand negotiation theory.  I highly recommend the book Getting to Yes.  One concept that is very useful in transactions is to understand the difference between positions (what a client says that they want) versus interests (what the client actually needs). An example of where this can come up is in negotiating the terms of a non-compete.  I handled a deal relating to a neighborhood coffee shop and bakery that also baked and sold cakes and other custom-made baked goods for special occasions.  Initially, the purchaser wanted a five-year, fifty mile non-compete.  The seller wanted the ability to move and start a coffee shop and bakery in a different part of the Denver metropolitan area at least fifteen miles away from the business.  After some discussion among the parties, they agreed to a fifteen-mile non-compete for a coffee shop and bakery and a fifty-mile non-compete for cakes and custom baked goods.  What the parties realized after discussing this issue is that people will typically not travel more than fifteen miles for coffee and a baked good, but they may travel more than fifteen miles for a wedding cake or other baked good for a special occasion, so the agreement that they reached accommodated all of their interests.

Getting to Yes also discusses the benefits of using objective criteria to support a party’s position in a negotiation.  In transactions, one source of objective criteria is deal points studies.  However, the deal points studies are based on larger deals, so they may not always make sense when applied to smaller deals.  For example, a 10% cap may make sense in a fifty-million-dollar deal, but it may not make sense in a one-million-dollar deal.  The applicability of the deal points studies to smaller deals is addressed in an excellent article, “The Impact of Transaction Size on Highly Negotiated M&A Deal Points,” by Eric Rauch and Brian Burke, Business Law Today, July 8, 2016.  

Understand Deal Structures

It is important that small business transactional attorneys understand alternative deal structures.  Factors may exist in a small business transaction that may suggest structuring the transaction using one of a number of deal structures, such as: (i) if the seller is a subchapter C corporation, selling the shareholder’s personal goodwill pursuant to the U.S. Tax Court case Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998); (ii) if the seller is a subchapter S corporation, structuring the deal as a stock purchase transaction, but making an election under Section 338(h)(10) of the Internal Revenue Code; or (iii) if the seller is a subchapter S corporation, but the purchaser is ineligible to be a subchapter S shareholder, handling the transaction as an F reorganization.  It is less likely that the clients, business brokers, and accountants involved in small business transactions will be aware of these alternative structures, so it is important that the attorneys in these transactions are knowledgeable about them and can make recommendations about using them as appropriate in deals.

Refer Appropriate Resources

An important service to clients in small business transactions is to be able to refer them to appropriate resources, such as business brokers, Small Business Administration (“SBA”) lenders, and accountants.  Lawyers working in this space should build a network of capable people that they can refer their clients to.

SBA-Guaranteed Loans

Many small business transactions are financed by loans guaranteed by the Small Business Administration (“SBA Loans”).  SBA Loans have specific rules that might have an effect on the structure of a deal.  For example, deals financed by an SBA Loan cannot include an earnout, but they can have a promissory note subject to reduction based on the performance of the business following the closing (a claw back or what I have referred to as an earndown).  By knowing these rules, a lawyer can effectively assist the parties in the structuring of small business transactions.