5 Steps to Reviewing a Legal Document

Thinking about sending a document to your attorney to review it?  I thought I’d take a moment to give a simple overview of the process I use for reviewing a document with a client.  It’s not how every attorney does it.  But I find this process is easy for the clients to digest, and pretty fast (translate: less expensive).

  1. Client receives a document, and sends it over to me to get an idea of what the review will cost.  I typically estimate based on number of pages, but it’s important to also look at the complexity of the language.  If it contains a lot of “lawyer speak” it will take longer to review.  Note: This is why I choose to draft in plain English.
  2. Once I get the go-ahead, I’ll start making my way through the document making redline changes.  This is a process by which any word that is deleted is crossed out with a red line.  Any words added are shown in red.  It’s used to make it very obvious where changes are made.  A good attorney never tries to sneak changes past the other side.  It’s not ethical, and you’re not really doing your client any favors.  You’re only creating an even larger conflict after the deal is struck on terms which were never truly agreed.  Tip: Demand that your lawyer use the redlining features built into MS Word.  Some lawyers actually go through and manually change fonts, etc. to create what looks like a redline.  But it is a nightmare to unravel on the recipient’s end.
  3. While redlining, I also add comments to the margins using Word’s comment feature.  In the old days, we would write a letter to the client saying, “See Section 12(c).  I would recommend deleting this section.”  This is a hassle for the client because they have to flip back and forth between my letter and the document, searching for the applicable section.  With margin comments, the message I need to convey is right there next to the text I’m referring to, making the client’s review of my thoughts much easier.
  4. Once the client has reviewed everything we get on the phone and start going through my changes and comments one by one.  It’s very quick and easy with the comments falling right in line as we go.  This phone call will often lead to a few more changes I need to make to the document.  If it is a quick change, I’ll actually just draft it right on the spot with the client still on the phone.  Often, it’s literally just a word or two that needs to be updated.  If it’s a change that will take some time, I make specific notes on what needs to be changed right there in the text, or within my little comment bubbles in the margin, as opposed to keeping the client on the phone while I type.  The key is detailed notes.  I never assume I’ll remember the conversation in detail.  It wastes my client’s time (and money) if I have to call them back for clarification on something I should have taken better notes on while I had them on the phone the first time.  I draft those as soon as I hang up the phone with the client so it’s all fresh in my mind.  Again, this saves time and saves my client money since I’m not having to re-read through things to refresh my memory days later.
  5. Once the changes are made, we ship it off for signature or to the other side for their review.

So that’s it.  A basic run-down of how I do document review for clients.  Even if you don’t use me for your document review, this gives you some idea of how a document review process works.

Have an awesome day.  And go launch, build and exit your business strong!


Deal or No Deal?

I met with a client to go over an “LOI” (or so he thought) for the purchase of property out of state.  My client had already signed the LOI and was waiting on the other side to sign as well.  The problem was that the document was not an LOI.  It was a contract.  My client had signed a binding contract for purchase of a multi-million dollar commercial property purchase without even having the document reviewed by his attorney.

As background, an LOI is a Letter of Intent.  It is a non-binding document that is later used as a guide to draft a binding contract.  I can have certain sections that are binding legally, but generally it is a non-binding document.  The reason we use them is to get the main points of the negotiation out in the open to be sure that the parties are basically in agreement before spending time and money on drafting a final document.

Normally, a contract of this type would be negotiated through a series of “redlines” where each side suggests changes, and these changes are negotiated.  Many of these changes are simple and approved without any issue.  However, there will always be a few that become contested issues with serious back-and-forth negotiation.  It is an important process, and on a deal of this size it is critical to get that document right.

So in this case, our client is bound to a very large contract which was barely negotiated at all.  All before he even brought it to my attention.  The good news is that the contract is not perfect, but the changes we would have made are not necessarily critical changes.  Yes, I would have greatly preferred them.  But we will be able to make due without them.

Also, one last critical point.  The contract allows for a 30 day due diligence period where the property is reviewed, inspected, etc.  During that time, the contract can be cancelled for any reason and the $100,000 earnest money is returned to my client.  So we have that as a fallback if needed.  However, I generally prefer to avoid terminating under due diligence unless there is a genuine due diligence issue at hand.

That’s all for today.  Have an excellent day.

Launch Strong.  Build Strong.  Exit Strong.


Don't always go for the throat.

I have a client who provides programming services.  When we drafted his agreement that he uses with his customers, we made sure that he retains ownership of any code his company writes until it is paid for in full.  He does a lot of work with startups, so getting paid can be a bit tricky.

He has a customer who is behind by about $200,000 in their invoices.  But they do about $20,000 or more business per month.  So it is true that they are way behind on their bills, but it’s also true that they’ve paid a TON of money to our client over a few years.  So our client came to us for recommendations on how to handle the past due amounts.

We had every opportunity to go for the throat here.  First, we could sue and we’d win that lawsuit.  It’s basic collection.  There’s really no defense to the lawsuit.  Or we could simply hold up releasing their code to them, because we retained ownership of it under the customer’s contract, and effectively shut them down.  They’d get desperate and find the money somewhere and pay us.

But why not look at solutions that actually STRENGTHEN this customer relationship, but still ensures that our client actually gets paid?

Our client took our recommendation and had the customer sign a promissory note for the unpaid balance.  The advantage of this is that it eliminates and bickering over how much is actually owed.  The balance of the note is fixed and in writing.  Simple.  Also, we found middle ground on releasing code.  We would not agree to release any code that hadn’t been paid for.  That was still a deal-breaker.  But instead of seeing the customer’s code as one large ongoing project, which it technically was, we looked at it as a series of monthly projects.  We apply any payment to the oldest outstanding invoice, and release the code prepared under that invoice.  So the customer has a steady stream of code arriving at their door every time they make a payment.  Any failure to pay a new invoice counts as a default under the note, so we isolate these old invoices as past due and work our way through them.  Otherwise, the customer could just keep paying late, but also still keep receiving bits and pieces of their code from older invoices but never really clearing their past due balance.  Finally, we secure that promissory note with a personal guaranty from the owners of the customer company, and we also secure it with stock options in the company.  Our right to purchase that stock is triggered by a sale of the business or its assets, and the strike price is whatever the outstanding balance is on the note at that time.

There are times when you have someone backed into the corner that you have to absolutely go for the kill.  But I think these times are exceptionally rare.  And without doubt, the primary incentive to “go for the throat” is always far more emotional than it is business.  As the line goes from the movie Groundhog Day… “don’t drive angry.”  It makes you feel good to drive your opponent into the ground.  But it rarely actually accomplishes anything tangible.

Have an awesome day,


3 Ways to Structure Your Sale

When selling a business, there are a few ways the purchase price can be handled.  For this post, assume the business being purchased has an agreed value of $1,000,000.

  1. Cash at Closing.  The simplest transaction is cash at closing.  The buyer writes a check to the seller fro $1,000,000 and the deal is done.  Most often the buyer has actually obtained a loan for the purchase price.  But from the seller’s perspective, she doesn’t care if the check is from buyer or his lender.  The seller is paid in full as of the closing, and the deal is done.  Simple.
  2. Seller’s Note.  The seller is often asked to provide part of the financing for the sale of their own business.  So the buyer brings $800,000 to the closing as a check (either their own money or from a lender) and executes a promissory note to the seller for $200,000.  The key to negotiating for the seller is to get the amount of the note as low as possible (thereby getting more cash at closing), keep the duration of the note as short as possible (the long the duration, the more risk of default), and secure the note with the assets of the business, buyer’s personal guarantee, or both.  Seller’s notes are common when the buyer is paying by way of an SBA loan.  Often these loans require a certain portion of the transaction to be paid as a seller’s note, and often with a full two year waiting period before payments to seller even begin.
  3. Earn Out.  The highest risk for seller is an earn out.  This is similar to the seller’s note above, but the amount the seller is financing is not fixed.  It’s based on the success of the business after the sale.  So the buyer brings $800,000 cash to the closing.  But instead of setting the remaining amount of $200,000 in stone, the buyer agrees to pay a percentage of revenue or profits for a period of time.  Perhaps buyer agrees to pay seller 5% of revenue monthly for two years.  Seller takes the risk that the buyer won’t earn as much as expected, thereby reducing the amount paid to seller.  Like the seller’s note, sellers should try to reduce the amount dedicated to an earn out, and reduce the time the earn out will be paid.  The only time when this is not true is when the seller has strong confidence that the buyer will actually grow the business after the sale.  If so, the seller would enjoy that growth through his percentage of revenue.  Finally, seller’s should always seek to have the earn out calculated based on gross revenue and not based on profits.  Profits are far too easy to manipulate and disagreements are almost certain as to how to calculate the amount to be paid to seller.

Each of these types of transactions could be a series of posts on their own.  There are far more details and nuances.  And there are also several far more complex transaction structures out there to maximize tax advantages, etc.  But these cover the basic three concepts behind selling your business.

Make today a great day.


Getting both feet across the finish line.

Today is just a quick note on completing a transaction, all the way.  Clients are busy people, and tend to move very quickly when forming an agreement.  The agreement is then documented, usually by a lawyer.  There is some back and forth to get the language just right, and then it is sent to the client for signatures.  Often, these documents are not related to a specific deadline. And these can often go unsigned for weeks or months, or (worst case) forever.

If you are purchasing a business, you will certainly be signing those documents, or the seller won’t turn over the keys.  But there are many documents that need to be signed, but there is no pending transaction looming over everyone’s head ensuring that signatures actually happen.  A good example is a shareholder agreement.  Yes, we know it needs to be signed.  But in all honesty, it doesn’t really need to be signed today.  It can wait until tomorrow.  But then tomorrow becomes next week, next month, next year.  Or never.

One of the toughest calls we can make as an attorney is telling a client that this document they badly need was never signed, despite a flurry of reminders from the attorney. Eventually, the attorney will give up and will probably send a letter saying, essentially, “I did my best, but this is on you now.”  The very worst is when an agreement was never signed, and one of the parties has now died.

So the takeaway today is to be sure you get both feet across the finish line before calling a transaction “done”.  Don’t stop short of the ultimate goal, and be sure to set reminders to gather those important signatures and really tie up the loose ends.  You’ve spent the money to get the document completed.  Be sure you finish it off!