MAU 21 | Business Sale Legal Considerations


Have you ever wondered what type of legal review is necessary as you contemplate the potential sale of your business? David Buckley, a Founding Member of Kelleher & Buckley, LLC, joins Domenic Rinaldi to talk about some of the legal areas to consider prior to sale. Discussing the right questions to ask a seller prior to consummating a transaction, David dives into the seller’s perspective and why staging your business to get the right curb appeal like you would stage your home when selling is key to get maximum value. Tune in to today’s episode to learn about the critical importance of assembling the right advisory team early on and why post-transaction is great for both owner and buyer.

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David Buckley: Legal Considerations

Have you ever wondered what type of legal review is necessary as you contemplate the potential sale of your business? The reality is the legal checklist can be rather expensive but there are lots of opportunities if properly planned to improve the business value and ease of succession. We have an outstanding attorney, Dave Buckley of Kelleher & Buckley, to discuss a few of the legal areas to consider prior to sale. For business buyers in the audience, this will also inform you of the right questions to ask a seller prior to consummating a transaction. Dave co-founded Kelleher & Buckley with Andy Kelleher in 1997. Dave concentrates his practice on corporate transactions and succession planning for business owners. Dave is also a CPA so he possesses a unique understanding of his clients personal and financial needs. Dave, it’s such a pleasure to have you here. Welcome.

Thank you.

Dave, if you wouldn’t mind giving the M&A Unplugged community a quick background on yourself and on the firm.

I went to the University of Miami of Ohio undergraduate with degrees in accounting and finance. I worked in Northbrook, Illinois for about a 25-person CPA firm. I went to Loyola University, Chicago Law School at night. After graduation there, I worked at Schiff Hardin in Chicago for three years splitting my time between the corporate group and the estate planning group. Andy and I formed Kelleher & Buckley in 1997 and have been doing that ever since.

You guys have built a hell of a firm. The time that I’ve known your firm, the growth there has been amazing.

We’ve been fortunate. Most of the attorneys who do the sort of work we do are located in the loop in Chicago. There’s a real need in suburban Chicago for firms that can do both high-level work but also with suburban accessibility and be able to do that high-level work in different areas. We’ve been fortunate that we’re located out here where there’s a real need for our services.

You’ve attracted some great talents along the way too.

We have and we’ve merged in a couple of experienced practitioners in practice areas that Andy and I don’t personally focus on, mainly being litigation areas and bringing on some good corporate talent with people who’ve been at firms Baker McKenzie, Schiff Hardin and Arthur Andersen. We’ve been able to attract a great team.

Congratulations on that growth and success. I interviewed Andy in a previous podcast and I’ve gotten to know your firm a bit. We’ve done some transactions together and you guys do tremendous work. You’re a top tier firm.

Having the law firm hat, the CPA firm hat, and the business owner hat enables you to relate to your clients and deal with them better. Share on X

Thank you. That’s what we strive to be.

You’re both a CPA and an attorney. It sounds like you did a lot of schooling in a short period of time. I imagine that having both your legal background and being a CPA benefits your clients. How do you leverage that on a day in and day out basis?

Andy and I and a couple of our other attorneys have our CPA designation in addition to being attorneys. It’s helpful because that along with having actually practiced in public accounting, we’re able to see things from a perspective of a lawyer and a lawyer who does estate planning along with corporate representation. We’re also able to put our CPA hat on both from the perspective of the tax issues, but also the practical issues that you deal with clients as a CPA. With Andy and I founding this and building it, we’re also business owners. We started at the ground up with the two of us and now have about 55 people. The combination of the perspectives of having the law firm hat, the CPA firm hat and the business owner hat enables us to relate to our clients and deal with them better because we understand better where they’re coming from than somebody that has one of those three hats.

They’re getting a lot of bang for the bucket at the end of the day. They’re getting a number of different professional perspectives. I got to believe that it benefits your clients.

It does and I think estate planning is a critical part of that because the mindset when we’re drafting somebody’s estate plan is we’re going to be sitting with the widow or the kids 10 or 20 years down the road so this has to work. We’re not drafting the documents, we’re going to administer them and help the family years in the future in that long-term perspective. What it looks in that 10 or 20-year period is helpful for the business owners because the business owners are stuck in the tyranny of the everyday. They’re trying to get their orders out, get new things and being able to deal with them, coach them and get them to slow down and think about that long-term time horizon is helpful. They oftentimes don’t have natural energy or focus on that because they’re trying to solve the problems of today and this week, not 2 or 5 years down the road.

Probably there’s a psychological component to that as well. I would imagine that most people don’t want to think about that phase. They want to remain vital and relevant and thinking about planning for those sorts of stages in life. I imagine it’s a hard thing for people to get their heads wrapped around it.

It is because most of our clients founded their companies or if a previous generation did, it’s still part of their family identity. Getting them to think about it in a way where they’re not as critical to the operations can be a real challenge because in their mind, that’s who they are.

They associate themselves with their business often. Bringing it over to M&A and the preparation of a business from a legal perspective. Maybe we can keep it at a high level and we can drill down from there. When a client comes to you and first says, “I’m thinking about potentially going down the path of a merger, an acquisition or a succession plan,” what legal documents or legal areas are you focused on with that client to help them prepare?

Let’s assume that you got everything that you wanted. Tell me what that looks like for you as the business owner. Is that a certain amount of money? Is that the business continuing with protecting your current employees? What does that look like? For a lot of business owners, it comes down to, “I’m not sure how long I want to do this anymore.” It’s difficult to operate a business. We want to first have an understanding of, “This is going to work exactly the way you wanted. Tell me what that looks like. Tell me what that looks for you personally after that.” Once we have an understanding on the seller side, we usually talk with them about the buyer side. I relate selling your business to staging your home for sale.

MAU 21 | Business Sale Legal Considerations

Business Sale Legal Considerations: Business owners don’t have a natural energy or focus on estate planning because they’re trying to solve the problems of today and this week, not two or five years down the road.


Imagine you are going out to buy a house. You drive up to the house, what does the curb appeal look like? What does the inside of the house look? Does it meet your needs? That’s exactly what buyers of businesses are doing. We have to get the business owner to think you’re not the seller here. What if you were the buyer? What are the things you would be looking for that would make you want to invest this sort of money in something new and let’s make sure we provide those things to the buyer well before we have a clue on who’s the buyer? Whether the buyer’s going to be in an internal succession plan with the key management team or the next generation or it’s external with an industry person or with private equity, everybody’s looking for the same stuff. Pretend you were the buyer of this company. What is it that you’re going to see about it that’s going to make you not pay full value for it and how do we change that?

Starting with the end in mind is critical and then envisioning what a buyer wants so you can maximize the value of your asset, which is their largest asset is critical. Once you go through those steps with somebody and they can think through that, where do you take the process or the conversation from there?

What we’d usually say as a next step is, let’s look at who your current team of people are and let’s get that team together so we’re all having one discussion about what you want to do. While we’re going to have a good perspective from the legal side, the CPA’s going to have a different perspective. If things are working well, they’re talking to their CPA more than they are to us if they’re working with a firm. You’re going to have a different perspective because of what the market currently is and what the process is like. We usually want to assemble the team for a meeting, even if it’s 3 or 4 years in advance and say, “Let’s draw out that picture for when you’re ready to sell and let’s all agree on the things that we should be working toward to stage that house perfectly, as we talked about.”

Preferably it is years in advance. What we find is the folks who come to us a couple of years before they’re ready, they put themselves in the best position for that moment in time. That moment in time may come at your choosing or not at your choosing if there are other outside events that affect that. Being ready at any moment is critical.

If you’re the business owner and you are used to being in charge and you sell your company and now somebody else is in charge, you’re not going to be as happy in that new environment. We’ll have buyers come in and say, “We want the seller to stay for 2 or 3 years because of their relationship with the customers and they know how it operates.” Often, the seller either doesn’t want to do that upfront, they know that or they think they want to do it, but six months or one year in, they don’t want to do that. One of the planning things is, “Do you have your internal team in place such that when the buyer comes along, you aren’t going to be required to be there full-time for this to work?” It’s building the internal team, the internal structure and the processes you have are important if you’re going to be with a sophisticated buyer. The other benefit of doing that is if I’ve built that good team around me, I’m oftentimes willing as the business owner to keep the business longer because it’s more fun.

We see this time and time again. The more owners delegate, the more fun they have in their business, as long as they brought in the right people and they let those people do what they’re good at.

We’ll often say to business owners, “If you want to be done in three years, what if you were able to give away 40% of the job you liked the least and only keep that other 60%? What will three years become?” For some people, it’s three years, but for most people, it’s maybe 5 or 7 years.

Dave, let’s talk a little bit about securing your internal team. I’m going to call them your key employees or executive staff. The owner agrees with that strategy and they’re going to put those pieces in place. You know there’s a sale, merger or succession somewhere down the road. What legal aspects are you helping that owner think through as it relates to those key people?

Oftentimes for the key people, one of the main issues is, how transparent are you going to be about your intention to transition out or to sell? The better your relationship is with those people and the more transparent you’re comfortable being, the more likely it is that those key employees are going to be willing to stay through a transition and through any earn-out period that’s post-transition. We’re trying to understand from our clients, “Who is the key team? What do they know and when are you going to tell them?” Oftentimes, letting the business owner know, just because you’re not going to tell them, doesn’t mean they’re not going to know.

If you've built a good team around you, oftentimes, you're willing as the business owner to keep the business longer because it's more fun. Share on X

In other words, if they’re a valuable part of your team, then they know how old you are. They have a general sense of your wishes and desires. What does that environment look like? We’d have written employment agreements with those key people and we generally want to try to align their interest as the employee with yours as the business owner. I’m working on a succession plan with a business owner that anticipates selling in the next few months. There are two key employees there. We’re having them enter into employment contracts where they’re going to participate in the upside of the sale above a current baseline. We’re going to time the payments that they receive after that change in control to line up with what we expect the seller to receive.

We’re going to assume that most of the money’s received at closing but there’s probably some earn-out component and what those employees receive is totally aligned with what the owner receives. That owner has comfort that his team is going to be there post-closing to maximize his earn-out or upside after the transaction. The employees are grateful for that because they’re on the inside and they know what’s going on. They’re also grateful because they know they’re going to participate in value they create over the next 24 months and probably for the 24 months after that. When a buyer comes in, they’re going to see that the seller has, in a professional and diligent way, locked up the key employees with non-competition, non-solicitation, normal provisions, but has also treated his employees fairly and with a high degree of loyalty. That makes a buyer way more comfortable.

Let me ask you those discussions I imagine that have to be carefully handled and are highly sensitive. What do you advise owners to do there? Are they the first ones sitting down with those key employees and having the discussion? Will they bring your firm in shortly thereafter? How does that unfold in the perfect scenario?

We’re having a discussion with a business owner and oftentimes the CPA’s talk through what the business owner’s plans are. Prior to creating an expectation with the employees, they’ve got the advice of the CPA and oftentimes structuring it and what it’s going to look like. Typically, the business owner is talking to the employee by themselves because it’s a more natural discussion than the employee being scheduled to go to the CPA’s office and meet with the attorney. That is oftentimes a little less natural. It’s usually a discussion directly from the seller, but after they’ve had the advice and counsel of the CPA and attorney as to the general parameters.

What are the sticky issues that will come up in those discussions? I’m going to ensue will be somewhat of a negotiation between those employees and the owner. What are the typical high-level things that will come up?

It’s a positive conversation because the business owner is willing to agree in a binding contract to give the employees something they currently don’t have any contractual right to get. They’re a lot less contentious than people would think because the employees are typically grateful. The biggest issue is usually, “Can you fire me because you want me or is there a standard? If I do get fired, what are the restrictions on my ability to earn a living? What’s your ability as the seller to terminate me right before a sale and not pay me?” Those are the discussions we’re having with the business owners so when they talk to the employee, it is all couched as, “This is a positive thing. I’m willing to obligate myself to give you something. You don’t have a right to get because you’re valuable to me.”

This example that you brought up a minute ago about thinking the owners maybe 18 to 24 months away from a potential sale. Is that about the right timeframe to be doing that or would you recommend doing it even much earlier than that?

I’d recommend doing it earlier because a lot of times what the business owner wants and their timeframe changes. A lot of our business owners don’t know if they want to try to do an internal transaction. They oftentimes haven’t given the freedom to the other people to evaluate them fairly on whether they could do it or if they want to do industry or private equity. As from what you do, selling to an industry person who already understands what you do versus private equity are different transactions. We usually want to talk about it early because we want to have good financial statements from a reputable CPA firm. We want those to be consistent over a several-year period because if I’m the buyer, I’m paying you an amount of money to purchase the income stream that your business throws off. The more confidence I can have in that income stream and the more consistent it is, the more I’m willing to pay for it.

Do you ever see that these discussions wind up going in the direction of the key employees coming back to the owner and asking for an option on the business or a right of first refusal?

MAU 21 | Business Sale Legal Considerations

Business Sale Legal Considerations: Building the internal team, the internal structure and the processes you have, is important if you’re going to be with a sophisticated buyer.


For sure and we view that as a good thing because at least you have people internally that are interested in doing what I call sitting in the big chair. If they are interested, you want to give them an opportunity for you to evaluate if they are qualified to do that. The risk with an internal sale is typically you’re going to get less money upfront because your employees probably don’t have the money to pay you 80% or 90% of the purchase price. You’re taking a little more of a leap of faith financially, but you’re doing it with people you have worked with for a long time, which is good.

You typically want to, first, give them more authority and see how they do and try to mentor them because what we see a lot more than I would have anticipated is, everybody wants the big chair until they’re in the big chair. It sounds great, “I want to run the company and I want to have all the benefits you have that I see as the business owner.” When it comes time to sign on the dotted line with the bank, with a personal loan, and to go home and explain that to your spouse, oftentimes people chicken out.

It’s a totally different scenario. That is great advice before going down that path, ratchet up the responsibilities and see if they want to take them on.

The good part is, as that key employee, they’re given that opportunity and they decide, “I don’t want to own the whole thing.” It’s much easier to go to that employee then and say, “You are still valued. Let’s talk about that employment contract with the non-competition, the non-solicitation, where you can participate in the upside of a sale without ever having to sign that bank loan.” It’s a much easier discussion if the employee figures out on their own. I don’t want to be the owner of this company when I still want some of the benefits.

Dave, are there other aspects from a legal perspective, as you assemble the team and start to talk to the owner that you look at and review with the client?

As part of what I called earlier, the staging process, we’ll typically go through with the client and the CPA. We have a master due diligence or legal audit checklist that says, “Let’s go through all this huge menu of issues and see which ones apply to you and which ones don’t.” If there are things that apply to you that aren’t where they should be for a buyer, at least you’re now aware of them and can address them. We’ll see a lot of businesses that’ll have not great diversity in their customer base. It’s not that they have twenty customers each with 5% of the revenue. It’s one customer that’s 40% or 50%. Oftentimes, they won’t have a contract with that customer. They’ve only been doing business forever. That’s obviously going to be a major buyer issue. If the contact between the companies is business owner to business owner and they’re both in their 60s that will make that buyer nervous.

We’ll want to look at contracts with customers, key vendors and suppliers. We have a lot of clients that do a lot of business or source a lot of things in China where they may have products being manufactured over there but there’s no written agreement. As a buyer, you’re going to be nervous about that and you’re going to make much more of the purchase price contingent on future performance and that puts way more risk on the seller.

You referenced pulling up a perspective due diligence checklist that the owner’s going to get from a buyer anyway and have them go through that checklist point by point. You and I know to go through enough transactions. Usually half of the items on a due diligence checklist don’t even apply. Sometimes even more than that. Let’s look at what’s on this list that potentially applies and understand other things you can do to improve the business and the ease of succession of that business.

Another reason we to start the discussions 4 or 5 years in advance so the seller can understand what the tax consequences of the sale are going to be. We had a transaction fall apart because a brand new client of ours who was the seller didn’t get good CPA advice and they were a C-corporation. Inside of the C-corporation was both the operating business and the real estate. Even though they got a buyer to offer the price they wanted, when they saw what the net amount was going to be after taxes to them, it didn’t work for them. If we had been able to have a discussion with them five years ago, we would have been able to change that answer pretty dramatically.

You say five years because the window to convert from a C-corp to an S-corp or some other entities where you don’t have double taxation is five years. The government has a five-year look back and that’s what you’re referencing?

Everybody wants the big chair until they're in the big chair. Share on X

Correct. They could also have spun out the real estate into a separate company under a holding company. There are different techniques they could have done that they didn’t know about because they had grown up with the same CPA forever and that CPA was in his late 60s and didn’t act proactively to protect the client.

This tax issue can surprise a lot of people. We’ve had a number of C-corp situations over the years of doing this. In some cases, there are some potential workarounds, but you have to be careful with those workarounds. For example, I’ll list one personal goodwill we’ll see sometimes utilize, but you have to be careful with personal goodwill. The natural thing is, will the buyer buy the stock of the corporation? There are tax implications on the other side to the buyer and liabilities potentially that they need to think through.

There are some buyers that are willing to buy the stock and there are others that simply are not going to go there. Part of going through the exercise of identifying who you think you’re going to sell to, part of that is that’ll help give us a better idea of whether a stock transaction might be possible or might not.

I’ll tell you it’s often during my interviews here on M&A Unplugged, we come back to this key concept of preparation. It always boils down to if you take some time to prepare and assemble the right team. It goes beyond maybe calling your local CPA that’s always done your taxes. It’s bringing in a firm who has specific M&A experience because the issues are going to be different than they are when you go to prepare your taxes.

I was talking with a business owner who was like, “That sounds good, Dave. I’m not sure I want to go through that exercise right now.” I said, “You told me at the start of our meeting that you had your daughter preparing for the SAT for 1.5 years with different consultants. Why would you not go through that same process with the company you’ve built over 40 years? You’re doing it for other people, do it for yourself. It makes a big difference.”

This is somebody’s largest asset or top three assets. I guarantee they’re constantly looking at their portfolio of investments and modifying it wherever they need to. Your business is one of those and should be looked after with the same care and concern.

The other reason for the five years is a non-legal one. If I own a business, I’m probably getting roughly a 20% return on my capital. If I have a business earning $1 million a year and I can sell it for five times, I have $5 million of capital in that business in theory and it’s throwing off $1 million of income. If I sell that business for $5 million and $1 million of tax to keep it simple, now I have four left. I can invest that at 5%. I’ve turned $1 million of cashflow into $200,000. In that process, I probably had a lot of expenses that were being paid for by the business that I now have to pay for personally.

If I sell the company, I’m done. I pay my own cell phone bill, car lease, and probably some entertainment expenses that I’m going to pay personally. It’s good to walk business owners through that because a lot of times we’ll see business owners that can’t afford to sell their business. You’ve got the entrepreneurial mindset that helped you build it in is why you’re successful but that’s often the mindset that wants the vacation home and the jet skis more than a nice bond portfolio. We’ll say, “If you want to get out in five years, you got to get with your financial planner and start putting your personal financial situation in order so you’ll have the freedom to decide to buy or sell when you want to.” A lot of business owners haven’t thought about it that way. The return on capital for business is a multiple of what it is with passive investments.

The statistic is over 75% of owners don’t properly prepare for an exit or succession of their business.

That’s definitely true.

MAU 21 | Business Sale Legal Considerations

Business Sale Legal Considerations: Selling to an industry person who already understands what you do versus private equity are very different transactions.


It’s staggering when you think about it, but it’s true. Dave, this has been such a pleasure. This is great information. Before we end the interview, you guys do a lot of M&A transactions. You’re involved with business owners. Anything from a high level M&A perspective trends or even advice that you’d offer up to the M&A Unplugged community?

I hit on something we did which is, get your external team in place. Make sure you’ve got your assets properly owned and allocated, separating business and real estate. Pay yourself in the leases and other things on market rates to create a nice smooth picture for the buyer. Handle those items and take steps with your key employees to keep them there and align your interest in theirs. If you can do those things and allocate the part of your job to others that you don’t while getting your personal house in order, you’re going to be in good shape. We have lots of business owners that don’t ever sell their companies because they took the steps to build the internal team that they don’t have to do things they don’t want to do and they have the freedom they want. They just assume they’ll keep earning that 20% return on capital rather than selling and that’s usually the best scenario.

I appreciate everything you’ve offered up to the M&A Unplugged community. Dave, if people wanted to get in touch with you, how could they reach you?

My email is [email protected] or our general phone number is (847) 382-9130. Ask for Andy Kelleher or myself and we’d be happy to talk to you.

Dave, thank you so much. I appreciate you being here.

Thank you so much, Domenic, for the opportunity.

Let me recap a few items. Dave recapped some of these as well, but they’re worth pointing out. He made the analogy of staging your business much you would stage your home when you’re looking to sell it. While being different as far as the depth and breadth of what you need to do to stage business, it’s so critically important. You make sure that you’re getting not only maximum value for your business but you’re keeping the maximum amount of dollars with the least amount of tax and you’ve taken care of your legacy and your family. Assemble the right advisory team and do it early. When we say the right advisory team, people who understand M&A transactions, succession planning and all the things that go into that. Critically important in doing that is securing your executive team.

Dave talked about a number of strategies to do that with contracts that would pay them some percentage or some amount upon a successful sale and keep them motivated to stay post-transaction. It’s good for you as an owner but it’s also good for the buyer. It will give buyers a lot of confidence that you’ve been thoughtful about running your business. You’ve taken care of your good people. You’ll attract more buyers as a result as well. The last thing that Dave brought up that is key is, when you’re doing this review and part of that staging, using a mock due diligence list as your template for what buyers are going to look at is a great way to start with your staging. Go through that list and look at all of the items that might apply and start to address those items.

It’s great information from Dave and I appreciate him being here. If you would like to learn more about the process of acquiring or selling a business, please visit our website at or feel free to reach out to me at [email protected]. I look forward to seeing you again on the next episode of the show. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.

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About David P. Buckley

MAU 21 | Business Sale Legal ConsiderationsConcentrates in estate planning, estate and trust administration, taxation, corporate transactional work, succession planning, and real estate.

Is involved in estate planning for high net worth individuals, business succession planning, the administration of complex estates, resolving IRS disputes regarding contested estates, and the formation of corporations, partnerships, limited liability companies, and tax-exempt organizations.

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