Agency deal might not be too good to be true

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Mark Pestronk
Mark Pestronk

Q: In last week's Legal Briefs column ("Future revenue informs agency sale price"), you wrote that "earn-outs," i.e., acquisitions where most or all of the purchase price depends on future sales or revenue, are now the prevalent acquisition formula. However, another agency owner has approached me and has said "just take it off my hands." He says that he wants no money at all, just a commitment to employ his small staff, retain his few independent contractors (ICs) and process some ongoing sales and refund requests. Is a deal like this legal? Would I be liable to his creditors if he has any? Since this may be too good to be true, what would I have to look out for?

A: The transaction that you describe is unusual but by no means unique these days. It is legal, but it is not as simple as it sounds.

If you are not careful, you could end up in lawsuits by any co-owners of the other agency, creditors, clients, employees or ICs, and you could end up owing the agency's back taxes.

For example, if the other agency has an outstanding bank loan (other than a Paycheck Protection Program loan), the bank probably has a lien on the agency's assets, including its client list. If the seller transfers those assets to you without the bank's consent, the bank could sue your agency for the loan amount.

新沙巴体育To take another example, a landlord could argue that a transfer of assets for less than "fair value" at a time when a company is insolvent is fraudulent, opening you up to claims for the rent. Even if you proved that the agency had zero value, you would have spent thousands of dollars in legal fees defending your position.

There could be day-to-day problems, as well. Once you take over existing transactions, clients could claim that the seller promised a refund or the like, but you might have no record of that promise.

新沙巴体育In a usual acquisition, you could deduct all these liabilities from the purchase price, so you don't suffer any net loss, but with no purchase price, you may have no real recourse if these problems arise after the deal is done.

新沙巴体育The solution is not to abandon the idea entirely, as the benefits of the additional business that you hope will materialize may well outweigh these kinds of risks. Rather, the solution is to do some due diligence and ensure that you have an agreement in which the seller discloses all the potential problems that might arise.

新沙巴体育For a transaction involving a small agency, due diligence would primarily consist of answers and documents that the seller can provide in response to a questionnaire such as you can find . Then, you would follow up with questions about any issues that you spot.

新沙巴体育Your agreement should also cover which party keeps commissions for sales before closing, which party is responsible for paying ICs for their share of those commissions, how client deposits get transferred and any other commitments by either party. 

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