COFFEE SHOP DEALS
AND
NAPKIN AGREEMENTS
By Stephen J. Kerr
When a business owner is ready to sell his or her share of their company it is often tempting to sell the business to a partner, friend or family member. The conversation may go something like this:
 
"Roger, you've been talking about selling this business for almost a year now. I think you have a great company and I would like to buy it. Let's go over to the coffee shop and talk about it". Roger, who has been grumbling about selling the business after 20 years of running it, likes his friend and thinks he's a smart guy. He's tired and is ready to make a change.
 
The question is should Roger sell the business to his friend (partner or family member) without having first reviewed all of his options. And should he distance himself from the negotiations by bringing in his attorney, accountant or a business broker into the deal. I can promise you that Roger's friend does not want an intermediary between him and acquiring the business from Roger.
 
Too many businesses are sold for too little, under adverse conditions to the buyer or seller in this type of coffee shop deal with paper napkin agreements. Not only can thousands of dollars in equity be lost at the table, so too can lifelong friendships. And, both the seller and buyer are at risk. What they don't know, can and will hurt them.
 
In coffee shop deals between friends, business associates, vendors, parents and children, brothers and other known relationships it is often impossible for both sides to truly gauge the value of the business being transferred or the risks to each party.
 
Should this be handled as a stock or asset sale, and what are the tax consequences of each? What about hidden liabilities and personal guarantees? Are all the company's contracts transferable? What if the friend defaults on the payments? Who gets the money in the company's bank accounts?
 
There can be many unanswered questions between friends that should have been delt with in arms length negotiations between buyer and seller.
 
Unless Roger looks at bids for his company from other potential buyers, he will never know if he accepted a price that was too low for his business. When his friends in the business sell their like companies for considerably more than Roger got from his "buddy", Roger is going to feel cheated and betrayed.
 
It happens all the time.
 
The moral of our story is, before you sell your share of a business to family, friends or associates, do three things: Get an independent appraisal of the business, Hire an intermediary to represent you in negotiations; and Never discuss price and terms with your buyer until you have reviewed all of the ramifications of the sale.
 
Sometimes the right thing to do is to pass on the easiest thing to do ... sell the business to someone you know. You might just lose both the equity in your business and your friendship in the bargain.

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