The Evolving Landscape of Collaborative Law Ethics

I recently gave a presentation on “The Evolving Landscape of Collaborative Law Ethics” to the Collaborative Law Committee of the American Bar Association Dispute Resolution Section.  It’s available here: The Evolving Landscape of Collaborative Law Ethics: Presentation to ABA Collaborative Law Committee.  We all think we are ethical, professional and responsible, but the guidance provided by the Model Rules of Professional Conduct is invaluable for advising practitioners on how to be lawyers in a limited scope representation like Collaborative Law.  There’s a distinction between ethics and practice guidelines.  Ethics tells you how to carry yourself when you walk into the room.  Practice guidelines tell you what to do.  You can’t be a good lawyer without both pieces.

Changing Practice

The practice of structured early dispute resolution is changing.

On one end of the spectrum are organizations that focus on individuals and small businesses.  The International Academy of Collaborative Professionals (IACP) is no longer trying to be a big tent organization.  Instead, it is focusing on all things family-related.  The Global Collaborative Law Council is stepping into the breach with a focus on “civil Collaborative Law,” meaning everything that’s not divorce.  Local practice groups have sprouted all over the world, including our own Massachusetts Collaborative Law Council.  Meanwhile, for large businesses, organizations such as the International Institute for Conflict Prevention and Resolution have developed similar structures for resolving disputes out of court.

For practitioners across the spectrum,  the American Bar Association has published several helpful books including John Lande’s Lawyering With Planned Early Negotiation and Lainey Feingold’s Structured Negotiation:  A Winning Alternative to Lawsuits, and in addition to the Collaborative Law Committee has established an Early Dispute Resolution Taskforce.

Legislatively, some US jurisdictions have adopted the Uniform Collaborative Law Act or Rules, which provide a shield of legal privilege and a stamp of approval for those who follow the practice standards the Act and Rules embody.

These groups. authors and legislators are all talking about the same thing from different perspectives:  resolving legal disputes out of court by providing an intentional structure for the negotiation rather than letting a structure evolve from the rules of a court-based process.

Collaborative Law Ethics and Practice Guidelines

In professional circles, there is much talk about Collaborative Law Ethics.  However, as new practice guidelines are battling each other in the innately conservative marketplace of legal ideas, there is a danger that professional responsibility developments are not keeping up.  Much of the formal ethical guidance is about the question of whether it is permitted to represent clients without going to court, a focus that derives from the world of small firm family lawyers while ignoring the fact that a huge number of lawyers are not litigators.  This guidance is saying that early dispute resolution is OK to do, but not so much about what happens after we agree to do it.  In order to advance this part of our practice, we have to look beyond that, to questions of how we carry ourselves.

IACP is in the process of updating its ethics standards to cover that next step.  While the draft is not yet available for public comment, from the early version I’ve seen it is an enormous advance over what came before.  However, it still leaves some questions open, which is why elsewhere on my website you can find my first stab at model ethical guidelines that transcend one particular area of practice.

Expanding Our Understanding

Some disputes belong in court.  For those that don’t, let’s keep expanding our understanding of what works and how we work within these new systems.  As our sense of what we are doing evolves, we will be better able to convey it to our clients.  Structured dispute resolution can be another arrow in the quiver if we know how to do it professionally, responsibly and ethically.

Mergers and Acquisitions Strategy and Execution: A Cloud-Based Solution

Uniddo logoI’m pleased to announce that I’ve joined the advisory board of Uniddo, Inc. Uniddo  (pronounced you-ni-DUE) is a start-up developing a cloud-based solution for mergers and acquisitions strategy and execution.  The system will cover the M&A process from soup to nuts, from strategy development and pipeline management to post-merger integration.  Its goal is to provide expert guidance, project management and data management across the entire multidisciplinary M&A team.  People in other kinds of deals could eventually use some of the execution-stage modules, too.  For example, the due diligence piece would be a great tool for securities and venture capital lawyers to manage the process and mitigate risk.  Interested to see how it develops.

Nine Things to Remember When Mediating Inheritance Disputes

Good news. An article I wrote a few years go for Family Mediation Quarterly on mediating estate disputes is being re-published as part of an American Bar Association book called Mediation for Estate Planners. Many thanks to the editor, Prof. Susan Gary of the University of Oregon Law School, for including it.

Time to Change Your NDAs: The Defend Trade Secrets Act of 2016

Time to Change Your NDAs:  The Defend Trade Secrets Act of 2016

business, office, law and legal concept - picture of man and womThe US federal Defend Trade Secrets Act of 2016 was signed into law in May.  It brings more consistency to the hodgepodge of statutes and case law surrounding the misappropriation of trade secrets and offers new rights and remedies to those who seek to defend their intellectual property rights.  The immediate impact on most businesses will be to the documents they use to manage their trade secrets, particularly those they use for employees and independent contractors.As an initial suggestion, until further case law and best practices develop, I suggest that companies consider the following changes to their standard documents:

  1. The DTSA generally follows definitions like “trade secret,” “misappropriation” and “improper means” from the Uniform Trade Secrets Act that serves as the basis for state trade secret law in much of the country. However, Massachusetts and New York have not adopted the UTSA.  Be sure agreements that use defined terms for these concepts track the new definitions in a way that also reflects the relevant state law definitions.  Note that the term “improper means” expressly excludes reverse engineering, so companies should be sure their agreements still contain appropriate protections.
  1. Certain kinds of damages are not available under contracts and agreements entered into after the statute went into effect unless DTSA language is added. Agreements with individuals that govern the use of trade secrets or other confidential information should include a disclaimer like the following, modified to fit the particular agreement:

“Notwithstanding anything contained herein to the contrary, to the extent provided in the Defend Trade Secrets Act of 2016, (i) individuals may not be held criminally or civilly liable under any Federal or State trade secret law for certain disclosures made in confidence solely for the purpose of reporting or investigating a suspected violation of law or otherwise in a lawsuit; and (ii) certain disclosures may be made by individuals who file a lawsuit for retaliation by an employer for reporting a suspected violation of law.”

An employer may include this kind of disclosure in employee handbooks or other policy documents as long as it provides a cross-reference to a reporting policy for a suspected violation of law.

  1. Most contracts have clauses about the forum for resolving disputes. While some employers prefer arbitration, many agreements instead provide that all claims arising under the agreement must be resolved in court.  The DTSA makes a technical change to case law limitations on the jurisdiction of federal courts to hear certain state law claims.   Agreements that refer only to state courts should therefore be revised to give employers the right to seek remedies in federal court as well. This way, employers can pursue claims under both federal and state law at the same time without having to navigate quite as complex a procedural minefield.
  1. Almost all confidentiality and intellectual property protection agreements include an acknowledgment of some of the elements a court would consider in granting an injunction, like monetary damages not being a sufficient remedy for breach. The DTSA goes even further than injunctions. Under extraordinary circumstances, it gives a court the power to authorize ex parte seizure of material containing trade secrets to prevent its dissemination (that is, seizure during the pendency of a case without prior notice to the party whose property is being seized).  Courts can appoint a special master to oversee the investigation and seizure and can even authorize law enforcement to participate. Employers should consider adding language to agreements with employees who have access to key trade secrets that an injunction would not be a sufficient remedy and that the employee consents to exparte relief under the circumstances described in the statute.It is not yet clear how effective this kind of language will be, but we can expect much litigation about the whole topic.
  1. Speaking of injunctions, the DTSA generally does not expand state law rights to injunctive relief or otherwise preempt state law. Separate DTSA injunctions must be based on “evidence of threatened misappropriation,” a much higher standard than an employee’s simply knowing a trade sec  The choice of state law governing the contract is therefore just as important as it has been.  Courts typically apply the law of the employee’s home base, but for employers with multistate contacts it may make sense to review the choice of law provision to see if there are enforceable options.
  1. Commentary on the DTSA so far has mostly focused on employees and independent contractors. However, businesses can also use DTSA in other contexts to protect their tradesecrets.  For instance, companies that make disclosures to prospective investors or acquirorsshould consider using nondisclosure agreements that require parties receiving company information to include DTSA-like provisions in agreements with their own employees and independent contractors.

The first cases were filed under the DTSA within days of its enactment.  It is not clear how successful they will be since claims have to relate at least in part to the misuse of trade secrets after the effective date of the statute.  However, since the cases do show that the national landscape is moving quickly toward new focus on the statute,businesses should consider protecting their competitive positionsnow by making changes to their confidentiality and intellectual property protection agreements, employee handbooks and other published policies.

How to Divide Law Firm Partnership Income

One of the quickest ways to silence a roomful of lawyers is to raise the question of how to divide law firm partnership income. Many lawyers are reluctant to discuss the subject because they are unfamiliar with the options and uncertain how to select among them. Others are concerned that a conversation with their partners about compensation splits will be too uncomfortable. The good news is that there are there are enough different ways to slice the pie for each viable firm to be able to find a solution that works. Also, as with other partnership agreements, the conversation becomes much easier if it starts with what kind of culture and behavior the partners want to encourage rather than with money. The actual numbers flow more easily once the goals are clear.

The major variations are as follows:

1. It’s Good to Be King. One lawyer is the name behind the firm. He originates many of the clients by virtue of his prowess, reputation or connections. All the others bask in his reflected glory. He gets to look over the books and decide how much the other partners should be making based on subjective or objective criteria. He may not disclose all of what those criteria are. However, most people see the fairness of his decisions. There is enough money coming in to keep most of the people happy most of the time. The incentive is to keep the king happy.

2. The Gang of Four. Instead of having one king, a group of lawyers forms a committee to decide how to split the income for the rest of the partners. At some larger firms, the compensation committee is separate from the executive committee that runs the firm. At others, the compensation committee makes a non-binding recommendation to the executive committee. At still others, it is the same committee. Although the committee likely has to publicize some of the factors on which it makes its decision, the other partners often become supplicants who write up an annual impassioned summary of achievements and predictions for the committee. This structure works if people trust in the process and the people on the committee. The incentive is to shoot for the targets the Gang of Four makes public and to make sure everyone in the Gang likes you.

3. The Black Box. The Black Box is a variation of The Gang of Four, except that the criteria are entirely subjective. It may work if there is enough money to go around, but the problem is that lawyers, like everyone else, often compare themselves to their peers. The subjective element creates a huge potential for perceived unfairness, which can cause rifts in the firm. The incentive is to work hard and play office politics.

4. Eat What You Kill. The EWYK model appeals to the strong strain of individualism in Western culture, and American culture in particular. The theory is that each member of the firm is the captain of her own destiny, can choose how much to work in any given period and should be rewarded for her efforts. It is a very common structure among smaller firms, but tends to go by the wayside as firms grow. The behavior it incentivizes is the sharing of space and administrative resources, individual responsibility, the development of individual practices and a sense of independence. It can also encourage divas. It does not encourage other benefits of being in a firm, such as cross-selling to specialists within the firm, a team-based approach that becomes necessary as matters become more complex and multidisciplinary, the sharing of knowledge, the development of associates coming up through the ranks and, perhaps most importantly, balancing out the strength of individual practices on a year by year basis. A lawyer might have a bad year followed by a good year, while another has a good year then a bad year: the EWYK model does not let them smooth out the cash flow. Finally, the incentive to develop a sense of community within the firm is not emphasized, which means that lawyers feel less incentive to stay. When they leave, they take “their” clients, who have never developed a relationship with others in the firm. Nonetheless, many smaller firms with practices that do not require extensive teamwork find the clarity of the approach appealing.

5. The Formula. The Formula takes the overall firm revenue and plugs in percentage values for factors that may include some or all of (a) length of service, (b) client or matter origination, (c) ongoing relationship management (in case clients get handed over from one lawyer to another), (d) billing responsibility for a matter (which may be separate from relationship management), (e) time spent servicing clients, (f) management and administrative time, (g) special projects or other incentives, (h) total hours billed, (i) prospects for the coming year (especially if there are client payments that will straddle the fiscal year-end, as in corporate matters that get billed at the end of the transaction or contingent fee matters) and (j) other creative elements. The advantage is that if everyone knows The Formula, it reduces the chance that people will see distributions for a particular year as being unfair. It sets the incentives. If structured properly, it encourages the kind of internal cooperation that is good for the firm’s longevity, which is why it is common throughout the service sector. The disadvantage is that a mechanical formula removes business flexibility and encourages people to structure their practice in ways the framers may not have intended. For instance, big corporate transactions can be very lucrative, but a formula that focuses entirely on collections may encourage business lawyers to move to firms that give them more steady current income rather than periodic bonuses when transactions close.

6. Solomon’s Baby. Outside of the law firm world, many people who own partnerships expect a fixed percentage of the profits, like dividends from shares of a corporation. Law firms have two variations:

  • Lock-step compensation, in which everyone in the same year of partnership is paid the same, was the gold standard for generations. Not so today. It requires a huge amount of trust that each member will pull his or her own weight, make up for down years with future up years, get paid less in up years than might be possible elsewhere to even things out or out of a sense of community, and stay with the firm. It requires and encourages teamwork and long term planning, and reduces internal conflict over pay.
  • Some smaller firms have fixed distributions that reflect the perceived relative contributions of the partners. Often, they are based on circumstances at the time the firm is formed and may seem imbalanced as time goes on. The imbalance often fractures firms that do not have a mechanism to revisit fixed percentages as practices develop over time.

7. The Reference Standard. In baseball, even the greenest Major League player is entitled to be paid a minimum salary. Law firms sometimes do the same, with each member of the firm being entitled to receive some minimum compensation. For instance, some firms have decided that no partner should receive less than the highest paid associate. Others use a similar method to calculate retirement or buyout distributions.

8. The Bleacher Seats. Since the 1980s, more and more firms have been moving toward a tiered partnership structure. The tiers are divided differently in different firms, but many contain a tier of “non-equity partners.” These partners may hold themselves out as partners to the outside world, but really receive a salary plus bonus based on individual performance and have varying degrees of tenure (some of the many flavors of being “of counsel” overlap with being a “non-equity partner”). The next tier may be paid on a formula that combines a smaller fixed amount plus a percentage of the firm’s net income or divides a set percentage of firm profits among all partners in that class. The top tier is often paid on more of a percentage basis divided using one of the approaches outlined above. The assumption is generally that total compensation – and risk – increases as one climbs the tiers. Firms use a tiered structure to manage expectations and attorney development and to maintain firm financial health. Some firms have a policy of moving non-equity partners out the door if they do not advance within a certain period of time. Other firms use the incentive structure to focus non-equity partners on client origination, which may come at the cost of servicing existing firm clients. Rightly or wrongly, many perceive non-equity partners as being like tenured associates who can only advance if the firm fears they will walk away – meaning that they have developed invaluable expertise or a separate, portable client base. As long as the firm stays on top of how its attorneys are developing, though, this system works well enough that most of the nation’s largest firms have adopted one or another variation of it.

There is no one “best” way to divide law firm income. Indeed, many firms take a creative approach in combining these basic elements to reach a result that their members find fair. For instance, a firm could pay each partner a minimum and then use another method to divide up any balance of cash left at the end of the year. A firm could distribute a third of its net income on a lock-step basis, a third based on total hours and the rest on a formula basis that gives 70% credit to origination and 30% to service. It all depends on what the partnership wants to reward.

Finally, whether partnership terms work well for any firm depends on one big intangible: trust. Do attorneys trust each other to continue developing and maintaining their separate practices? Do they trust each other enough to work together on firm and client projects, to assume joint liability, to share the burdens of administration and not to jump ship at the first opportunity to make a few extra bucks? Do they trust each other enough to set shared goals and rewards? Most importantly, as they develop the partnership compensation structure, do they trust each other enough to have open, good faith conversations about what kind of firm they want? The level of trust drives the partners’ options.

Five Conflict Styles That Affect Our Approach To Disputes

Arrow of a compass pointing to the word mission (3D Rendering)People have different conflict styles.  They approach conflict differently.  Every conflict is also unique.  Different personalities, relationship dynamics and histories all impact how a conflict is resolved.  Mediators and Collaborative lawyers are well trained in working with people who have different personality types and conflict styles.  They examine conflicts to see if the resolution is all about compromise or if other approaches might work.  They help translate the language and positions of parties that approach conflict differently, and help them create various ways to resolve their disputes that not only meet their bottom-line needs but also make sense in terms of their approaches.  While mediators and the Collaborative Law team use different specific techniques, the overall philosophy is the same.

In one model that is commonly used to analyze conflict, there are five primary modes of conflict: avoiding, competing, compromising, accommodating, and collaborating.  None of them is best at all times.  Each of these modes has its appropriate place, sometimes even during different steps of resolving the same conflict.

People avoid conflict when their sense of self-protection is triggered or when conflict is uncomfortable.  It also makes sense if the timing is bad or one party has not had enough time or information to prepare for real engagement.  Many disputes begin with avoidance.  However, if both parties continue to avoid conflict, it may prevent a resolution.

Competing and accommodating occur when an individual focuses solely on his own goals or primarily on the interests of the other party, respectively.  Pure competing mode is totally selfish, and pure accommodating is totally selfless.  Pure competing can be a good approach when the relationship is unimportant or, in commercial cases, if that is the culture of the relationship.  Pure accommodating can be a good approach when the issue is much more important to one party than the other or if the relationship is so important that any hint of competition might damage it (think of the dysfunctional boss versus the longsuffering employee!).  Either one may result in a “win” under the circumstances, depending on on what is important.  However, most of the time, people tend to compromise, finding solutions in the middle that at least partially meets the interests of both parties.

Collaborating occurs when each party focuses both on meeting its own interests while working with the other party to meet its interests as well.  It is an active process that requires listening, communication and the sharing of relevant information.  It is not the best solution to all problems, since it takes more time and resources to collaborate than to compromise.  It is the most difficult mode to enter and the easiest to fall from.

In this model from conflict theory, collaborating is a great way to “expand the pie” in coming up with creative solutions to problems.  However, when it comes time for making a decision, most of the time the options will involve some degree of compromise.  The skill of the mediator or the Collaborative Law team are in guiding the parties through the process, using whichever techniques best fit the situation.  For a complicated conflict – especially one that has already reached the legal system – these roles are helpful.

Finally, these roles can be helpful in developing contractual arrangements, like partnerships.  People who have to learn to work together sometimes benefit from assistance in applying these different conflict styles to the negotiation of the terms of their arrangements.  Properly trained professionals can help.

Here is an easy way to remember the different conflict styles:

Avoiding – Run away!
Competing- I win
Accommodating – Whatever you want
Compromising – Let’s split the baby
Collaborating – Is there a way to expand the pie so we both get something we want?

Avoiding Breach of Contract Lawsuits

a lawyer in his office showing a document with the text lawsuit written in it

Breach of contract lawsuits happen when two or more parties have a disagreement about an arrangement they had previously committed in writing to a contract.  It does not matter if a party is an individual or a business:  both can claim a breach of a contract term or be on the receiving end of a claim.  However, litigation may not be the necessary result of a claim.  The issue is not the contract per se, but a dispute over whether one party failed to do something the other party believes should have been done.   Rather than a breach of contract lawsuit, there are, in fact, a number of ways that parties may resolve their dispute.

Going to court can be an expensive, lengthy process.  Individuals sometimes try it on their own (“pro se”), but for matters that rise beyond small claims court levels most people use attorneys.  Businesses have to be represented by attorneys.  Lawyers are not cheap.  Most of them charge hourly for their services (contingent fee representation is rare in contract cases), and most breach of contract cases take well over a year to resolve if they go to trial.  At trial, litigants are often surprised to find that they cannot tell their story in the way they would like, but only limited bits of it in a regimented way.  Lawyers should also advise clients that nothing is certain in litigation, since judges and juries are unpredictable.  I have never been a judge, but having arbitrated a number of cases, I can tell you from the other side of the table that what the decision maker thinks is important and persuasive is not always what the parties and attorneys do!

Most litigated cases resolve before trial anyway.  The parties may reach a compromise or find a different way to continue their business arrangements.  One of the ways they reach that point is through mediation, an out-of-court process that gives the parties the opportunity to craft a resolution of their choosing.  In mediation, the parties work with a neutral third party mediator who facilitates their discussions and in some cases the exchange of relevant information, gives them a forum to present their factual and legal cases to each other (including breach of contract claims and defenses) and, depending on the process, either allows them to find a solution or actively guides them toward one.

Other processes include early neutral evaluation – like mediation before all the discovery in a case is complete, but with the neutral advising how a court might respond to claims – and Collaborative Law, in which specially trained attorneys and, in some cases, a neutral coach-facilitator assist in highly structured negotiations designed to help the parties reach agreement.

One of the biggest advantages of mediation and other ADR processes is that the parties are in control of timing.  Rather than being at the mercy of a court’s docket, negotiations using these processes may be scheduled at the parties’ convenience.  Starting is as simple as making a phone call to a mediator’s or Collaborative Lawyer’s office.  Alternative dispute resolution allows the parties to save money while reaching a resolution much sooner than in a traditional court process like a breach of contract lawsuit.

How to Handle Conflict in the Workplace

Conflict in the workplace is inevitable any time people interact and their wishes are different. If properly managed, it can be a source of positive energy in the workplace. If not, it can have devastating effects on a business. Worker productivity declines, the office becomes unpleasant, turnover increases and it can even lead to litigation. As a business owner, it is important to resolve these conflicts before they get out of control and hurt your reputation and profitability.

There are as many reasons for conflict as there are employees, ranging from benign differences of opinion to clashing egos, perceptions of disrespect or unequal treatment, problems with workflow management, poor communications among staff or management, managerial skills that could use improvement, a structure that encourages strife and financial or other incentives that are not aligned with the organization’s goals. Often, different employees in the same conflict have different motives and perspectives.

Business owners and managers should consider a few things:

  • There are ways to manage conflict productively. Learn how to use them. Learn how to work with the different conflict styles and skills you and your individual employees bring to the table.
  • Don’t paper over differences. False harmonies fester. Address disputes before tensions build up and spill over into other aspects of the workplace. Unhappy employees can be toxic to morale, especially when they feel their concerns are falling on deaf ears. They can also signify systemic problems in your business organization. Even though many business owners and managers are reluctant to get involved in workplace disputes, being conflict averse can be costly.
  • You cannot fix what you are not aware of. Take steps to implement a culture of open-ness, so employees will feed you the data you need to evaluate situations.
  • Third parties can really help. A trained mediator can assist in translating among employees who are not communicating and in surfacing the concerns underlying the conflict. Depending on the circumstance, after some initial work, a mediator may also bring in organizational development resources to help fix systemic problems that lead to battling employees or poor team performance. In many cases, managers and business owners find it helpful to add an ombudsman to the mix, someone who is on-site regularly to handle small problems before they turn into big ones.

Conflict is neither inherently good nor inherently bad, but if managed well it does not have to weigh your business down

When Business Partners Disagree: A Reason to Call in a Mediator

When business partners disagree, it should not be surprising. There have been disagreements between partners for as long as there have been partners. However, disagreements can reach the point that the daily operations of the business suffer. Perhaps one partner wants to take out a loan that another partner disagrees with. Or, perhaps the partners cannot agree as to whether the business should enter a deal with another company. If a disagreement becomes major or a pattern of disagreement starts to develop, it may become harder and harder for the partners to continue working as a team for the benefit of the business. Fortunately, mediation is a tool that is being used to resolve more and more business partner disputes across the country.

Each mediation is different, depending on the partners and the particular dispute they have. If it is a dispute that so divides them that they could be headed to court, the process may be more formal and more focused on finding a specific resolution – perhaps finding the best compromise between them. If it is an intractable operational dispute, the mediation may focus on removing sticking points from the discussion so the partners are able to separate the forest from the trees and address core points of disagreement – setting up the conditions for more collaborative decision making that is not focused primarily on bargaining positions. It is helpful for a mediator to have enough of a business background to understand both the substantive issues and how businesses actually work. That way, if called for, the mediator can help the parties develop new ideas for resolving their dispute. In any case, the partners are in control of whether, how, when and what kind of resources they devote to reaching agreement, since, unlike a judge or arbitrator, mediators have no decision-making power.

Although people are sometimes reluctant to acknowledge it, many business disputes do have an emotional aspect. Business partners may spend more time with each other than they do with their spouses. When they disagree, they can become just as angry as if they were squabbling spouses. While trained mediators know techniques to mitigate disruptive influences in negotiations, it may be that these influences are at the core of the disagreement. One of the great benefits of mediation if the circumstances call for it is the ability to tell one’s story and have it heard. This often goes a long way toward dismantling roadblocks to agreement. It is also something that most parties are surprised to learn is rarely available in court.

How to Buy a Business in Wellesley MA

There are a number of steps in buying a business.

First, you have to find the business you want! Whether you are expanding your existing business, buying something for investment or buying something to operate, the first step is to identify the “target.” Acquirors use investment bankers, business brokers and networking to locate a target. Using a third party to help sometimes makes the initial contact easier.

The next step is to begin discussing terms. While the details are not final until all the documents are done, the buyer and seller often start to have general discussions of price, whether the existing owners or employees will stay involved in the business and whether any liabilities will be assumed as part of the purchase. The parties may also want to get a sense of each other, to start deciding whether the other is credible and whether the other is likely to stay motivated enough to complete the deal. It may be that one party wants to generate a “term sheet” or “letter of intent” at this stage – an outline of the major business terms that the lawyers can use to start drafting the documents – but most lawyers representing buyers suggest doing some investigation of the business first.

Investigating a business is called “due diligence,” based on a phrase in an old legal case. A prospective buyer must usually sign a confidentiality agreement or nondisclosure agreement. The due diligence process then involves learning about the financial health, history and prospects of the business, its market and customers, its history of employee relations and history of liability and other financial and operational risks. It also involves understanding any major commitments or contracts it has. Buyers sometimes use third parties to help them value a business or conduct other parts of the due diligence investigation. Business lawyers are involved in the investigation early on.

As the due diligence is winding up, parties begin negotiating in earnest. Sometimes they draft a term sheet or letter of intent, but sometimes they go right to the definitive documents. The negotiation process covers a handful of specific points, such as structure (which may be driven by tax concerns), financial terms, noncompetition agreements for former owners and the “representations and warranties” that shift risk between the parties over factual matters or uncertainties involving the business. Even though the legal documentation may seem complicated, it is the tip of the iceberg when it comes to buying a business.