Here's my answer to a blog question posted on Linked-In:

QUESTION: "What kind of legal fees should I expect in a small business buyout?"

ANSWER: Dear Seller,

I agree with many of the comments already posted, but I want to add one additional legal-fee arrangement I've used in the past. In addition to the traditional hourly rate (reduced or not), you should consider an incentive options. Under this arrangement the attorney works at his or her hourly rate but your out-of-pocket legal fees will be capped at an agreed amount per month; say $3,500. Now the attorney may have done more than $3,500 worth of work at their hourly rate - which they continue to keep track of.

When the deal finally closes, your Engagement Letter states that the attorney will be entitled to reimbursement for their unpaid hourly fees up to 10% (or whatever %) of the sales price of the business, whichever is greater. This way, the attorney is getting a small fee as the project progresses, and will truly be paid when the job is complete. This provides both an incentive for the attorney to work, and provides predictability to your overall legal fees on a monthly and total basis.

I've found this arrangement to be very effective. Sometimes I win and the incentive fee is greater than the hours put-in, and sometimes I lose where the time spend was more than the 10% cap. Either way, the deal got done as originally agreed at a price we both negotiated to be fair.

One more thing I want to throw into the mix, and speaking from personal experience, once you start the buyout process, it's very difficult to predict how long the process will take. Buying or Selling a business is not like making a car deal where the negotiations are limited to whether or not you get floor mats. Many times the thing that holds up the transaction has nothing to do with the parties themselves, for example, terms and conditions lenders want to see in the contract, or other indemnity or personal guarantee matters. I don't think having an hourly cap is wise. This can cause tension between you and your attorney.

My job is to do the best job possible for you, but if our contract prevents me from acting, how can I? Also, if your attorney feels they are not going to get paid for their efforts, they might start considering shortcuts to get the deal done which may have liability consequences because they didn't spend the time hammering out the details (and the devil is always in the details). On the other hand, what if the Buyer's attorney does not share your concern for hours spent? They may purposefully drag the process out to get you to "give" on a point in their favor because you didn't want to spend the time working it out!!

From my point of view, you want an attorney to work in your best interest, at the same time, I want a client who's going to pay me for my time and expertise.

To schedule a complimentary teleconference with me to discuss your purchase/sale of a business, click here.

Hope this helps.

Bradley Barth, Esq.