Goodwill When Qualifying Accredited Investors

[Bryan Hancock]

When you are qualifying accredited investors and advising them about how to fill out their subscription agreements do you use a standard procedure for letting them know how to value their goodwill?

Do any of our resident accountants have commentary about how goodwill is generally determined for small businesses?

[Don Konipol]

As a seller of syndication interests, you do not want to act in an advisory capacity to anyone interested in investing in your deal. If you act as an advisor in any way, shape or form, you are expanding the breadth of legal actions against yourself by any investor's attorney should the investor later choose to sue you.

First, the essence of the exemption from registration for accredited investors is that they have sufficient capital and are sophisticated, so that they should be able to fill out a simple personal financial statement themselves. If they rely on an advisor the advisor should ber independent - any advice from you in this regard is a conflict of interest and will be regarded as self serving.

Further, assuming you are not a Certified Public Accountant, you would be practicing accountancy without a license, much the same way I am practicing law without a license by writing this responce! But of course I have no conflict of interest and no prospect of direct financial gain nor any actionable inducement, all of which you can easily be accused of by "helping" potential investors fill out their personal financial statement used to determine their accreditation.

After gaining experience with syndications that both profit and those that lose, you will begin to understand how every misstep, however well intended, will be used as a basis of action by investor's attorneys. And if the syndication is big enough, someone who loses their capital will decide to sue, some attorney will take the case, and if others who initially appear ready to face up to their own responsibility for their investment decisions are offered the opportunity to potentially recover some of the losses for a "free ride", they will join the bandwagon, and remember anything and everything you did incorrectly.

Also, should the syndications investments go badly and investors sue, unless the syndicator is a strong national company, expect to be named in the resulting lawsuits as an individual defendant. and although you may be found not to have any personal liability (far from a given conclusion) you will be $50K in attorney fees poorer for the experience (not withstanding the syndicators quarantee to cover your legal fees) and spend many hours meeting with attorneys, attneding depositions (both your own, and those of the plaintiffs), and spend many sleepless nights considering the potential outcomes.

It is not easy being "in business" and riskier still when investing other peoples money!