Expensive Mistakes When Buying & Selling Companies by Richard G. Stieglitz PhD

Author:Richard G. Stieglitz PhD [Stieglitz PhD, Richard G.]
Language: eng
Format: mobi
Publisher: Acuity Publishing
Published: 2009-12-09T14:00:00+00:00

Mistake #30

RELYING ON A HANDSHAKE

Your leverage shrinks when you sign the Letter of Intent,

so get the structure of the deal, the selling price, the payment terms, and other essential terms and conditions all in writing!

A client approached his attorney with a signed LOI negotiated with the buyer and was jubilant about the sale price. Excitedly, he said: “The buyer and I are tight. We understand each other -We shook hands. This will be the fastest deal you’ve ever done.” The lawyer congratulated him and commented that, other than the price, it was the most one-sided LOI he’d ever seen: just a page long, a 90-day exclusionary period, and only a few vague terms and conditions, among other seller-leaning features. To no one’s surprise, the first draft of the Purchase & Sale Agreement left a lot to be negotiated. It set the liability cap at 100 percent of the sales price, retained 35 percent of the proceeds in escrow, and gave the buyer a five-year recovery period.

The transaction eventually closed, but it took eight months to undo the one-sided LOI, and negotiate reasonable terms and conditions in the sale agreement. Frustrations were intense on both sides of the table, and transaction costs were astronomical. Normally, the seller wants as much detail as possible in the LOI and a short exclusionary period. However, the buyer would prefer to wait until after due diligence to lock-in terms and conditions, and wants the seller off-the-market as long as possible. The seller has maximum leverage over the buyer just prior to signing the LOI - especially when there are multiple bidders. Immediately after the LOI is signed, negotiating leverage shifts to the buyer.

Before you can sell your business, you will receive an offer, respond with a counter-offer, negotiate terms and conditions, and sign an LOI. The offer generally starts at first in verbal form, but soon becomes a LOI that documents the buyer’s proposed price and terms. It is an exciting but stressful day when you begin negotiating an LOI with an external (or internal) buyer who is really interested in buying your company. Signing the LOI signals the start of due diligence where the buyer confirms the condition of your business and its finances, and you confirm the buyer’ management and financial wherewithal to complete the deal. Everyone optimistically looks forward to the day (often six or more months in the future) when negotiations will be finished, both parties will sign the sale agreement, and the payments and escrows will be transferred.

Buyers often get nervous when they put an offer in writing. They will examine and re-examine everything from the sales price, to what it takes to manage your company, to what will happen if the deal falls apart. For the most part, your broker will assuage the buyer’s fears and encourage him to submit an acceptable offer. The buyer knows, of course, that an LOI is not binding on either party - but it doesn’t feel that way! Most LOIs include contingencies - conditions to be met before the offer will become legally binding or a deposit will be forfeited.

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