Selling Your Business? Early Evaluation of Critical Deal Points is Essential.

You’re thinking of selling your business but aren’t sure where to begin so you turn to a business broker for help. An experienced business broker can be a good resource and member of the transaction team, advising on the potential value of your business and managing early discussions with potential buyers. He or she might also help with the preparation of a term sheet or letter of intent (LOI) containing the major commercial terms that you and the potential buyer are comfortable with at that early stage. But don’t sign anything until you talk to an experienced business lawyer.

You might think you don’t need a business lawyer until just before you’re ready to sign the final purchase and sale agreement, but that might be too late especially if you’ve already signed a term sheet or LOI.

Recently we were engaged by a client who was selling the assets of his business. He and his business broker had been working with a potential buyer for a few weeks on the terms of a LOI that our client was considering signing. When we first saw the LOI, we raised a number of questions, many that weren’t addressed in the LOI and that hadn’t been raised by the broker either.

  • What was the plan for the employees post-closing? Was the buyer going to retain them with the same compensation and benefits?
  • How many hours was our client going to devote to transition assistance and work for the new owner as an employee after closing?
  • Was the buyer willing to accept the assets “as is” like our client wanted?
  • Was our client’s seller-financing of a portion of the purchase price going to be secured or unsecured?
  • Had the parties discussed whether the buyer would agree to cap our client’s liability?

After a brief discussion, our client agreed these were critical issues that needed to be fully vetted with the potential buyer and addressed in the LOI for the deal to move forward.

What happened? The next day, our client called to report that the deal wouldn’t be proceeding and he thanked us. It turns out the potential buyer did not see eye-to-eye with our client on these and other critical issues.

Luckily, our client discovered this early on in the process and before signing a LOI that he would have wanted to unravel later — a process that might have cost him significant legal fees (plus potential broker fees) and would have been a distraction to his business.

Our suggestion — involve your business lawyer early on. He or she will be a key member of your transaction team who will help you consider the critical deal points that need to be addressed with a potential buyer and guide you through the LOI process to ensure you don’t inadvertently sign a binding LOI (like the one our client’s broker drafted).

This article is made available by Corporate Counsel Group LLP for educational purposes only and to give you general information. It is not legal advice.