Selling Your Business: Resolve Major Issues Early In The Process

The letter of intent often kicks the can down the road with respect to key terms that will be negotiated in the formal purchase agreement. Frequently, the parties do not realize there are major points of disagreement until the first agreement draft is circulated. For this reason, the seller should push the buyer to produce an agreement draft as soon as possible, even if that draft contains holes that still have to be filled in through due diligence. Also, the seller should be up front about significant or unusual “asks” if they are important to the seller.

It generally benefits the buyer to keep major issues unresolved until the end is near. At that point, the seller has invested time, money and strain on personnel resources responding to due diligence inquiries. The seller will sense the finish line is in sight, along with the accompanying sale proceeds, if only the parties can work through the remaining issues. The seller’s resolve may be weakened by the temptation to relent and get the deal done. Such late stage negotiation concessions often result in adverse consequences.

When major issues are identified, they should be addressed promptly. For example, the parties may recognize a potential working capital disagreement. A working capital shortfall against the target usually means a dollar for dollar reduction of the purchase price. As a rule of thumb, parties should approach working capital with the assumption there will be disagreement. They should conduct a “dry run” working capital calculation early on, to make sure both sides agree on the calculation rules and methods. While working capital discrepancies usually only amount to a small percentage of the transaction value, there are situations where a working capital disagreement can put millions of dollars at stake.

If a post-closing employment arrangement for the seller or key employees is important, it should be communicated at the outset. Often, the ancillary employment agreements become an afterthought as the process progresses. They may be drafted and negotiated in a rush shortly before closing. The seller should urge the buyer to address the employment terms early, perhaps by committing to them in the letter of intent, or describing them in the purchase agreement, whether in the body of the agreement or in footnotes that are taken out when the employment agreements are prepared.

The seller’s leverage is stronger before it invests in the transaction, and before it divulges vast amounts of key and confidential information to the buyer. By addressing known issues and anticipating common items of disagreement, the seller can negotiate those terms at a time when it has better bargaining power.

If you have any questions, or for a better understanding of these transactions, contact our office.