Entering the Playing Field without a Team.
The successful purchase and sale of a US business may require consultation with a variety of professionals depending on your business plan. Buyers and Sellers will routinely consult with Chartered Accountants, Certified Public Accountants and lawyers. The most overlooked professional with whom a consultation is required is the immigration lawyer. If your business plan requires the use of Canadian supervisors, managers and/or employees in the US business you, more likely than not, have immigration issues. Although there are multiple avenues for businesses to pursue, immigration issues are rarely resolved quickly. Consult with an immigration lawyer at the beginning of the transaction and well ahead of the projected Closing date.
Underestimating the Time and Expense of the Negotiating Process.
Rarely is a first draft of the purchase and sale document accepted. Sellers frequently count on a quick sale, look to new business ventures or ease into retirement shortly after the Letter of Intent is signed. Sellers often overlook the fact that the Letter of Intent is only the beginning of the purchase and sale transaction. Lawyers for the buyer and seller will generally prepare and submit multiple drafts of the transaction documents before a final version is reached. Virtually all of the transaction documents drafted in the early stage of negotiations will contain language more favorable to the buyer or the seller depending upon who drafted the document. Although the negations will culminate in a final document, that document is almost always the result of lengthy discussions.
Drafting Your Own Letter of Intent.
Buyers and Sellers alike should avoid the temptation to draft a Letter of Intent to buy or sell a business without the assistance of legal counsel. Time and time again transactions fail because of expectations not fulfilled in the Letter of Intent. Although most Letters of Intent are non-binding, the representations made therein easily become etched in stone during the course of the transaction. Details such as sales price, interest rate, security interests, payment terms, down payment etc., frequently change during the document drafting and due diligence process. “Casting these terms in bronze” in the Letter of Intent virtually destroys your ability thereafter to follow legal counsel’s advice on the proper structuring of the transaction.
“We Agreed in the Letter of Intent.”
Buyers and Sellers who have drafted detailed Letters of Intent are certain to hear the words “But we agreed in the Letter of Intent.” The immediate response to this statement is to point out that absolutely nothing was “agreed” to in the Non-Binding Letter of Intent and to be able to quote the exact paragraph in the Letter of Intent that makes this clear.
Allowing the Seller’s and the Buyer’s Business Brokers to Negotiate and Draft Documents.
Don’t hire a lawyer to do a business broker’s job i.e. find the buyer or seller. Likewise, don’t use a business broker to do the lawyer’s job i.e. draft legal documents. Business brokers don’t get paid unless the transaction closes and as such they have a vested interest in seeing the transaction close in order earn a commission. Buyers and Sellers alike must be extremely careful not to allow their business brokers to draft Letters of Intent. Often times the best intentions of the business broker are inconsistent with the legal protections upon which the Buyer’s and Seller’s lawyers will insist. The business broker should be viewed as the person who brought the parties together but not as the scrivener of Letters of Intent and/or Purchase and Sale documents.
Failing to Avoid Desperate Seller and Anxious Buyer Syndromes. Anxious
Anxious Buyers and desperate Sellers are becoming more and more commonplace. The very minute that you signify that you are a desperate Seller you have lost your negotiating power. Although a desperate Seller may obtain his/her purchase price, Buyers faced with a desperate Seller are certain to demand unsecured promissory notes, long payout periods and a host of other concessions that weaken the Seller’s action in case of a default. Once you lose your negotiating power you are virtually at the mercy of the other party. A Buyer who senses the anxious Seller will make frequent use of the concept of “take it or leave it.”
Failing to Use a Professional to Perform Your Due Diligence.
Don’t hire a lawyer to do a financial analyst’s, CA’s or CPA’s job. Buyers frequently make the mistake of doing their own due diligence investigations or relying on their lawyers to do due diligence investigations. A Buyer’s due diligence investigation is best performed by several professionals. The lawyer’s job is to (1) review the legal documents involved in the transaction including the purchase and sale agreement, the security agreement, the promissory note, the non-competition agreement and (2) to review the legal documents provided in response to the due diligence requests. Buyers should not, however, rely upon their lawyers to review accounting and financial documents when in all actuality the lawyer most likely lacks the expertise to do so. Utilize the services of a Chartered Accountant or Certified Public Accountant firm that offers “audit and assurance” services to (1) review accounting and financial documents, (2) audit tax returns (3) and review the due diligence respo
Failing to Make Certain that Everybody is “On the Same Page.”
As previously stated, virtually every purchase and sale transaction will involve multiple drafts of the Seller’s and the Buyer’s proposed documents. Make, organize and maintain a Transaction Notebook where each and every draft is labeled, identified by the originating party, dated and filed. Communicate your organization to all members of your professional team. Purchase and sales transactions involving Buyers and Sellers who reside in different states or different countries are more easily managed if all members of the professional team have access to all the documents at all times.
Failing to Use Tracking Changes and Balloons.
Use, or encourage your staff to use, computer software that has “Reviewing Functions” including such features as Tracking Changes, Accept/Reject Insertions and Deletions, Comment Balloons etc. which will enable all parties to see the drafting history of a particular document.
Failing to Set Parameters; Take a Hard Line Stance
You will never achieve the desired end unless you have the ability to take a firm, hard line stance when appropriate during the course of document drafting. If you reject the other party’s language proposal do so firmly, explain the rationale therefore and be ready to identify whether or not it is a “Deal Point.”