Legal Issues In Business Sales: The Pilgrim's Purchase


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This talk outlines the issues, documents, due diligence, characters, and problems to consider in the course of looking for and negotiating a business purchase.

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Legal Issues In Business Sales: The Pilgrim's Purchase

  1. 1. Legal issues in Business Sales By: William A. Price, Attorney at Law,
  2. 2. The Pilgrim’s Purchase I. Sleep: Are You Called To This? II. The Palace Beautiful: But There Are Lions. The Armory III. The Valley of the Shadow/I will fear no evil IV. Faithful Or Wanton? V. Vanity Fair: Money-Love, Hold-the-World, Save-All VI. Hopeful and Valiant
  3. 3. Are You Called To This? • Change, or Die: Business Lives By Growth • Buy or Build? Compare costs, assets and market position available after each • Purchase program risks: Loss of independence, bad employees/partners/results after mergers, ROI expectations of capital partners
  4. 4. The Palace Beautiful • Well-Organized Sellers Write A Good Prospectus: Growth in sales and profits • They “clear the underbrush” of bad contracts, minority shareholders, problem products and people before you see the deal • They offer a well-positioned add-on to your business
  5. 5. Lions In The Palace • The best sellers are your competitors • Their “underbrush clearing” may have left liabilities or future lawsuits • The customers may be tied to the seller, not the business • Sellers and staff may not play well with others • The numbers, permissions, or paperwork may be wrong
  6. 6. The Armory Purchase Process Documents To Protect Buyers And Sellers: 1. Engagement Agreements With Brokers 2. Nondisclosure Agreements With Possible Sellers 3. Term Sheets To Outline The Deal 4. Agreements Signed At Or Before Closing
  7. 7. The Valley of The Shadow • Most deals break down • The search and negotiations take much longer than expected • Time on these tasks produces no new business income until you are done • Careful process helps avoid the unexpected: distrust and fear kill deals
  8. 8. I Will Fear No Evil 1. The brokerage agreement • Term: how long to find a deal? • Payments: Retainers, monthly consulting, and contingent, expenses? • Noncircumvent: Payment for introductions, even if deals not done by term • Exclusive vs Nonexclusive engagements
  9. 9. I Will Fear No Evil II 2. Nondisclosure/Noncircumvent With Prospective Buyers/Sellers • Protects vs competitive use or disclosure of information provided, disclosed pty and agents and employees • Identify and document information transfers • Publicly available information not covered
  10. 10. Faithful or Wanton? Disclosures before and Due Diligence After Letters of Intent (LOI)/Term Sheets Deal Room pre-Term Sheet items: • Proof of ownership • Three years financials or good projections • Business plan (Products, markets & competition, business team, budgets & profit/activity plans & results/trends)
  11. 11. Vanity Fair LOI/Term Sheet Negotiation: The Characters Our Pilgrim: seeks to buy the Truth Save-All: The broker, lawyer, and bankers, seek to bring the parties together Money-Love, or Hold-The-World: The possible sellers (Greed, or keep what he has?)
  12. 12. Vanity Fair II Term Sheet Elements 1. No binding contract 2. Stops negotiation with 3d parties for due diligence period 3. Sets closing date 4. Price and Ownership Terms 5. Closing Date 6. Other Contingencies
  13. 13. Vanity Fair III Price and Ownership Terms • All cash, or earn-out? • Stock deal, or asset sale? • Incentive Payments For Earn-Out Milestones/Targets
  14. 14. Faithful, or Wanton, Again Due Diligence Period: 60-90 days before closing: • Verify all dollar, ownership, business representations, regulatory issues • Financials and documents easiest • Employee discussions/negotiations sensitive, follow show of good faith • Customer discussions/negotiations most sensitive, last before closing
  15. 15. Faithful or Wanton Checks: Your Team • Lawyer to coordinate, check contracts, contingencies completed, results of other professional’s work, negotiate final terms • Accountant/bookkeepers to check all taxes filed and paid • Environmental engineers to check site, process engineers and industry experts to check equipment/process, appraisers
  16. 16. Hopeful and Valiant • The final agreement: terms, post-sale warranties, warranty limits, definition of dispute resolution processes, transfer documents for all assets • The accounts at closing/inventory checks • Pre and Post-Closing Filings (Bulk Sales, IRS Reports on Allocations) • Mediation, Arbitration, or Litigation If Necessary
  17. 17. Questions? William A. Price Attorney at Law P.O. Box 1425 Warrenville, IL 60555 Tel/Fax 1-800-630-4780 Email: