Keeping deals under control

 

Take the following example:

Two business partners set up a business which they ran together successfully for a number of years. The business is cash positive, has strong clients and is “clean”. The co-founders worked very hard, had families to support and wanted a buyer to come along and provide them with a cash exit. They were interested in a clean cash exit but were prepared to take some cash up front with the balance to follow. 

A buyer in their industry approached them and the vendors were delighted that a potential exit was in sight.

The buyer indicated that he wanted to sign a heads of terms, where he had exclusivity. If the sellers breached it, or for some reason could not complete, they would have to pay the buyer’s costs.

The vendors were extremely excited to progress matters and wanted to sign and worry about the lawyers later. 

What happens next?

Well, there are three possible endings:

1. The sellers sign the heads without advice. The buyer progresses, conducts due diligence and the sellers spend money on lawyers and accountants, only to find that, at completion, the buyer can’t get funding in place (very common in the current market). The buyer withdraws, leaving the seller with all of the costs, a lost opportunity and dejected.

2. The sellers sign the heads after getting advice, and the lawyers insert a reciprocal clause requiring the buyer to pay the sellers’ costs if the buyer is unable to complete due to finance or otherwise. In this case, even if the deal doesn’t progress, the seller is protected.

3. The seller signs the heads without advice and the deal completes as they intend and they exit. 

The final example is the route that all sellers hope for. However, in this climate – where bank funding very tight and a limited number of buyers can actually complete the deal – you should go for option two.

Always undertake due diligence into any potential buyer. Review their financial strength and, before even signing the heads of terms, make sure that they have funding lined up. It’s worth engaging a good lawyer to review the heads of terms to protect your position.

Peter Weiss is a partner at Davenport Lyons

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