Time waits for no one, and good deals can be lost without quick action. Since you know your business, why delay sealing the important terms of the deal? Write it on a napkin, on your placemat, or elsewhere — just get it done. After all, once you've negotiated the price and the medium of payment, the important aspects of the deal are done. Just give it to your attorney and it will be finalized. Right? WRONG!!! If you take this course of action, you may have the opportunity to get to know your attorney on a daily basis, over many years.
Had the above experience? If so, you may have learned that after you committed your business to a deal, there were many other alternative structures and contractual provisions that should have been considered — with very different tax, business, and legal results. You may have also learned that there were many steps and actions that should have been taken to protect your business from unanticipated consequences. Quite often there are serious structural and contractual conflicts between the parties in a deal, and if these conflicts are not understood and properly documented in advance, they can result in lost deals and costly mistakes. As legal advisers, we often find ourselves scrambling to save deals and find workable solutions. Consider the following areas of conflict that frequently arise during the life of a deal.
- Promoter's Personal Liability. Beware of creating personal liability! Obviously, avoiding personal liability is one reason you incorporate or create a limited liability company. But sometimes those entities are not created before you act to promote a deal. While one can act prior to creation of the entity providing the liability shield, one must do so properly. It is also interesting to note that if the deal is done, but the entity that owes your business the obligation does not yet exist, your deal may be null and void. The entity is not bound by an act committed prior to its existence unless it expressly assumes that obligation. The result is a lot of effort, no deal, and personal liability. Not a profitable day at the office.
- Confidentiality. The other party's request to look at your vendor list, your financials, your intellectual property, your sales, and so on, was reasonable in the context of the deal. You trusted them — after all, you were going to be working together. How did you know that once they had that information, your business was no longer needed? Goodbye competitive advantage. Goodbye proprietary information. Lucky you — although you don't have a deal, you do have a good lawsuit. The lifeblood of a business is often the primary focal point of the deal; after all, why else would you be discussing a deal? The conflict between protecting valuable or proprietary assets and the need to share those assets as part of a deal must be carefully addressed. There are many methods that provide protection, from confidentiality agreements to workout agreements. If these issues are not addressed in advance, the opportunity to do so may be lost forever, or may require legal action to secure once again.
- Letter of Intent. Not only did you write down on the napkin most of the deal terms, you expanded onto the placemat and you were sure everyone understood the terms and conditions. Then why use a letter of intent? A letter of intent or term sheet is no guarantee that there will be no additional issues to negotiate. However, its proper use can identify those critical deal terms early in the process and avoid unnecessary loss of time and resources. If there are terms that will make or break a deal, it will be determined early on whether or not it will be possible to complete the transaction. Critical elements as viewed by the other parties are also identified.
- Due Diligence. Even if your business is incorporated, you may once again find yourself looking at personal liability, depending on the nature of the deal. To make matters worse, you may be relying on good faith and trust in a party who doesn't have a firm grasp of what you consider obvious, much less the critical agreements of his own business. Each deal is unique and requires time, effort, and thoughtful consideration to ensure that the elements you expect to find are authenticated. For example, if you are primarily purchasing intellectual property, it is critical to ensure the ownership and exclusiveness of the asset. This is an area of potentially significant legal and business expense, but it is also an area in which failure to properly investigate can result in damages and losses that far exceed the value of the transaction. Once you have closed the deal, you can't go back and unring the bell — you're often stuck with it, good or bad.
- Documentation. In the due diligence process, asking for documentation can intimidate the other party. Providing your own documentation is time consuming and costly. But completing a transaction without documentation can be disastrous. Imagine a deal gone bad without the foundation to prove your representations and warranties or the ability to prove the other party's inability to live up to theirs. "Puffing" is legal, so without documentation, it is difficult to substantiate or meet the legal burden to prove misrepresentation.
- Mergers, Acquisitions and Buyouts. Businesses expand by internal growth and by acquiring businesses from third parties. Acquiring businesses from third parties can be accomplished with cash, debt, stock, and assets, and can be structured with or without tax consequences. Legal concerns include, among other things, tax consequences, shareholder rights, voting control, existing shareholder or management agreements, federal and state securities issues, mechanical problems of transferring assets, fiduciary obligations of board members and officers, Hart-Scott-Rodino Act compliance, management agreements, fraudulent conveyance considerations, representations and warranties, knowledge and materiality issues, employment, and ERISA.
- Closing the Deal. Finally, you have negotiated the deal, reached agreement, and are ready to close. Unfortunately, at closing, issues arise that you thought were settled. You shouldn't be surprised. Sellers are often psychologically more committed to deals than buyers, and negotiations may not be complete. Indeed, some parties will hold back additional issues for closing. For these reasons, understanding the motivation and psychology of the other party can be critical to closing the deal. By properly and thoroughly negotiating, investigating, and documenting the deal, you can minimize these surprises.
Using professionals, such as legal counsel, should not "gum up" your deal. The needs and timelines of the transaction will dictate the response required by legal counsel. Good business law firms are familiar with the life and urgency of deals, and are prepared to respond accordingly.
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