heads of terms

Deal Advice: You’ve Signed Heads Of Terms, So What Can Go Wrong Now?

Linkilaw Legal Advice

 

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This article was written by Andrew Weaver and originally published at Growth Business.

Signing the initial agreement to sell your business means the hard work is done, no? Well it might be worth keeping that champagne on ice for just a while longer.

You’ve Done Everything They Told You To Do At The ‘Sort Your Exit Strategy’ Seminar 2 Years Ago:

1. You didn’t rush to sale, you prepared properly and made yourself replaceable

2. You selected experienced advisors & got your ducks in a row before going to market

3. You targeted strategic buyers and heated up a nice bidding war

Yesterday, you signed heads of terms to sell your business, so what can go wrong from here?

Well in truth, the fun has only just begin and it’s now where your advisors really start to earn their crust, because the journey from heads to completion can be a very tricky and emotional one.

Whilst the deal may have momentum, there is still everything to play for and if you think those terms are fixed in stone then please, don’t order the champagne just yet, because these are just some of the factors that can make a deal go wrong.

Due Diligence (“DD”)

Heads signed, now is the time for the nerve jangling DD.  The phase when your buyer (or his advisors) get under the bonnet of your business and poke around.

If you’ve prepared properly and conducted some “up front” due diligence then hopefully, this phase should be less of an issue but, it’s amazing how 2 people can view 1 situation differently, so it’s unusual for a DD process to proceed without some issue emerging.

Be well prepared and minimise the risk.

Exclusivity

Early point of conflict is often based around exclusivity.  The buyer demands it, the seller doesn’t want to risk losing other buyers.

What you’ll soon realise is that many elements of a deal process become individual moments of negotiation which, if the players have goodwill is often easy to sort but sometimes, the result of these moments is often dictated by who has the balance of power.

Exclusivity shouldn’t come cheap but, don’t dig your heels in if he’s the only buyer in town.

Balance Of Power

Balance of power can have a major impact on how the deal proceeds.

As the process nudges closer to completion, tension begins to rise, costs are building up and you might already have told key staff.  You have invested a lot in this deal happening, but what about the buyer?   Have they got as much to lose?   Might they take advantage and wield some last minute power with a “price chip”?

The importance of retaining experienced advisors at this stage of a deal cannot be emphasised enough.  They’ve seen the tricks before and can see through the bluff.

Impact Of Time: Time Kills Deals

The longer it takes to complete, the greater the chance that one part of an intricate deal jigsaw will dislodge and bring down the rest of the party.

If DD drifts for any reason, the deal starts to suffer.

Keep your advisors feet to the fire and in turn, make sure they do the same to the other side.

Third Party Delay

A major cause of delay is often caused by a failure to get third party consent.

Landlords in particular, often have nothing to gain from your deal so if you leave their consent to the last minute then the deal can be left hanging on their whim and, that whim might potentially require incentivising.

Get all third parties lined up as early as possible.

Breakdown Of Communication

Another key issue, particularly if the deal starts to drift or advisors are in conflict, is to keep direct channels of communication open with your buyer/seller.   Amazing how often a simple phone call between the people who brokered a deal in the first place, can resolve an issue that brews up between advisors.

The micro nature of DD and risk averse stance of professional advisors, can sometimes lead to sensible deals unravelling beneath a welter of niggly points of issue.

Warranties & Guarantees

This deserves a whole section on its own because the issue of what should, and shouldn’t be included in the warranties and guarantees, is often a toxic area of tension and one often requires separate negotiation on its own.

What is reasonable, unacceptable, understandable, unfathomable behaviour?

Is the buyer being fair, over cautious or trying to box the seller into a corner to offset their own risk?

Another phase where experienced lawyers are an absolute must. Using lawyers with limited experience will could affect your sale price and potentially leave you with a nasty legacy post-sale.

Rank Bad Deal

Sometimes deals collapse because they’re just rank bad deals – agreed in haste or by inexperienced players, it begins to unravel as the reality sinks in.

Article written by Andrew Weaver.

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