Tina: What are the most common legal mistakes buyers and sellers of businesses make and what advice can you offer to help them avoid these pitfalls?
Chris: The most common mistake in general that buyers and sellers make is approaching the negotiation of a business without the proper mindset and preparation. While there are many negotiation philosophies that one can utilize, I tell each client that they should never enter into a negotiation that they are not willing to say no and walk from a deal that he is uncomfortable with. A seller desperate to sell his business and retire, or a buyer who is terrified of losing out on what he perceives to be a great opportunity will almost always regret the deal terms he strikes without having a drop dead limit.
While there is nothing wrong with putting the best spin possible on the business, if a seller goes too far by inflating revenue statistics or offering “projections” which are not factually supported by the business history or market trends, a seller could find himself with a buyer who will feel that he has been cheated.
As far as legal pitfalls, for sellers it is definitely whey they get into situations where the buyer is going to pay all or part of the purchase price over time ( seller financing ). While sellers often accept promissory notes and security agreements to secure payment, it exposes a number of potential headaches for the seller. If a buyer is unsuccessful in operating the business, gets buyer’s remorse, or something else happens to negatively impact the buyer’s ability or desire to pay the seller, a buyer may look for ways to blame the seller and justify their non-payment. If selling, you prefer a clean break if possible and when the deal is closed, it’s closed.
For a buyer, not paying enough attention to the “fine print” of the transaction can be problematic. Buyers tend to be very focused on the end game of the transaction, i.e. dreams of how successful they will be at operating their new business post-closing. But even if something is a good financial opportunity, there may be other risks involved with a particular business or with a particular seller which are not readily apparent and could be overlooked in due diligence. Buyers should pay attention to the limitations that sellers attempt to impose in the agreement as to what is being guaranteed. Often, it can be a red flag.