Submitted by: Eric Pritchard, Business and Finance Partner, Kleinbard
Many companies grow by acquisition providing buyers the opportunity to perfect their efforts. Most companies that sell do so only once. This disparity results in a knowledge gap between buyers with significant acquisition experience and sellers with little or no experience. Compounding the disparity, seller likely is selling a company they’ve spent years (and blood, sweat and tears) building.
While acquisitions vary, certain key documents are present in just about every deal. Here’s a short list of operative documents and a brief explanation to educate would be sellers about each. My advice as a deal veteran – don’t sign any of these agreements without consulting legal counsel experienced in acquisitions.
Not every buyer uses a broker to find sellers. And not every seller uses a broker to find the best buyer. Those that do, however, know that the right broker can be invaluable in getting the best possible deal. A broker’s agreement is not a “shared” document executed by both parties. It’s an agreement between one of parties and the broker, executed before the deal, and details the broker’s services, time limitations on the relationship, and payment the broker may receive on closing.
Non-Disclosure Agreement (NDA)
Likely the first document buyer and seller sign, an NDA requires the parties to maintain the confidentiality of exchanged information. This document is crucial to seller – the party disclosing confidential customer, financial and sales information. An effective NDA must contain certain specific provisions, or it will be of little or no use. While these agreements generally follow a standard form, they are not mere boilerplate. The parties should resist the urge to adopt an agreement from another transaction and should negotiate terms specific to their deal. And most of all, seller should get their counsel to prepare the NDA. Otherwise, it could be a situation of the fox guarding the hen house.
Letter of Intent (LOI)
Often misunderstood, LOIs detail deal terms. Usually prepared by buyer, sellers often sign LOIs without asking counsel for review, believing an LOI to be non-binding. This classic mistake can have significant consequences. While the LOI permits buyer to walk away based on enumerated circumstances (e.g., the results of due diligence), LOIs often require seller to close the deal under the stated terms. An LOI typically precludes seller from speaking with other potential acquirers and may limit seller’s ability to conduct business during due diligenc