Trust May Not Be the Best Strategy When Buying or Selling a Business

I have talked before about what makes up a term sheet (also known as a letter of intent) but now we should talk about why it is important.  Any time a business is being sold, the parties - but the buyer in particular - has to incur certain costs in anticipation of the deal, including due diligence costs and certain accounting and (ahem) legal fees.  Before a buyer expends those costs, it wants to have some assurance that they will be well-spent. But that doesn't always happen.  I had a client recently engage with the sellers of a business over the course of a couple of months.  Their on-again, off-again talks had finally started to reach a crescendo toward a deal.  We had begun work on a letter of intent and were ready to send it to the sellers when the email arrived - they sellers had sold to another buyer.

"Can they do that?!?" was the immediate response from my client.  In a word, "yup."  As frustrating as it is, we hadn't yet locked up the deal (even though we were 24 hours away).  It is not always the case with these documents, but they often will have a certain lock-up exclusivity period - with sufficient out clauses for the buyer - so that the buyer can conduct its diligence and do its pre-deal work without the fear of having the deal pulled out from under them.

So as it has been said, "trust but verify" and use your letter of intent to keep you in control of your transaction.