Legal Strategies for Successful Business Sales and Acquisitions

Isabel - Great program. If a potential buyer has a financing contingency, then do the parties in your experience ever agree that the potential seller's proprietary/confidential info re IP, customer list, finances, etc. will not be disclosed until the financing contingency has been cleared? Thanks. MC

I would split my answer into two sections – sensitive customer information and financial information. Sensitive Customer Information: This has come up a couple of times in my experience, although not specifically tied to a financing contingency. When my seller felt strongly about not disclosing a customer list until we were farther in the sale process, we simply redacted certain identifying information from the list. So, it is possible to address it. The initial letter of intent (LOI) should also contain a binding confidentiality clause (separate from non-binding business terms) that would prevent a prospect from unauthorized disclosure of due diligence information. Financial statements, P&Ls and tax returns from the last 3 years are generally provided very early in the process. So no, those would not be withheld or redacted or tied to a contingency. They are essential as part of due diligence and disclosure is par for the course. Not to mention the buyer’s bank would need them to support the loan.

Do you agree that cash up front is always the best on a business sale? Small business carry backs always seem to end up with litigation. Do you think a judicial reference provision in a sale agreement (i.e. Cal. CCP 638) is far better than an arbitration agreement?

90% of deals I work on in the $1M-15M range have a seller carryback, whether the buyer is a private individual (frequently someone exiting corporate) or private equity. Cash is always king and of course the more up front the better for the seller, however, sometimes a higher sale price can be achieved if a carryback is negotiated. Also, it is frequently a bank condition to buyer’s loan to have the seller inject equity in the form of a note, often on standby for a period of time. Naturally, a note comes with risk, but there is a potential upside, too. Important backstops like security agreements, UCC-1 filings and personal guarantees can help offset some of the seller’s risk of buyer default.