Lesson Learned: Ensuring All Parties Understand Key Deal Points

October 22, 2015

I learned a valuable lesson during a business brokerage deal this year. One I hope provides some insight for you as well. As a business broker, I represented a very successful company being sold to a 45-year-old, well-educated buyer with both money and success in earlier business ventures. Given the skill sets and financial strength of the buyer, my client (the seller) was untroubled with the LOI (letter of intent) which specified a seller note for 20% of the agreed upon $2.0 million purchase price. Wow, what could be better and easier for a business broker than this deal?

Well, due diligence went smoothly and the attorneys divided the responsibility for document creation with the buyer’s attorney writing the asset purchase agreement, and the seller’s attorney writing the promissory (seller) note and related documents. Banking requirements for this deal, as on many deals, specified a two-year standstill on the seller note; i.e. the bank would not allow the buyer to make any payments (principal or interest) on the seller note for the first two years post close. The seller had been warned by me that this was a likely requirement of the bank commitment and, fortunately, the seller was accepting given the strength of the buyer and the fact that unpaid interest would be accrued and added to the seller note, which would start amortizing in year three.

So, I thought, how could the buyer have an issue with this? He does not have to pay the seller a single cent during the first 24 months post-close and, thanks to the bank, the buyer didn’t even have to ask the seller for this attractive deal concession. Well, after the buyer received the draft of the seller note, he called me stating that he has “no intention of paying any accrued interest on the seller note.” Over the last decade during which I have sold more than 100 businesses, I had never heard such a buyer complaint. This concept had simply always been obvious to me and previous clients.

The buyer, however, claimed that since the LOI didn’t specify accrued interest (it specified interest), he was not going to pay it. He also insisted that if he were to pay accrued interest, it would negatively impact his projected cash flow in the critical first two years post-close. At this point, the seller and the seller’s attorney were both outraged, and I could feel the deal crumbling over accrued interest, something that had never been an issue before.

I thought about what was really going on here and decided to do what my school teacher daughter would have recommended. Though I knew that accrued interest might be obvious to over 95% of business buyers, it seemed that this particular buyer didn’t truly understand the concept. So, hearing her voice in my ear, I prepared a month-by-month spreadsheet showing the activity of both the principal and interest on the seller note. When I reviewed the spreadsheet with the buyer, he immediately “got it” and quickly apologized, admitting that accrued interest was “not exactly” what he thought it was. Ten days later, the deal closed. I had a happy seller and a happy buyer.

Best of all, I had a new tool in my deal kit. I knew now that what may be obvious to and understood by “everyone” might not be the case for the single party that truly matters. So, in future deals, if the buyer or seller has a problem with normal deal components, my next step is to make sure that the party does in fact understand the issue he or she may find problematic.

Contributed by Michael Greengard, Praxis Business Brokers.

Through the Michigan Chamber’s partnership with Praxis, we can guide you through a step-by-step process of the complexities, all while maintaining complete confidentiality. To learn more about selling your business, please contact Lindsay Fulton at lfulton@michamber.com or 517-371-7691.