I recently closed on the sale of a business for one of my clients. It was a smaller transaction, under $1 million dollars. This was the first-time the seller had ever sold a business and the buyer was also a first-time buyer. As a business broker, what I have learned is that no two transactions are ever alike. You are dealing with different personalities, industries, situations, and the list goes on and on. Even selling two different businesses that are in the same industry will most likely feel like completely different transactions. What I can say however, is at the end of the day as a broker you are always trying to act in your client’s best interests and of course make sure you are serving them to the best of your abilities. There are many reasons that a client may wish to entertain a certain offer. It is vitally important the details are reviewed and that your clients fully understand any of the potential challenges or red flags that may lay ahead.
This brings me to my recent closing. The seller and buyer were known to each other and they each had their reasons for wanting to work together. Initially, I wrote the Letter of Intent for the buyers which they then reviewed with their advisors. After their review, they kindly informed me that they were going to have a new offer written. If a buyer wishes to have their own LOI or offer to purchase done, I am fine with that, but I usually know this can create a few more twists and turns and some potential inefficiencies along the way.
In this case, the new LOI was quite straight forward. Very simple purchase structure, with clear conditions and expectations for both the Vendor and Purchaser. It should be a very good guiding document for the transaction as we all march towards the closing date. We should be good to go right? There was one item however that left me confused and upon asking the buyer and their advisors about it, they were adamant that this would not be changed. There was a clause stating the final Purchase Sale Agreement would be executed within 10 days of the signing of the LOI. This meant that before any due diligence was preformed, financing had been applied for or any other purchase conditions were investigated by the buyers and their team, that the terms of the Final Agreement were going to be written and agreed to? For any other Brokers out there or individuals who have been through drafting a buy/sell agreement, as you know, doing this in 10 days would be a daunting task much less trying to accomplish this before a lot of the final sales details are even known? This made me question the motivations of why the buyer was being guided to try and execute the transaction in this order.
As mentioned, there were valid reasons that my clients and I discussed of why the offer was in their best interests and why they chose to accept it. What I always try to inform both sellers and buyers is to remember that YOU are in charge of the transaction. You are always in the driver’s seat. It is up to you to remind your advisors what you want to do and how you want to go about it. Buying or selling a business will take many twists and turns, but how you go about the process will also determine how efficient and organized the transaction will unfold. Selling or buying a business is also not cheap and I am sure you will want to manage costs as best as possible. It involves a team of people who will all need to be involved to do their part. In this case, because the LOI stated the Final Purchase Agreement would be executed within 10 days of signing, this meant both parties immediately started incurring costs they could have avoided before they had any idea if conditions of the sale would be met or financing for the business would be approved? Kind of sounds like a backwards way to go about it right?
This transaction did prove successful and we did reach closing. Would I allow something similar to happen again in the future? That depends. In this case it was the right decision and both my clients and their buyer are very happy with the outcome. Could it have happened differently and been more cost effective? Absolutely. I’ll also take the time to congratulate them all for their cooperation and communication through the process and I wish the new buyers the best of success as they enter into entrepreneurship and grow a business they are extremely passionate about!
Jay Barrett Business Broker, Alberta Business Sales and Commercial Ventures