comment on do you need counsel to sell company - do you need LOI June 3, 2017

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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comment on do you need counsel to sell company - do you need LOI
June 3, 2017
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comment on do you need counsel to sell company - do you need LOI  from May 23, 2017 article
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Ken
    I take objection to one of your comments that part of your advice to the seller of his alarm business in today’s blast. You and I have talked about this issue before.
    You say and I quote 
    “Even if you were foolish enough to commit to a Letter of Intent”. 
    Why would you say this? In fact, contrary to this statement, in most cases a Letter of Intent( LOI) is a very smart thing to commit to. Most LOIs lay out the broad terms of the deal in much simpler language than the final purchase and sale agreement and gets both parties to agree to these terms before going any further. If constructed properly, they ask the Seller put an end to his search for more buyers for a short period of time while the buyer and seller try to complete the deal.  Most LOIs that I see are non-binding on both parties and a very important first step in the sale process. It is only after a LOI has been signed that most sellers will allow buyers access to their books to do due diligence and with good reason.
    I could go on and mention other benefits of a Letter of Intent but suffice to say I think you were wrong in the advice you have given about them.
    Regards,
Victor Harding
Harding Security Services Inc.
Toronto, ON
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Response
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    I stand by my advice.  However, many attorneys and almost all brokers would agree with you.  
I prefer a handshake on a few issues.  

• Multiple;
• hold back;
• limit of liability;
• excluded accounts;
• guarantee period;
• restrictive covenants.  

    Reach agreement on these issues and we're ready to proceed.  You might wonder why these items and a few others can't be memorialized in an LOI?
    Too often sellers are asked to sign an LOI before talking to their attorney.  If that attorney is me, I think I might have something to add to assist the seller in structuring the deal or educating seller on what would be customary in the transaction specific to this seller's situation.  [Modesty constrains me further elaboration on this issue.]  Perhaps most attorneys would have nothing to add, so no point asking in advance of beginning to finalize a contract to sell.  But once a seller commits to an LOI, even one that is not binding, it's like stepping into a cement bucket.  It's not hard yet but it's not easy getting out of either.  
    If the LOI is clear that it is not binding on either party then theoretically "no harm, no foul" signing one.  But as I've already mentioned, and it bears repeating, reneging on LOI terms and trying to re-negotiate is an up-hill battle.  Sure, even a handshake isn't easy to get out of if you have even a little bit of integrity [and most of you do] but going through the trouble and expense of an LOI brings that handshake to another level.  Sort of like when you take the stand and agree to "tell the truth" as opposed to "the whole truth and nothing but the truth".  I'm getting a bit off topic because I have too much time on my hands, and so apparently do you.
    You think the LOI is important so that the buyer can start looking at seller's records.  Well, that's the wrong agreement.  A seller must insist on the buyer signing a Non Disclosure Agreement.  I have one that's "better" than most; better than the one you have from your last deal, for sure.  So, that's not an LOI.  Yes you could have a NDA as part of the LOI, but the NDA is much easier to agree to.  After all, buyer wants to look at records, etc, then buyer should agree to almost anything regarding the confidentiality of that information.  My NDA covers almost "anything" by covering "everything". 
    Too often LOIs are not "non-binding" because of poor draftsmanship.  Even if "non-binding" a buyer and its attorney will keep referring to the LOI and insist that the final Contract of Sale read just like the LOI, even though the LOI was not read by seller's attorney before it was signed.
    How's this for a compromise?  Get a NDA signed.  Get LOI prepared but not signed by seller.  Buyer can sign it and present it as buyer's proposal for terms of sale.  Seller can agree to the LOI with a shake of the head and then buyer's attorney can prepare the Contract of Sale.  By then the seller should have engaged counsel.  If it's me you can bet that if there is any disagreement in the terms of the Contract of Sale I will not be swayed or even influenced by buyer's lawyer explaining to me that it's in the LOI;  even if the LOI is signed.  It's "non-binding" right? 
    If seller engages me before agreeing to or signing an LOI then negotiating the terms of the LOI may save some time when the Contract of Sale needs to be negotiated, but over-all there won't be any saving of time.  
    Want to discuss further?  Send me your email for circulation or call our Contract Administrator Eileen Wagda at 516 747 6700 x 312 to book some private consult time with me.
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THE ALARM EXCHANGE

Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com
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