KEN KIRSCHENBAUM,ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER
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Does The Buyer Have The Money?
March 7, 2013
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This is the sixth and final article in the series by alarm industry broker Barry Epstein. Thanks for the articles and participation.
This final article raises two interesting issues. The first is apparent, does the buyer have the money? Sometimes both buyer and seller know the answer, and it's "no". In that case the seller has undoubtedly decided to fund the sale. Maybe the buyer is a relative or long time employee, or the seller doesn't need the immediate cash and would prefer the interest earning payments.
But Barry mentions a letter of intent followed by a 6 month to a year due diligence period. A bunch of red flags are coming up in my mind. Why a letter of intent? If asked to sign one be very careful and do not sign it without me or your local counsel reviewing it. A letter of intent can end up being the contract if it has all of the essential terms. You don't want to be at the contract negotiation stage, by which time you've finally hired counsel, only to be told that there aren't going to be any negotiations because all of the terms are in the letter of intent, which may not have been your understanding or contain all of the terms you now want included in the contract, particularly since the buyer took its time, a year, to decide to approve the sale and proceed. Skip the letter of intent. Your buyer should be ready to sign a contract and move forward.
The anatomy of a deal should be 1) confidentiality agreement; 2) contract of sale; 3) closing documents.
Getting back to a letter of intent - that may be appropriate for very large deals, but for the average deal, under $5 million, I just don't see the need for it. May as well work out the contract terms and get it signed. Most likely the buyer has signed a confidentiality agreement and done its investigation to its satisfaction. Guess what, a lot of the due diligence can be done after the contract is signed because the contract is going to have lots of representation and warranties; the seller is going to have to comply with all of them and the buyer is going to be able to do plenty of investigation to confirm those representations and warranties before money changes hands.
One thing for sure. A seller who has subscriber accounts to sell has a valuable asset, and a buyer can't buy it with baloney.
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Does the buyer have the money?
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This is a new question that we never saw until this past year and yet it is being asked more often. We get calls from sellers that want to sell that tell us they went through some period of time (usually 6 months to a year) where they had signed a letter of intent, gone through an exhaustive and intrusive period of due diligence (including their employees finding out), and then the buyer couldn’t come up with the money. Whether the buyer blamed his bank, his equity or lunar tides, the result was an exhausted seller that would only deal with future buyers if they could prove that they had the money in the bank early on. In a number of cases with questionable buyers, we told the interested parties that they were welcome to make an offer or meet only after they first provided a recent bank statement with monies greater than the purchase price. In each case the buyers failed to provide the documentation and the seller was saved further fruitless aggravation.
All the best,
Barry Epstein, President
Vertex Capital
972-740-2740
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