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Negotiation 101: Analyzing a Contract for Sale of a Business

[different, random, but hopefully interesting]

I’m helping a friend (party A) out with some financial negotiations and it NEVER ceases to amaze me what people try to get away with.  The circumstance is that party A is being bought out of shares in a private company by party B, a manager but not owner in the business.  Party A is an owner but not an active participant in the business so Party B has significant advantages and a much deeper understanding of the business and direct access to the company’s books.  While party A may technically have access as a shareholder (they are roughly a 20% shareholder), practically speaking they don’t. 

My overall comment on the process is that it seems that a sense of equitable fair dealing seems to have flown the coop and / or people seem to think that the other party in the negotation must have “fallen off the turnip truck” (for those non-english native speakers, this means an unsophisticated individual). 

Here’s the standard approach that I use for any contract I’m asked to look at.  And I am not an attorney so bear that in mind.  My opinion is that a person of average intelligence should certainly have an attorney and an accountant but the first step is to make sure they understand it themselves.  I’ll admit that contracts and finance are scary but they are understandable if taken slowly, thoroughly and by doing a little bit of Googling.

  1. Get the contract into electronic form if you can at all.  Just ask for the word file.  If the other party objects then ask “why?”  What reasonable objection can they give?  Or just tell them that you can’t receive a fax when traveling (and you are all of a sudden away) and then ask them to email it to you.
  2. Go into Microsoft Word and turn on revision marks so that every comment you make is annotated.
  3. Add a comment everywhere you don’t understand something.  Everywhere.  There is no such thing as a stupid question.  No such thing.
  4. Phrase the comments and questions so that they are nice and reasonable but that you just don’t understand.  The more reasonable you are the harder it is for them to be angry with you.  And if they are then ask yourself “Why are they angry?  What are they trying to hide?”.
  5. Are you enabling them to buy you out?  It’s a little known fact that many small businesses (even large privately owned businesses, where most of the principals are owner - operators) don’t pay out dividends each year.  What they do instead is pay out just enough so that NON operator owners can pay their taxes.  The owner - operator takes their “share” of the profits in salary.  This is a way that many non operators get totally screwed since salary disclosures are NOT required for non-public businesses.  The reason that I mention this is that in this particular situation the payout stream is annual and shortly after tax time.  That makes me suspect that the payout policy will be changed and that, in essence, the shares being acquired are being used to finance the deal.  If that policy was changed then perhaps the shares wouldn’t need to be sold.
  6. What if they die?  Anytime the period of payments is long (20 years in this case) you have to assume the worst.  A life insurance policy should be purchased for the amount of the sale and
  7. In event of the sale of the business?  Business are bought and sold.  This type of debt should be settled in the event of a sale.
  8. Apply Basic Psychology.  In this case one of the people in the business who normally advises Party A simply won’t talk to them about it.  That said to me “conflict of interest” / “perhaps unfair dealing that they can’t discuss”. 
  9. Be wary of people that want to separate you from your advisors.  A common negotiating tactic in this circumstance is to want to talk about it over lunch where Party B offers to “explain” to Party A the deal and give them the initial paperwork. 
 

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