Sunday, April 26, 2009

Time may heal all wounds.......but it Kills Deals

We recently represented a seller of a service-based business in the Chicago area. This was a good business with a proven track record, and our office secured multiple offers. Negotiations resulted in a strong offer with a financially sound buyer. We commenced due diligence within forty-eight hours from deal acceptance by providing operational and financial data on the business. There were a half dozen due diligence items to clear, and the process took six weeks for the buyer to get satisfied enough to proceed with a closing. The parties were both eager to consummate the deal and it was time to turn it over to the attorneys for final closing documents. We strongly recommended that the parties utilize the services of a closing attorney, which is the business equivalent of a real estate title attorney. The presence of a closing attorney has multiple benefits, such as efficiency and lower costs, BUT by far the most significant is that these deals have a higher closing ratio.

In this case, the seller decided to forgo a closing attorney and engage an attorney who was not very familiar with business sales and closings. It took four weeks, an eternity in deal time, for the seller’s attorney to produce a woefully inadequate set of closing documents. Conversely, the buyer had a very savvy attorney who saw the opportunity to exploit this weakness by slowing down the process, requesting more operational and financial data, and raising additional deal issues. The timing was unkind, as the business was going through a short yet unexpected soft period. This caused the buyer to re-think the entire acquisition, which resulted in a renegotiation that reduced the price by more than twenty percent. A terrible outcome, but completely avoidable had a closing attorney been engaged for this transaction.

In the sale of a business, a mortgage lender is usually not involved. That should not prevent the same approach from working. A closing attorney – someone experienced in buying and selling businesses - is engaged to provide transaction documents and other services. This person does not represent either the buyer or the seller, instead this attorney’s role is to provide efficient documents intended to be “fair” to both sides and bring the transaction to a quick close.

A closing attorney does not replace the need for legal counsel for either side of the transaction. Both sides must continue to be represented by a qualified lawyer who can review the documents and represent their client’s interests. This may be counter-intuitive, but by having an independent resource to document the transaction, the time and cost required to bring the transaction to a quick close can be greatly reduced and, most importantly, secure a successful transaction.

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