Questions to Consider before the LOI is Signed

The issues posed may be based on the perspective of a buyer in the examples, but the concerns are the same for sellers.  Some big picture questions that need to be answered before an LOI is executed:

Will the deal be structured as an “asset purchase” agreement or a stock sale?  There are significant differences in the structure, particularly when it comes to the liabilities that will be sold and those that will be retained by the seller.

Does Seller plan on extracting all the cash from the business at the close of the sale?

What’s happening with the accounts receivable?

Does the Seller have much work in progress and, if so, what are his or her expectations for the revenue post-close?

Does the business rely on one or only a handful of key customers?  How much of their revenue is derived from the top customers and how are those relationships?

How much of the inventory is slow-moving or obsolete and therefore of little value?

What’s the track record for warranty repairs and will the seller assume covering any existing warrantied products or services for a period of time?

Will (or should?) Seller commit to staying on as a consultant or employee for a period of time while the transition of management takes place?  Either way, will they execute a non-compete agreement?

How will the purchase price be paid?  All cash? Will Buyer have an opportunity to apportion a certain amount of the purchase price in an “earn-out” provision?  Is there a note and, if so, can it be secured?  Are there other creditors that will make the security pointless?

How will the purchase price be allocated?  Goodwill, inventory, customer list, etc.

Will Seller refrain from entertaining other inquiries from other Buyers during the time period that you are conducting your own due diligence? Negotiating with a second buyer in the background may be counterproductive to your current negotiations.

Both parties need to be represented by an attorney at these early stages.  We often encounter clients that didn’t want to retain us at an early stage to help reduce costs and prior to confirming the transaction can go through after their diligence is complete.  That error can cost much more than our services, as the material terms in an LOI will be written in stone.  Parties can be forced to honor the terms of the “harmless” LOI when those same terms are the non-negotiable substance of the purchase agreement itself.  This effectively removes the room for much negotiation as the terms of the LOI will govern.

It’s never too early to involve counsel on your side, especially when you could unknowingly be locked into some less than favorable terms at such an early stage.  The LOI, despite whatever soft language regarding the intent is drafted, is a legally binding document.  Don’t let the descriptive title fool you – it’s a contract that creates rights and obligations.

Click here if you missed Part I of Lets Talk Letters of Intent: What is an LOI and Why a Attorney Should Review it Before Signing

Technology continues to change us, for better and for worse. The Wall Street Journal recently had an article about CVS or Computer-Vision Syndrome, a new condition for what is happening to our eyes from all those hours of staring at the computer. CVS could be the source of headaches, neck pain, blurred vision and fatigue. Most of us use a computer for three or more hours a day: checking email, writing documents, exploring social media on Twitter, Facebook, Linked-In, etc. All that time spent on the computer is taxing on our eyes. However, go to your eye doctor about CVS and they might not know how to treat the weakening of mid-range vision. This condition is so new that it doesn’t even have a proper name yet. What would you call it? ‘middlesightedness’? According to the article, there are no guidelines for testing mid-range vision yet, so some eye doctors are just cutting reading prescriptions in half. But, depending on how far you sit from your computer, that prescription might not do you any good. So, make sure you bust out the measuring tape before heading to the eye doctor.

After I did some measuring of my own, my final thoughts were these: First, put on the To-Do list “Find a good eye doctor” and second, what will happen to the generations behind us? To the kids who grew up on a computer? What about the kids today who play games on an iPad? Are we a society destined for computer glasses? Like most things, only time will tell.

What is an LOI and Why your Attorney Should Review it Before Signing

Interested in buying a business?  Does the Seller want you to sign a Letter of Intent (LOI)?  Often we hear the same story: ‘The Seller says the LOI is merely a formality that will allow me to review books and records of the company and get the process started.’ Sounds simple enough, but should you have an attorney review the LOI before you sign? Absolutely. And here’s why:

The LOI can be the most important document during an acquisition. It will outline the parameters of the deal, sometimes in substantive (although ostensibly “non-binding” in parts) detail.  It is a rather simple and short document but it manages to encompass all of the material terms of the deal that will later be expounded in a lengthier Purchase Agreement.  The LOI sets up the expectations for the deal.  Seller has probably already met with his/her attorney (in fact, his/her/their attorney drafted the LOI!) and determined the most advantageous structure for the transaction.  The LOI will dictate the material terms of the sale, which will have significant consequences to both buyer and seller.

To be continued … look for Part II: Questions to Consider before the LOI is Signed. Coming soon!

I’m seldom excited by the decision of the courts in our land. There are few surprises and most issues fall off my radar before any decision is made. By the time the courts actually get around to letting us know their take (and therefore the law of the land – at least for now), it’s rarely a hot topic.

July 13th, however, was a great day. The Second Circuit tore apart the FCC’s stance on censorship – namely that their arbitrary and fleeting definition of “patently offensive” was applied inconsistently and when applied, without substantive explanation.

Obscenity (and, ostensibly “patently offensive”) are personal definitions. Much as the court itself has struggled with defining “pornography”, the FCC had a poor policy and it applied it in a less than uniform manner. For some great examples, check the opinion yourself (just Google FCC and it’ll pop), it’s rare to see our judges have to delineate the nuances of curse words.

It’s personal. It’s age appropriate. It’s ours to control – change the channel or don’t watch.
I have a son. Though he’s too young to understand any salacious programming, I already find myself wanting to censor his reception. And this is where the control should be. Let me make the decision. Make me parent. Censorship doesn’t remove the content I want my son to avoid – it just softens it with lousy overdubs.

The next step would logically be an appeal to the Supreme Court. The current constitution of the Court will likely hold the decision and part of me wants to see an even lengthier dissertation on the absurdity of the FCC. What about you?