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More than 300 Michigan businesses sold in the past 15 years resulting in $1,000,000,000 of transaction value to Praxis business owner clients

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Making Sure Buyers Understand Key Deal Points

True Story: The following describes a real 2015 deal in which I was the business broker representing a very successful company being sold to a 45 year-old, well-educated buyer with both money and success in earlier business ventures.

Given the skill sets and financial strength of the buyer my client (the seller) was untroubled with the LOI (letter of intent) which specified a seller note for 20% of the agreed upon $2.0 million purchase price.

Wow, what could be better and easier for a business broker than this deal? Read on… Due diligence went smoothly and the attorneys divided the responsibility for document creation with the buyer’s attorney writing the asset purchase agreement, and the seller’s attorney writing the promissory (seller) note and related documents.

Banking requirements for this deal, as on many deals, specified a two year standstill on the seller note; i.e. the bank would not allow the buyer to make any payments (principal or interest) on the seller note for the first two years post close. The seller had been warned by me that this was a likely requirement of the bank commitment, and fortunately the seller was accepting given the strength of the buyer and the fact that unpaid interest would be accrued and added to the seller note which would start amortizing in year three.

So how could the buyer have an issue with this? He does not have to pay the seller a single cent during the first 24 months post-close, and thanks to the bank the buyer didn’t even have to ask the seller for this attractive deal concession. Well, after the buyer received the draft of the seller note, he called me stating that “he has no intention of paying any accrued interest on the seller note.” Over the last decade during which I have sold more than 100 businesses, I had never heard such a buyer complaint, and of course I calmly told the buyer this obvious historical fact.

Well the buyer would have no part of this claiming that since the LOI didn’t specify accrued interest (the LOI of course specified interest), he was not going to pay it. A week or so later the buyer added an additional complaint that accrued interest if he were to pay it would negatively impact his projected cash flow in the critical first two years post-close.

At this point the seller and the seller’s attorney were both outraged, and I could feel the deal crumbling over accrued interest, something that is never an issue.

At that point I did what my school teacher daughter would have recommended – even though accrued interest might be obvious to over 95% of business buyers, make sure that this specific buyer truly understands the concept. So hearing her voice in my ear, I prepared a month by month spreadsheet showing the activity of both the principal and interest on the seller note. When I reviewed the spreadsheet with the buyer, he immediately “got it” and quickly apologized, admitting that accrued interest was “not exactly” what he thought it was. 10 days later the deal closed. I had a happy seller and a happy buyer. And perhaps best of all, I have added a new tool to my deal kit: what is obvious to and understood by “everyone” might not be understood (or be misunderstood) by the single party that really matters. So in future deals if the buyer or seller has a problem with normal deal components, my next step is to make sure that the party actually understands the issue he finds problematic..

Contributed by Michael Greengard, Praxis Business Brokers.