Fool’s Gold: Details are Bigger than Dollars
By Alex Knaub, Law Clerk
“I’ll give whatever price you ask, but I set the terms.”
I heard this years before I handled my first business sale. At once, my mind began to wonder how someone could make such an offer without knowing anything about the business, its processes, or its products. It took some study and investigation to understand why they would be willing to do such a deal.
Now that I have some experience in the arena of business contract negotiations, however, I feel compelled to explain why someone might make such an offer. Today, I know that price becomes irrelevant in a deal where I control the terms.
Allow me to explain…
Our hypothetical business client is a burger restaurant called Big Ben Burgers (“BBB”). They use Big Ben as their logo of course, and the most famous burger they have is the “British Pound” (comes in half pound too; those with a smaller appetite may want to try the “Shillings”).
When my client Ben decided to sell BBB, a ready & willing buyer approached him offering $50,000,000 as the purchase price, with the caveat that the buyer sets the terms. To Ben, this seemed a ridiculous offer for his business that was barely making $300,000 in gross sales.
Without consulting with me, Ben agreed to the deal with the promise of riches.
An escrow account fully funded with the purchase price played its siren song, seducing Ben. With this assurance, how could anything go wrong? He signed the dotted line and took the freshly bundled $10,000 cash given at signing. Ben was told he would be receiving the balance in equal semi-annual installments over three years.
When Ben came to me 6 months later asking why he had not received the first installment of the $49,990,000 that was due to him, I had to break the news softly. The terms of the contract were not exactly what he had been told; the contract was fraught with contingent terms.
These contingencies were tied to the performance of BBB. The contract said roughly, “If Buyer, in its sole discretion, determines at any time in the future that the gross sales of BBB are not $100,000,000 (“Minimum Amount”) in any one year of the three years subsequent to the closing of the deal, the difference between actual sales and $100,000,000 shall be deducted from the purchase price and charged against escrow each year, to the benefit of Buyer until such time as sales exceed the Minimum Amount or escrow funds are depleted, and if at any time escrow funds have been depleted, Buyer shall have no further obligation to seller.”
Here’s the math:
First Year Gross Sales: $400,000
Minimum Amount: $100,000,000
Escrow minus Shortage: $-49,610,000
Year 1 Escrow Balance: $0
At the end of the first year, the balance would be depleted and the buyer would have no further obligation to the seller. You can imagine Ben’s reaction upon learning the truth behind the terms of the contract.
Luckily, this story is fiction.
Terms similar to these, however, are not fiction and wind up in contracts more often than we would like to believe. The contract is dark and full of terrors, business owner, but our firm burns them all away. Even John Snow knows that…
If only Ben had called, instead of falling for Fool’s Gold.
Take-away for the selling business owner:
- Read contracts thoroughly, ask questions, and know the specifics.
- Do background research on anyone you are doing business with.
- Consult with a professional business advisor or attorney who can review the contract(s) and protect your best interests.
- Do not be fooled by numbers and figures. The devil is in the details.
Avoiding business contract pitfalls is as easy as a phone call to the Business Transaction Attorneys at Stone | Dean. We offer efficient, cost-effective representation and are our clients’ strategic partner. You can find more about our business transaction team and services by visiting the practice group page here: https://stonedeanlaw.com/practice-areas/business-transactions/