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I recently represented a client who was preparing to enter escrow on a small business purchase. The broker (who was working with both my client and the Seller) wanted to use a “standard” business purchase agreement, along with some additional provisions escrow would provide. After taking a look at the escrow provisions I suggested to my client that there were a number of key areas that neither the standard form agreement or the escrow provisions covered.
“Is there really that much that isn’t covered by the ‘standard’ agreement that it’s worth drafting a separate agreement?”, my client asked. It was a valid question, and I told them that I would send over my thoughts on what I’d like to see included, and he could decide whether any of my suggestions were important enough to include. When my client received my proposed rider, he told me, “I can’t believe that none of this is in either the standard agreement or the escrow provisions.” And those were just the forty-four provisions (out of hundreds of possible provisions we could have possibly included) that mapped directly to his transaction.
While he understood the protective value of each of the provisions I was proposing, my client was concerned that the seller might not agree to include everything. “Proposing provisions like these serves two purposes,” I explained, “First, if you do consummate the transaction and run into issues down the line, you’ll have a much broader set of protections than if you had to rely on the “one-size-fits-all” approach of the standard agreement. Second, proposing a detailed set of seller representations and warranties will often reveal hidden problems in a deal before it ever goes through.” My client agreed, and proposed the complete rider to the seller, who immediately balked and backed away from the transaction without even really looking at it.
While my client was disappointed, he quickly saw how valuable it was to simply propose a detailed set of representations and warranties even if they weren’t accepted. We discussed whether there were any specific provisions the seller was concerned about that we might be able to modify, but it quickly became clear that something “just wasn’t right” with the transaction. As I told my client, “None of these provisions are particularly complicated—if the seller won’t even consider walking through them then this transaction is probably not the right fit given that you want to minimize your risk.”
If you’re buying a business, before you sign anything, remember that there are at least forty-four good reasons not to simply rely on a “standard” purchase agreement.
