A Tale of Two Deals

As a business lawyer, I am asked to provide advice on a wide variety of transactions. No matter what the deal, there is one overreaching issue that comes up over and over again. What exactly is the deal? This may seem obvious, but you would be surprised at the number of times the parties have not agreed on what is actually going to happen. A fundamental gatekeeper issue in any transaction is having a clear understanding of the key components of the deal. What is being sold? What is being manufactured? What is the cost?  Who is responsible for what? If the parties don’t have a clear understanding of these basis fundamentals, a deal may never be reached or there may be unnecessary confusion, delay and cost in closing the transaction.

I was working on a business sale that had taken several years and many different versions before the parties decided to proceed. The parties were looking forward to an ongoing prosperous relationship.  Seller would transfer a portion of its business to the buyer and provide some services to the buyer during the transition. After the sale, the seller would continue to operate the rest of its business but once the deal progressed, it was clear that the buyer and seller had a very different idea of what was being sold. Many meetings and dollars later, the parties finally were able to agree on what part of the business was being sold and what part of the business was being kept by the seller. After extensive back and forth, the parties were able to work it out, although not without unnecessary delays and added cost.

In another deal, the parties were going to enter into a joint venture or partnership regarding the development and sale of a product. The product was not clearly defined and each party had different expectations regarding ownership and responsibilities. After much negotiation and delay, the deal fell through and each party was forced to go back to the drawing board after being saddled with significant legal fees.

Although not every term in a deal can be worked out in advance, it is important to have a clear understanding of the fundamental components of the transaction. Don’t be afraid to ask questions before you agree to proceed. Ask for a written term sheet or memorandum of understanding that spells out the key terms of the deal. This may take a bit longer upfront, but it forces the parties to communicate their understanding of the deal and determine if it really is a deal that both parties want.