How critical is it to meet some employees prior to signing?
February 29, 2020
by a searcher from Harvard University - Harvard Business School in Arlington, MA, USA
I have a signed LOI with the seller, and was hoping to meet her right hand person. This is a small team (7 people) so any changes will be quite disruptive. She doesn't want to alarm any employees until the PS agreement is signed.
I'm curious what others' views are on this and how hard I should push on this point.
from The University of Chicago in Chicago, IL, USA
There could be all sorts of reasons that transactions need this type of structure. In larger transactions, there could be antitrust review with the Federal government. In restaurant transactions, there might be a transfer process for a liquor license and approval of the new owners by the applicable licensing board/commission. In early stage investment transactions, it might be submission/clearance of a "510k" with the FDA. As these examples suggest, regulatory approval of some type is often a basis for this bifurcated structure.
However, it is also possible for transactions to be signed and conditioned on a due diligence period for highly confidential materials, resolving outstanding litigation or other disputes, or getting approval from third-party stakeholders like landlords and contractual counter-parties. There's no reason you can't sign the purchase agreement before meeting the team with a condition to closing that you are permitted to meet with and lock up under contract the existing team.
In doing so, the seller would find comfort in a signed deal that feels to them like a certain amount of moral weight that might be enough for them to permit you to meet with and negotiate contracts with the team. On your end, you simply want to make sure that you have unfettered rights to get out of the deal with no questions asked if the diligence, meetings and negotiations with the team are unsatisfactory.
As an aside, I would caution you from incurring all the time, effort and cost of getting to and through a signed purchase agreement without meeting the team because that's such a monumental part of what you're buying (as mentioned above). But that's more about if you're willing to take the risk on that time, effort and cost to get the deal to that point when it's probably a coin flip as to whether you'll be closing the deal with an unknown team. If you're willing to bear those risks, then it's totally doable.
Finally, bear in mind that whatever structure you've put in place until now and at the signing will potentially dictate your further risk and liability. If you've agreed to put money into escrow or put up a deposit, make sure you understand your rights regarding walking away. In general, I advise against putting money up in escrow as the buyer or a deposit to move ahead unless it is fully refundable. Unfortunately, at the end of the market where a lot of search deals happen, you find a lot of unsavory, unsophisticated and/or unprofessional brokers (some of whom are really just real estate agents posing as business brokers). They can force you into a process that impairs your rights and you want to make sure you don't step into a trap. Buyer beware!
Good luck!
Brian
from Westminster College of Salt Lake City in Salt Lake City, UT, USA
Long ago, when gaining domain expertise in an industry I wanted to invest in, I found a role in a company that was one of the Fast 50, meaning one of the fastest 50 growing companies in the state across all industries. After the 3rd & final interview, having met with all of the senior managers, I took the job but came home & told me wife it would probably be a short experience because in four years the company will no longer exist. She asked why? I told her that they had so much success, they've lost focus on their core product that created the success, diluted the brand & while everyone thinks they are the hottest company in our state, including every employee & senior manager, trouble is a few years out when competitors to their core product have developed something better & they're spread across too many to keep the core product in the game. Renewal rates will start to suffer, then recurring revenue, profit & it will be a quick end to something that was once great. Four years & four months later, the founders were forced to sell the assets of the company. Even after three years of hearing me tell them precisely what would happen. They were so sold on themselves, they couldn't see beyond the attention from the press, investors throwing money at them, etc. We have remained friends & each reached out after & asked how I knew even before taking the job. I told them that their employees told me but didn't know they were telling me because I was looking from a different perspective. One they were unwilling to accept.