Caps and Baskets: How Buyers and Sellers Negotiate Risk in a Business Sale
A beautifully drafted set of seller promises is worth very little if the cap is too low to recover under or the basket is structured so you can never reach it. This…
During due diligence, the buyer and its advisors examine the business within the time the letter of intent allows.
The buyer's CPA or a quality of earnings firm tests the financial statements and earnings. Our review focuses on legal risk: whether liens or lawsuits attach to the business, whether key contracts and the lease can be transferred or end when ownership changes, and whether the business holds the licenses, approvals and tax clearances it needs.
We size the review to the deal. A family-owned service company and a multi-location business with outside investors call for very different request lists.
Searches and Checks We Run
UCC Lien Search
Financing statements filed against the seller with the Texas Secretary of State, which must be released at or before closing.
Litigation and Judgment Search
Pending lawsuits and judgments involving the company and its owners.
Entity and Tax Standing
Whether the company exists, is in good standing and is current on its franchise tax.
Contract Assignment and Change of Control
Which customer, vendor and lease agreements need the other side's consent to transfer, and which let the other side end the contract when ownership changes.
Licenses and Regulatory Approvals
The permits, licenses and government approvals the business depends on, and whether each one transfers, needs an agency's approval or must be reissued in the buyer's name.
Documents We Review
We review customer and vendor contracts above a dollar threshold set for the deal, the lease, employee and contractor agreements, permits and licenses, insurance policies, intellectual property and any franchise agreement. For each contract, we check whether it can be assigned to the buyer, what consents are needed and whether a change of ownership gives the other party the right to terminate.
Our articles on what due diligence covers and hidden pitfalls in diligence go further.
How We Run Legal Diligence
Request List
A document request sized to the deal, sent to the seller or its attorney.
Searches and Review
Public record searches and a review of the contracts, lease, licenses and records.
Issues List
A plain summary for the client of what we found and what it means for the deal.
Solutions in the Agreement
Price changes, specific indemnities, holdbacks or closing conditions for the issues found.
Closing Checklist
Consents, lien payoffs and releases tracked until closing.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWhat should a seller have ready for diligence?
Formation documents and ownership records, recent tax returns and financial statements, the lease, key customer and vendor contracts, employee lists and agreements, permits and licenses, insurance policies, and a list of any claims or disputes. An organized set of documents shortens diligence and builds the buyer's confidence.
What happens if diligence turns up a problem?
Most problems can be solved without ending the deal. Depending on the issue, the buyer may ask for a lower price, a specific indemnity, a holdback of part of the price, a fix before closing or a new closing condition. Some problems are serious enough that the buyer walks away under the terms of the letter of intent.
Who pays for due diligence?
Each side usually pays its own attorneys and advisors. The buyer bears most of the diligence costs, including searches, its CPA's review and any third-party reports its lender requires.
Do sellers ever do diligence on the buyer?
Yes, when the seller is financing part of the price, keeping a stake in the business or receiving equity in the buyer. In those deals the seller should look at the buyer's finances, experience and ownership, and the seller's attorney may send its own request list.
More in Business Acquisitions
- Mergers and AcquisitionsBuyer and seller representation in Main Street and lower middle market deals.Learn More
- Buying a BusinessStructure, diligence, negotiation and closing for buyers.Learn More
- Selling a BusinessPreparation, negotiation and closing for owners selling their companies.Learn More
- Asset PurchasesBuying or selling a company's assets while the seller keeps the entity.Learn More
- Stock PurchasesBuying a corporation's shares, with its contracts and its history intact.Learn More
- Membership Interest PurchasesBuying an LLC's ownership under a membership interest purchase agreement.Learn More
- Partner BuyoutsBuying out a co-owner, or selling your stake, on clear terms.Learn More
- SBA-Financed AcquisitionsPurchase agreements and closings built around SBA 7(a) lender requirements.Learn More
- Seller FinancingSeller notes with clear payment terms, security and remedies for both sides.Learn More
- Earn-OutsContingent price terms defined clearly enough to measure, report and pay.Learn More
- Rollover EquitySellers reinvesting in the buyer, on terms that protect the stake they keep.Learn More
- Selling to Private EquityRepresenting owners who sell to private equity firms and PE-backed platforms.Learn More
- Search Funds and SponsorsVehicles, investor terms and acquisitions for searchers and independent sponsors.Learn More
- Franchise ResalesBuying or selling an existing franchise location, with the franchisor's approval.Learn More
- Letters of IntentSetting the price, structure and key protections before the deal is drafted.Learn More
- Purchase AgreementsThe negotiated terms that decide who carries the risk in a business sale.Learn More
- Closing an AcquisitionChecklists, payoffs, funds flow and the follow-up that finishes a deal.Learn More
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