There are numerous considerations for a proposed seller and prospective buyer to think about before entering into a buy-sell transaction. Most would agree the time for bringing in competent automotive counsel, an accountant, and any necessary advisors is at the very beginning because there are legal, tax and planning considerations that go into structuring the transaction in order to protect the parties’ interests.
However, often, parties aspiring to put together a buy-sell eagerly engage in discussions, and reach preliminary understanding of some of the material terms, before they have engaged their lawyers to advise them and prepare required contracts, memorializing the parties’ intentions. In this early stage, negotiations might impact material terms of the deal and the parties’ rights. If the parties do not involve counsel until the point when binding agreements are drawn up, they should be wary of potential problems they may create for themselves, and at a minimum, be mindful of a few points during this initial phase.
First, discussions should be documented. Prospective parties to a transaction commonly get together, in-person or over the telephone, to talk about their desired deal, which might include price terms and other aspects of the proposed deal. It is prudent to take thorough, contemporaneous notes of these conversations. These notes should include the dates of the conversations, who participated, and as much detail as possible and be placed in a separate file that can be easily accessed. Be organized. This may be helpful should the need arise down the road for clarification or in the event of a disagreement.
Second, the importance of collecting necessary information and documents cannot be overstated. This might include lists of inventories, customer records, existing environmental reports, appraisals, list of any pending litigation and the like. A seller should compile all of this information in the early stages, ideally before any negotiations occur. Relegating this important aspect to the end could cause undue delay, misunderstandings between the parties, and even jeopardize a closing.
Third, most dealerships have existing agreements, leases and even non-cancelable contracts with vendors and third parties (e.g., computer equipment/software maintenance contracts, agreements for uniforms, advertising, etc.). It is important for these agreements to be reviewed and identified early on so the parties can determine how they are to be handled, whether they will be assumed by the buyer, and what third party consents are required for them to be assigned. Failure to identify and address these obligations can prove costly and adversely impact the buy-sell closing.
Fourth, there are certain reasons why a party might seek to use a letter of intent. And while, ordinarily, not a substitute in a buy-sell transaction for the formal buy-sell agreement required by the factory to start the approval process, the letter of intent itself might give rise to a conclusion that it is a binding contract, creating legal obligations of the parties. The best course in the circumstance of a letter of intent, as with any written document, is to first consult with an attorney before it is signed.
Fifth, the parties should evaluate the necessity of any due diligence inspections of the business and assets and any real estate and improvements, including who will bear inspection performance costs and the consequence of inspection findings that are not satisfactory. Early determination of these issues could facilitate avoidance of delay, keep the deal together, or allow a party to determine whether to proceed to closing.
Sixth, the structure of the selling dealership is often a corporation or other legal entity. Though the buyer may have been dealing with the seller’s majority owner all along, minority shareholders may have rights under the law and the corporation’s governing documents which can impact the buy-sell process. Determine early in the process the rights, if any, of minority shareholders to avoid unnecessary delay and secure required approvals.
The better course for aspiring sellers or buyers is to retain competent legal counsel as early as possible before beginning the buy-sell process. Where principals participate in discussions about a prospective deal with interested parties or take other steps before securing counsel, extreme care must be exercised to avoid pitfalls that could adversely result in the undoing of the coveted deal, prove costly to the parties, or impact the parties’ legal rights and protections.