Legal Watch/RMR: 7 Deadly Sins

What to look for in buying and selling alarm accounts

It’s not eternal damnation, but might feel like it. Commit any of the seven deadly sins I’ve identified in my 20 years of counseling buyers and seller through hundreds of transactions, and you will suffer—loss of time, loss of money and perhaps the worst fate of all—loss of the most lucrative deal you could make. Read them below and then go forth and sin no more.

1. Retain your brother-in-law, the world’s greatest real estate lawyer, to close your deal. I am continually amazed at parties, both buyers and sellers, who use counsel who have no industry expertise. I will never understand how sellers who may have spent their lives building a successful security business who undertake the single most important transaction of their lives led by professionals with absolutely no experience with industry deals, or how to overcome obstacles—and there are always obstacles and issues—to get a deal closed. Inexperienced professionals cannot understand the scope of certain risks, how to avoid them or where the real landmines may be hidden. Why pay them their hourly rate to learn on the job?

2. Conduct inadequate due diligence. What’s the last and worst circle of hell? Finding an expensive problem after closing. Just ask a buyer who gets stuck paying seller’s $10,000 unpaid state sales taxes or a seller who experiences a buyer’s stingy reputation paying holdbacks. No matter which side of the deal you are on, the most important advantage in any transaction is knowledge. The better your knowledge, the better your deal. Experienced buyers examine a seller’s company with a magnifying glass. Sellers should do the same before the buyer does in order to identify and address potential issues that may delay closing or affect the purchase price. Think of it as a “business physical” to help you get in shape before embarking on the biggest transaction of your life. In my experience, this sort of an investment pays seller a handsome return on exit.

3. Over promise and under deliver. An acquisition is an extraordinarily sensitive process with a great deal at stake. Both buyers and sellers want to get a deal done, but they have competing interests. Egos also may be involved and emotions may play a large role, especially when a seller is selling a life-long or family business. Much of the deal process is about building trust and every statement or act by either side has potential consequences—including on the deal price. Sellers shouldn’t say things they can’t prove and support and buyers shouldn’t promise more than they can deliver. I’ve seen more than one deal crater because one side or the other said one thing and did another.

4. Ignore seller’s contracts. In an industry in which contracts are essential to limiting liability, many sellers surprisingly still have completely inadequate contracts. A poor quality contract (or missing contracts) can cause a buyer to significantly slash the purchase price, require seller to re-contract the base before a postponed closing or as a condition of getting an escrowed holdback, or even provide buyers with an excuse to walk from the deal completely. Some recent contract-related mistakes I’ve seen include contracts that are expressly non-assignable, residential agreements that omit the FTC required three-day right of rescission or contracts that have such jumbled text that the contract’s term is impossible to determine. The discovery of these issues during the deal brought the transaction to a screeching halt, forcing seller to spend time, energy and money to address these issues in order to get the deal closed.

This content continues onto the next page...