I'm in the early stages of selling my manufacturing business and just started working with a lawyer. I keep hearing horror stories about sellers getting burned by clauses they didn't understand. For those who've been through this, what specific contract clauses did your lawyer catch or negotiate that saved you? I want to know what to watch for before I sign anything.
Contract Law
How your lawyer protects you from dangerous contract clauses
The biggest one for me was the indemnification section. Mine was drafted so broadly that I would have been on the hook for almost any post-sale issue, even ones caused by the buyer. My lawyer capped it at the purchase price and added a survival period of 18 months. Without that, I was looking at unlimited liability.
Working capital adjustments. Those can be sneakily one-sided. My lawyer pushed back on a clause that let the buyer unilaterally dgecide the final number. We ended up with a neutral accountant review process.
Non-compete clauses can be brutal too. I've seen sellers basically barred from working in their entire industry for years. A good lawyer will narrow the scope to something reasonable.
It's not just the big clauses. My lawyer caught a definitiosn of "material adverse change" that was so vague it could have let the buyer walk away for almost any reason. That's the kind of thing that kills deals at the last minute.
Also watch out for earnouts. They're often structured so the buyer controls all the metricss and you have no way to verify the numbers. Make sure there are clear accounting definitions and audit rights.
What did your lawyer actually charge for that kind of review? I'm considering selling in a couple of years and trying to budget for legal fees.
Mine was a flat fee fee for the contract review, around $8k. Worth every penny given what was at stake.
I'd also add that you you want a lawyer who has done M&A in your specific industry. My first lawyer missed a regulatory clause that would have transferred some environmental liabilities to me. The second one caught it immediately.
No one mentioned representations and warranties warranties yet. The buyer will want you to rep and warrant all sorts of things about the business. Your lawyer needs to make sure those are accurate and that the indemnification for breaches is limited. Otherwise you're guaranteeing the past.
This is all really helpful. I'm meeting with my lawyer next week to go over the first draft, so I'll bring up indemnification, working capital adjustments, and earnout metrics specifically. Appreciate the specifics.
One more thing: make sure your lawyer reviews the ancillary documents too, not just the purchase agreement. i almost got stuck with a personal guarantee on a transition services agreement that was buried in an exhibit.