By Loren Smith
A failure to document verbal agreements––even those seeming to be minor––can create issues making a deal problematic or even killing it. Here’s how I learned that invaluable lesson years ago:
I was helping a harness owner sell his business, and as is often the case, the seller owned the physical plant. As is also quite common, the prospective buyer did not want to purchase the real estate, so he preferred to lease it from the owner, providing the owner a secondary source of income in addition to the purchase price. (This transaction is separate from the purchase of the business and is memorialized in the lease.)
After a letter of intent was signed during the initial phase of the due diligence process, the buyer asked me to call the seller and confirm that after the sale the monthly lease payment would stay the same. This is normal practice.
I made the call, and the seller told me that absolutely the payments would remain the same, whereupon I immediately called the buyer to pass on the affirmative response.
What I did not do was simply send the seller a brief email confirming our phone conversation. If only I had done that, I would have saved major grief toward the end of the due diligence process, right before the closing.
Shortly before the transaction was supposed to close––when the lease was drawn up and the seller saw the proposed monthly lease payment staying the same––he hit the roof. He told me he had no recollection of my call and he would never have agreed to this because his lease payment when he owned the business was a fraction of the market price for this type of real estate. I was sure I had made the call, but there was no documentation of our conversation.
Although the price he was receiving for his business was exceptionally strong, and all of the due diligence had gone well––including the buyer’s willingness to overlook factors that could have been construed as major problems––none of this made a substantial difference to the seller. For him, the primary issue was not being treated fairly.
In the end, we did manage to close the deal, but only after a lot of wrangling over the lease payments and other lease items that should have been handled on the front end of the process. All would have gone much more smoothly if I had only documented my phone call to the seller. Lesson learned!
