Even those who can sense a good commercial deal and have the acumen to negotiate the terms are often uncertain how to document their deal. This uncertainty isn’t because the process is so hard. It’s just that nobody has ever explained it to them. So let’s remedy that right now!
The country is full of savvy entrepreneurs who can run a profitable business, handle the marketing, budgeting, tax, employment and countless other details. Yet, even those who can sense a good commercial deal and have the acumen to negotiate the terms are often uncertain how to document their deal.
This uncertainty isn’t because the process is so hard. It’s just that nobody has ever explained it to them. So let’s remedy that right now! Whether you’re selling your business, signing-up for a project or any other deal, the first step is to get a good overview of the deal in your own mind. Always remember basic concepts and keep reverting to a macro view of your overall strategy so you can maintain your bearings.
There can be considerable flexibility in how a deal is documented and progressed. The main aim in any deal and any well-drafted legal document is clarity of the key terms: What is to be done? When? How much is to be paid? Who is liable if things go wrong?
Of course, many other issues must eventually be recorded and there’s no shortage of distracting issues.
A deal should be built to suit the particular transaction, its timetable and each party’s concerns. Interim documents can sometimes be bypassed or selectively used – just like selecting a particular item from a legal tool kit. The only really mandatory document is the final detailed Agreement.
Keep the transaction simple and don’t let the other party bamboozle you with unnecessary complexity or with jargon and terminology. Let’s work through what they are seeking if they ask you for a Deed of Confidentiality, Deed of Non-Disclosure, Deal Memo, Term Sheet, Heads of Agreement, Memorandum of Understanding or Letter of Intent.
Sometimes documents with the same effect or purpose are given different names due to individual habit. The contents are far more relevant than the title. Discussions are usually protected by a Deed of Non-Disclosure or a Deed of Confidentiality – same animal, different names. Such a document identifies and protects confidential information (ideas, concepts and proposals) from disclosure – except when disclosure is required by law or by stock exchange rules.
Headline terms are often recorded in a Deal Memo or Term Sheet. The idea is to record the basic commercial terms and let the lawyers subsequently fill in the more intricate detail in the final Agreement. This can be a useful process as there is a human element to any transaction and it’s important to strengthen the perception you’re moving the deal along. Working through the issues when compiling a Term Sheet may also help you evaluate the merits of the deal while there is still time to withdraw if the deal doesn’t stack up.
A Memorandum of Understanding or Heads of Agreement is a more developed Term Sheet with some legal clauses added to ensuring each party is ‘locked into’ the deal while more detailed terms are negotiated. It could also establish a due diligence process or set up a working party who will work through the finer details.
A Letter of Intent is essentially the same document that may have an added emphasis on one party undertaking to do a certain task or to enter into the transaction before a certain date. Legally, nothing particularly turns on the title, but the mention of ‘intention’ may yield some benefit – again, the human element.
Also, nothing turns on the terminology of whether the document is called a contract or an agreement. However, if it is called a Deed, there is a legal difference in how the document should be executed.
The final document should, of course, contain all the precise details. For example: not only how much will be paid, but by what date each month, whether there will be an annual CPI increase or whether interest will apply to late payments. In short, the myriad details crucial to full protection of your rights.
Get a lawyer involved as soon as possible if you don’t intend to fly solo in negotiating and documenting the entire deal. It’s very difficult to change a hastily agreed Term Sheet without damaging the trust and goodwill that must be cultivated to ensure a deal eventuates.