SEQUENCING MISTAKES CAN KILL YOU
I am sometimes amazed that someone with a million dollars in liquid assets to invest – which means he has a lot more in reserve most of the time – fails to appreciate that sequencing of inter related transactions, poorly handled, will cause you to lose all of the investment. In the alternative, it will tie up the assets in litigation for a long time, which is the next worst thing. By the time the legal expenses eat up five percent of the total amount (early on in the litigation), and you start to think of settling for half, you have squandered 55 % of the million.
How often does this happen? I don’t know. I’m just one lawyer, and I don’t get to see every event of sequencing disasters. But I do see it about three or four times a year, which means to me that it has to be happening at least 250 times a year across the country. Nobody ever talks about it, so we are going to deal with it here and now. Nobody writes about it, I suspect, because few people ever would believe that anyone could be so inept as to ignore the impact of bad sequencing in closing a principal transaction that has several ancillary commitments that at the closing remain unaccounted for. Do people think they just know this and don’t require supervision? They wouldn’t buy a home like this, unless they tried to do it without a realtor or a lawyer. Maybe it’s because so many people are investing in small businesses in which the primary contract is a franchise agreement, and the other things that could make everything go up in smoke don’t get proper attention.
People may go to a lawyer to get an explanation of the franchise documents, but they don’t then have the lawyer walk them through all the related other transactions to assure that they not entrapped. Franchise contracts don’t have provisions that allow you to get your money back or walk out on the deal after you sign it without the consent of the franchisor. That consent is rarely given, and then only for reasons that suit the franchisor’s agenda. No franchise agreement has a provision that says that if you fail to connect the dots on other related critical transactions, you have the right to rescind. So if you fail to handle sequencing of related agreements, you can and probably will lose your entire franchise fee. And that is not the only risk of rushing headlong into a franchise transaction with holes in your homework.
If you signed a commercial property lease for a store location in connection with your becoming a franchisee, and for reasons of your own omission you cannot handle the transaction, the landlord also has no contractual obligation to allow you to rescind. He may require that you find another tenant, at your own expense, including agent’s commissions, who is suitable, and that you pay rent until that is all sorted out. If you intended to put the store on property you already own and get into this bind, the franchisor will have the option to place another franchisee on that location. If you don’t consent to that, expect not to see a dime refunded on what you paid the franchisor. It doesn’t say that in the franchise agreement, but you probably had to sign an ancillary document giving control of the property to the franchisor for the full term of the franchise, plus any renewals, at the franchisor’s option.
What is most often the missing link in this chain of disaster is that your lender has for some reason decided not to close and fund your loan. Does this really happen? Not often, but sometimes. If you sign agreements that depend for your ability to perform them upon your having borrowed funds, and you don’t first have the borrowed funds in hand in the sense that the loan has closed, you are wide open to being devoured and at the mercy of the opposite parties.
Is it good business for people not to let you out of your deals when this happens? Generally not. However, not letting you walk away is worth some money, and the only question is whether your opposite parties want to hold your feet to the fire on deals that had no way out if something elsewhere failed to happen. Most often, in my experience, they will want you to write checks to obtain their indulgence. Sometimes, the exit cost is very high, especially when you then have to hire a lawyer to get you out.
In any multi transaction situation sequencing has to be accounted for, and if you can’t negotiate a rescission clause in case of a sequencing problem, you can’t allow yourself to close until all the related transactions are fully accounted for. You don’t sign any agreement without first closing on every other agreement that could affect it, unless you have that walk away right written into the contract.
With what is going on this week I wonder if anyone will even read this. Oh well!