Aaron-GhaisThis article was contributed by Aaron Ghais, a deal lawyer at Shulman Rogers that has helped his clients buy, sell, and finance businesses, and has closed over 350 deals worth over $2.5 billion in the past 20 years.

If you’re regularly involved in the process of buying companies or advising clients who are, you know there are plenty of “trip wires and trap doors” to avoid and always something new to learn.  And if you’ve never been involved in an acquisition but think you might be soon, you’re undoubtedly hungry to learn what you can to avoid mistakes and negotiate effectively.

One way to develop your deal savvy is to read cases addressing issues faced by buyers in real-world transactions, but I’m guessing you’d rather spend time growing your business than playing lawyer.  So let me save you some time by passing along some insight gleaned from a few important cases issued by the Delaware courts.

To put a finer point on it, let me share with you two deal terms that you, as a Buyer, should avoid when negotiating with a Seller.  Each of the suggestions below is qualified by one important caveat: you should defer to the advice of your legal counsel because every deal is different and the general advice below may not be appropriate for your situation.

1) Avoid a Binding Agreement to Negotiate in Good Faith.

Do not enter into an express agreement to negotiate specific deal terms in good faith, unless you’re absolutely certain you can live with those deal terms and that any ambiguity in those deal terms can be resolved in a satisfactory way.

So when does this come up?  When you’re asked to sign a term sheet, memorandum of understanding, or similar document that (i) summarizes deal terms or attempts to provide a roadmap for future discussion by describing specific deal terms that your Seller thinks have been agreed upon and (ii) lists other deal terms that need to be agreed upon to complete a deal.

And what’s the problem with signing something like that?

Here’s the problem:  if you sign a term sheet compelling you to negotiate certain deal terms in “good faith,” you could be deemed by a court to have acted in “bad faith” if you propose terms that are “substantially dissimilar” to those contained in the term sheet.  That may not always be a problem, but so often a Buyer’s view of what deal terms are optimal will evolve as a result of its post-term sheet due diligence and guidance provided by legal and business advisors.  So why bind yourself now to deal terms that may turn out later to be disadvantageous or costly?

If you want your term sheet to be truly non-binding, be sure to state that in writing and add that the term sheet is for discussion purposes only and subject to due diligence and the negotiation and execution of a definitive purchase agreement.

For the second deal term that every buyer should avoid, read Aaron’s original article on the Getting Deals Done blog by clicking HERE.