It is a good time to retain a lawyer when you found the target project. The client should communicate with lawyers during negotiation. Sometimes lawyers need to join in the negotiation. The most important thing is that the letter of intent should be signed after it have been reviewed by the lawyer. Some clients start to look for lawyers after the letter of intent has been signed. It may be too late. The letter of intent is the guide of a project. If there is a mistake in the signed letter of intent, it cannot be changed without consent of the other party. Even if the letter of intent is non-banding to both parties, there still is the risk if one party wants to make changes after it has been signed. First of all, the other party may think you are not reliable. Secondly, since you want to change one term, some other terms may be changed as well. If leaving the mistake there, there will be more troubles. The success rate of a project will be significantly decreased if the letter of intent has problems. Therefore, please do retain lawyers before signing the letter of intent.

When acquiring a company, the seller provides financial information, such as profit. Both parties agree to a selling price based on the financial information. What if the profit after closing is not as high as in the financial statement provided by the seller? There could be a price adjustment clause in the purchase agreement to protect the buyer. If the financial results after closing are worse than before, the selling price would be decreased, and the seller would refund the buyer. The better approach is to pay the price adjustment (a certain amount agreed by both parties) into escrow on closing, rather than waiting for seller to pay. When the price adjustment period is over, the balance will be paid to the seller. The seller may ask to adjust the selling price too. Should the buyer pay more if the financial results are better than before? All these should be negotiated before closing and addressed in the purchase agreement.

Some client told me that they would like to invest in a private company and acquire 50% of shares of the company. I would ask how much they will pay for the 50% of shares, 1 million dollars or half million dollars? It depends on the valuation of the company. If the client paid 1 million dollars to get 50% shares of a company, it means the company was valued at 2 million dollars after the investment. If the client paid half million dollars to get 50% shares of a company, it means the company was valued at 1 million dollars after the investment. If we do not know the value of a company, there is no point talking about the percentage of shares. Therefore, the value of a company has to be determined before investing. How should we confirm the value of a company? We can hire a valuator. If the client would like to value the company by themselves, there are different approaches for different industries. For traditional industries, the net profit or EBITA will be referenced, usually 5 times of net profit or EBITA. For hi-tech companies, may be 10 or more times of net profit or EBITA. After the value of a company is confirmed, the client can decide how much should be invested for how many shares.

Transaction Closing is the completion of a transaction. Closing is like a purchase where goods are delivered against payment. Goods in this case means legal documents. All the transaction documents should be signed, and proof of satisfaction of conditions, share certificates, company records, keys, etc. should be received, and then the buyer makes the payment to the seller. The transaction is completed once the payment is made. Payment is the last step of a transaction.

Some Chinese investors did not inform lawyers and made payment to the seller before closing. That is to say, they made payment to the seller before receiving any goods. If the seller refused to provide any legal documents, it will be very difficult for the investors to claim remedy.

The investors should keep communicating with lawyers during the transaction and follow lawyers’ instructions. If payment needs to be made in advance, it should be made to the seller’s lawyer’s trust account. The seller’s lawyer will then transfer the payment to the seller after the lawyers have received the “goods”.