Buying & Selling Businesses Blog Series - Part 3 - Pre-Contractual Negotiations

Posted by Malcolm Campbell, Luke Mitchell on 18 February 2016
Buying & Selling Businesses Blog Series - Part 3 - Pre-Contractual Negotiations

Once the structure of the sale has been settled upon the parties will then start considering the key commercial issues of the transaction. The pre-contractual negotiations between the parties are the cornerstone of any agreement and consideration needs to be given to exactly what is being acquired. The assets of each an every business will of course vary from business to business but usually are divided into:

 

  • plant and equipment;
  • stock in trade;
  • intellectual property and associated licences;
  • equipment leases and service agreements;
  • the rights of the vendor under material contracts; and
  • goodwill.

Each party will have their own views on the value of each of these components but also how that price is apportioned between these various assets. It is often very important at this stage that the vendor and purchasers:

  1. ensures that their accountant is involved in considering the structure of the sale to ensure that financial issues are dealt with and understood (including GST, CGT and stamp duty);

  2. undertake due diligence to ascertain the nature of the business and consider items such as:

    • the proper legal identity of the parties;

    • confirmation of the ownership of all assets purporting to be sold;

    • whether any other persons should be joined as a party to the agreement as co-warrantors (such as directors and senior executives);

    • who will act as covenantors on things such as the warranties;

    • whether any guarantors will be required;

    • a review of historical and forecasted sales figures;

    • the profitability of the business, including some forensic review of the financials to aid with any relevant add back or other anomalies in the figures;

    • the costs that the business incurs to generate its revenue;

    • keys contracts with suppliers, staff and customers;

    • the assets of the business;

    • the employees of the business;

    • the longer term (balance sheet) liabilities

Once there has been a careful examination of these issues the parties can commence and then finalise their negotiations as to the key elements of the transaction. In turn these will need to be formalised into the contract.

In our next blog we look at some of the key issues to be covered in the contract.

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