Buying & Selling Businesses Blog Series - Part 4 - Key Issues to Consider
In this blog we look at some of the issues which will always need to be covered in the contract for any sale of business transaction but can sometimes not be given the attention and forethought that they deserve.
Identification of Sale Assets
Whilst it may sound obvious carefully identifying and then listing the assets which are intended to be included in the proposed sale is critical. Too often we see lazy drafting in contracts such that you can not readily identify exactly what assets form a part of the asset being sold/bought. If there are any subsequent disputes about those assets if they have not been adequately identified in the contract a messy legal battle can often ensue.
Conditions Precedent to Agreement and to Completion
Quite often a purchaser will require certain events to occur before they agree to complete a purchase. Things like release of securities that have been given over assets which are the subject of the sale, or verification of stock levels or a certain number of key staff accepting offers of employment. If theses issues are important to a purchaser they must be carefully crafted into the contract. For a vendor it is wise to assess how possible and/or expensive it may be to comply with the pre-conditions.
Payment of the Purchase Price
Is it to be paid in one lump sump? Will it be paid over time? Does the purchaser want to hold back any as a retention sum to ensure compliance with warranties or is a portion of the price linked to performance of the business post completion? All of these clauses require very careful consideration and skilful drafting to create certainty for both parties.
Material Contracts (including the lease)
A contract is a contract but not all contracts are equal. Simply because one business operator has a successful relationship with a customer or a supplier does not guarantee that the next owner of the business will. For starters, is the contract capable of being assigned? Does the other party have any power to refuse the assignment? Leases are a key example of such a contract. Very close attention must be paid to the terms of the existing contracts and careful and strategic planning should be applied as to how to best ensure that all key contracts can and are assigned to the purchaser.
What is the vendor promising to the purchaser about the business? These are called warranties and can be a thorn in the side of an unwitting vendor and the ‘insurance’ that the purchaser needs to feel comfortable in their acquisition. Striking a fair balance between the two can often be a challenge but care needs to be given to any concessions made by either party.
Often bemoaned as unreasonable and unenforceable (erroneously) restraints of trade for vendors and their key personnel are critical for a purchaser to ensure that the large sum that they just paid for goodwill is not all for nought due to someone involved in the vendor’s business setting up down the road after the sale has concluded.
Careful due diligence and strategic planning with your lawyer and accountant can help identify the key issues for any sale and a lawyer well versed in sale of business matters can expertly craft a contract that can help you achieve your objectives with confidence and control.
In our next blog we take a look at what can go wrong when things don’t go to plan.Back