Buying & Selling Businesses Blog Series - Part 5A - What can go Wrong after the Sale has Been Completed

Posted by Malcolm Campbell, Luke Mitchell on 02 March 2016
Buying & Selling Businesses Blog Series - Part 5A - What can go Wrong after the Sale has Been Completed

Ideally once the contract has been completed, the purchase price paid and the various post completion items dealt with, the contract is filed away never to be seen again. However, difficulties can arise from time to time, some of which are set out below.

Financial Performance Issues

The importance of involving a competent financial adviser at an early stage has already been touched upon. That is because every  sale brings  revenue consequences for either the vendor, the purchaser - or both - which have to be managed and so far as possible competing interests accommodated. Revenue issues which can arise after completion and which can adversely affect the vendor and the purchaser can include:

(a) Valuation of the Business

Methods for calculating the value of a business are varied and can be complicated – be sure you are using a method which is relevant to the industry that the business operates in and the business itself.

(b) The Purchase Price – Adjustments & Deferred Payments

Many contracts will require adjustments for certain events, such as amounts for accrued entitlements for staff who transition across to the purchaser. Other adjustments can relate to stock levels and other variables which cannot be finalised until the day of completion. A vendor needs to understand exactly what the effect of these adjustments will be so as to avoid a nasty shock when they are calculated the day before or on the day of completion, leading to a significantly lower net payment being made to them.

Similarly, care needs to be taken as to any part of the purchase price being deferred – often subject to certain KPIs or key milestones being reached. If the KPIs or milestones are not thought through carefully and kept within the reasonable control of the vendor, this  can lead to a situation where the vendor does not receive the stated price, but a sum a lot less (and some times after the outgoing proprietor has worked in the new owner’s business for many months trying to achieve the objectives in order to receive the deferred payments).