Selling or buying a business can be one of the most critical business decisions you can ever make. There are many factors to consider as part of this process – factoring in lifestyle options, gained and lost opportunities, the price of the business sale, and conditions attached with that sale. These can all be subject to negotiations between the parties. Ultimately they will be condensed into a business sale agreement.
Here are our top 8 elements to consider when negotiating a business sale agreement.
1 – Price
Price is generally negotiated at the outset. Complexity appears when the due diligence process begins and the parties begin to chip away and adjust the price based on the risks that arise.
2 – Conditions
A range of conditions arise before a sale agreement becomes binding, from a seller’s perspective they will want the list of conditions to be narrow, whereas the buyer will want the list broad. Material Adverse Change is one of the most heavily negotiated conditions, particularly as if one arises, it allows the buyer to terminate, thus from a seller’s perspective they will want as much certainty as possible.
3 – Liability
Liability is another heavily negotiated component of a business sale. A seller will make multiple representations and warranties as to the status and operation of the business, many of which a buyer is relying on to be truthful and accurate. With regards to tax and other indemnities, a buyer will want the seller to be liable in the event litigation arises in the future. Tensions can arise between the buyer and the seller about how much liability should remain with the seller. Additionally, the time period in relation to working out claims tends to be heavily negotiated, with a buyer wanting a longer period of time, and a seller preferring finality once the sale completes.
4 – Post-completion adjustments
If there is a delay in the sale of the business, post completion adjustments may be required to make sure that the purchase price remains fair for both parties, particularly in circumstances where the business turnover or profitability (or any other relevant metric) has had a downturn. This is particularly important in unfortunate circumstances where a seller may strip working capital from the business prior to the sale.
5 – Non-compete / restraints
Non-competes and restraints are heavily negotiated. A buyer will want to know the goodwill of the business is protected, and that the seller will not (immediately) re-enter the same industry and engage with the same clients.
From the seller’s perspective, they would want the opportunity to continue to utilise their skills after the sale of the business, in a way that doesn’t stop them from being able to pursue their interests beyond the sale.
6 – Transition
A seller might have a preference to walk away completely after the sale of business. From the perspective of the buyer they might require transition services from the seller to enable a smooth change in control, i.e. head office and IT related services.
7 – Ongoing agreements between the seller and buyer
Any licenses, distribution, supply agreements and long term arrangements that may have a significant impact on the value of the business and the seller and buyer risk positions.
8 – Employee-related matters
It is important to consider the cost of any redundancies as the result of the sale, including who should bear the cost. This directly interrelates with the indemnities and warranties that the seller may make in relation to any employee-related disputes in the future, for instance, for underpayment.
Selling or purchasing a business is a decision that has many issues to be considered and negotiated. If you need legal assistance with either buying or selling a business, get in touch with our team.