TIPS TO AVOID THE 4 MAIN ISSUES THAT CAN DERAIL A BUSINESS SALE
Once you have made the decision to sell your business and found a buyer willing to pay the asking price it can be a huge relief. But there is a long road to travel between receiving the offer to purchase (which is usually made by way of a non-binding expression of interest through your broker), to the actual settlement of the business sale.
A business sale agreement still needs to be negotiated, agreed and signed by the parties to make the offer binding and then all the conditions in the contract need to be satisfied (or waived).
One of the main conditions will be the buyer obtaining suitable finance. This is outside the control of the seller and rests entirely on the buyer’s ability to finance the business purchase. There are however other conditions and issues that could arise within a business sale transaction which could lead to the buyer pulling out of the purchase either by not signing the binding business sale agreement or by rescinding or terminating the agreement.
A prudent seller should consider these issues, seek advice and take steps to avoid these issues derailing their business sale before going to market. Here are some top tips on what to watch out for and how to avoid these being an issue for your business sale:
Issue #1: buyer gets cold feet
People don’t like surprises, especially if you have a nervous buyer who does not understand all the nuances of buying (or running) a business.
There are obvious things that could lead a buyer to think that there is something wrong with your business, for example:
Finances not being readily available (‘What are they trying to hide?’). Make sure you have your last 3 years’ accounts, BAS statements and POS records ready to provide to a buyer who has signed a confidentiality agreement
The business name not being registered to the seller – if they are paying an amount for goodwill the seller will expect the Intellectual Property in the business to be robust.
Long lists of charges registered against the business on the Personal Properties Securities Register (PPSR) – this may indicate to a buyer that the business runs on credit or was struggling. (‘Who else do they owe money to?’).
Tips to avoid the issue: sort out any potential issues.
We regularly come across issues in a business sale that should have been addressed by the seller before the business went on the market (more commonly when the business is being sold privately without a broker). If you sell your business through a broker they will analyse the business beforehand and identify any matters that are likely to negatively impact upon the sale price or cause problems down the line. Engaging a commercial lawyer to conduct a Seller’s Due Diligence early on in the piece can also be useful in flushing out and addressing these issues, they can help you to:
Ensure that the business name is registered to the seller (for example where an old business partner has it in their personal name or it is simply not registered). The same goes for a trademark.
Discharge any old PPSR charges (for example from previous supply arrangements) so you don’t need to provide the buyer with covenants or delay settlement.
Ensure that all key contracts are documented – handshake arrangements have no value to a buyer so it is important to get all key customer and supply agreements in writing.
Ensure that you have everything you need to complete the business sale agreement, for example all schedules, as it is preferable to send across a complete first draft contract to the buyer.
Address any issues with your lease.
Issue #2: landlord won’t accept the new tenant
If you lease your business premises, the business sale agreement will need to be conditional upon the assignment of lease to the buyer. But what if the landlord won’t accept the new tenant? In that case, the conditions regarding landlord’s consent to assign the lease will not be satisfied and the contract will fall over.
Tips to avoid the issue: Understand the lease and communicate with your landlord
Speak to your landlord – If the sale is not highly confidential, have conversations with the landlord early on in the piece so that you are both on the same page.
Vet your buyer – Determine what the landlord’s priorities are and make sure that the buyer ticks their boxes (the higher offer might not be the better offer if the landlord won’t accept the buyer).
Review the lease: – Make sure that you are aware of all the assignment conditions in the lease and that these are notified to the buyer. For example, that they need to provide personal guarantees, a bond or a bank guarantee and how much that will be for (they will need to factor this into their financial analysis when determining whether they can buy your business or not).
Issue #3: The lease is too onerous
The buyer may decide after reviewing the lease that it is not ‘satisfactory’ and not to go ahead with the assignment.
This is likely to occur where the lease is onerous or if the lease term is too short and the landlord is unwilling to amend it to provide for further options to renew or grant the buyer a new lease for a longer term. This is likely to occur where:
The landlord does not want the buyer to become its tenant; or
Where the landlord has plans to redevelop the premises and there is no redevelopment clause in the lease.
Tips to avoid the issue: Make sure you understand your lease
Review your lease before listing your business for sale – conduct a seller’s due diligence and make a plan to address any issues.
Where you have a lease with only a short term left to run and no further options it is worth addressing this before you go to market.
Consider negotiating further option terms which are likely to be more attractive to a buyer and their financiers. (Don’t extend the initial term of the lease though because, if the sale does not go through you will end up being liable to pay rent for a longer term).
This may also be a good time to renegotiate other onerous terms in the lease. So, send to a commercial lawyer to report on what needs changing to make the lease more ‘commercial’ in the current climate.
Issue #4: buyer wants to renegotiate price
We have all come across buyers who have little regard even for a signed contract and use any opportunity to renegotiate the purchase price just before settlement.
The sad thing is that this often occurs where the buyer has or perceives that they have the bargaining power, for example where the sale has to go ahead quickly and they know that the seller will not:
be able to afford to fight them in court; or
want to waste any more time putting the business back on the market and trying to find a new buyer.
Tips to avoid the issue: Make sure that the contract stacks up:
Take a large enough deposit from the buyer to discourage a breach of contract.
Make sure that all conditions are drafted tightly enough to ensure that the buyer has little ‘wriggle room’ for example, if there is a due diligence clause make sure that it is tight enough to point to exactly want constitutes unsatisfactory due diligence. Do not leave it to the buyer to say that they are simply ‘not satisfied’.
When you need to rely on a clause in the contract you want to be sure that there is no ambiguity and that the interpretation finds in favour of the seller. The standard REIQ contract is not adequate to protect a seller, it needs well drafted ‘buyer’s’ special conditions.
Even before the contract is signed, having all the terms documented in a well drafted set of heads of agreement or terms sheet will help avoid this. Both parties will be on the same page and understand what the process of the business sale will be.
It is important to work with experienced business sale professionals when you sell your business to maximise the chances of success. We regularly assist with business sales and would be happy to assist you through the process.
If you require any assistance with your business sale or business purchase or need help with other commercial legal issues, please contact our commercial legal team: