Selling your business can be a long, involved process. Finding the right buyer can be tricky. The worst that can happen is the buyer backing out of the sale of business contract at the last moment. This article gives some tips to manage the sales process to minimise the risk of the sale falling over.
Decide Key Terms Before You Negotiate
Before starting negotiations with an interested buyer, it’s important to know what key terms you want to include in the sale of business contract. For example:
- price and deposit;
- date of settlement and finance approval;
- general terms such as the transfer of lease; and
- any special conditions that you agree upon, such as post-completion assistance.
The better you prepare for the negotiation, the less chance that you’ll be caught out by an unexpected issue.
Sign a Heads of Agreement
A heads of agreement (or term sheet) is a proposal of the commercial terms that the seller and purchaser have negotiated. A heads of agreement is typically non-binding and written before the sale of business contract.
The heads of agreement reduces the risk of the business sale falling through by giving clarity on the key terms of sale. Having a heads of agreement will also result in a faster and smoother transaction, and make it easier for your lawyer to draft up your sale of business contract.
Draft a Sale of Business Contract
Generally, the seller will draft up the sale of business contract. The purchaser then reviews the contract and may suggest some key points to change. However, these changes are less likely if you have a signed heads of agreement. Your lawyer can draft your sale of business contract to ensure that the there are fewer conditions that allow the buyer to pull out of the contract.
Collect a Deposit
Collecting a deposit from the buyer can motivate the buyer to meet its obligations and continue to settlement. The deposit does not go into your bank account but instead will be held by a third party such as your lawyer. With a well-drafted sale contract, if the buyer breaches its obligations, you will be able to recover the deposit.
Allow a Short Due Diligence Period
Buyers often require a due diligence period to look closer into your business records. In most cases, you want to give them a short period, such as 14 days, to conduct their due diligence. This is long enough for an interested buyer to complete the necessary checks.
As part of the due diligence process, the buyer will want to review your financials, operations manuals, and other business documents. Before you give access, you should make sure the buyer has signed the sale of business contract first. It should also have a confidentiality clause to prevent the buyer publicising what they discover.
Review the Conditions Precedent
‘Conditions precedent’ clauses require certain conditions to be satisfied before the sale becomes final. The conditions precedent clauses should be well-drafted to minimise the risk of a purchaser exiting the sale. Typical conditions precedent clauses might include:
- transfer of the lease;
- transfer of supply contracts; and
- franchisor approval.
Conditions precedent provide the buyer with extra assurance. They also give the buyer some time (usually 14 days) to conduct their due diligence and renew the key contracts. After this time, unless the buyer discovers a detrimental issue — like an undisclosed debt, the buyer will be legally bound to buy your business.
Carefully managing the sale of your business will help ensure that it goes through without a hitch. Otherwise, both buyer and seller will experience confusion and uncertainty, possibly prompting the buyer to back out of an otherwise good opportunity.
If you need assistance with selling your business, call LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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