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Businesses across a variety of industries use and are familiar with sale and purchase agreements. A sale and purchase agreement is a legally binding agreement between two parties – the buyer and seller. When entering large-scale transactions, you want to be sure you fully understand the terms of your agreement. To help, this article discusses common mistakes to avoid when entering into a sale and purchase agreement.

Failing to Identify the Conditions Precedent

Almost every business agreement will require you to fulfil certain conditions before you can complete the sale. When it comes to a sale and purchase agreement, these conditions often require:

  • the buyer to obtain finance to pay the purchase price under the agreement;
  • the landlord to consent to a new tenancy on their property; 
  • a franchisor to consent to the buyer becoming a franchisee; and
  • parties to enter into additional contractual arrangements to supplement the sale.

If you do not meet certain conditions in the written agreement or parties fail to identify what is necessary before going ahead with the sale, this can lead to unforeseeable delays in the transaction. This can impact your commercial relationship with the other party. Likewise, you might find yourself facing future legal issues regarding breaches of contract.

To avoid this, both parties must discuss what conditions they must meet on both ends in order to affect the final sale. In this instance, an experienced lawyer can help clarify what conditions your company might need to meet, particularly unforeseeable legal issues like transferring licensing rights to the buyer before the sale is affected. In any event, you and the other party should clarify what conditions precedent are necessary in your commercial context.

Failing to Consider Post-Completion Conditions

Often, sale and purchase agreements will include certain post-completion conditions. Completion refers to when you have transferred what you are selling to your buyer. In the context of acquiring another business’ shares, post-completion conditions typically restrain sellers from being involved in a competing business for an agreed time period post-completion. This might be necessary when the seller was a key manager of the business who, after selling their shares in the target company, may use their significant expertise to aid a competing business. 

Accordingly, a post-completion restraint clause can significantly benefit your newly acquired business by giving it some much-needed breathing space in the market.

However, parties often fail to consider what might be some necessary conditions after the sale goes ahead. Failing to include certain post-completion conditions can be a disservice to your sale. For example, if you fail to reasonably restrain the seller, they could very well use the opportunity to make a windfall by taking their expertise to a competitor. 

To avoid this, you should consider the future implications of the sale. After all, post-completion conditions are bespoke because both parties can tailor the conditions to meet their individual needs, whether that means providing training for the buyer of the new company or introducing the buyer to pre-existing suppliers.

Failing to Include a Dispute Resolution Clause

If a dispute arises between the buyer and seller in a sale and purchase agreement, an alternative dispute resolution (ADR) clause can provide the means to resolve the dispute without necessarily going to court. The table below outlines the most common types of ADR.

  • negotiations, where both parties alone discuss how they might resolve the issue;
  • mediation, which involves a third party who mediates a negotiation between two parties but does not make a legally binding decision; and
  • arbitration, which involves an independent third party who oversees both parties’ arguments and makes a legally binding decision to resolve the matter. 

A dispute resolution clause sets out the procedures both parties can take if a dispute arises. Therefore, it can provide greater certainty for either party entering into the agreement. Without a dispute resolution clause, you could face unwanted and costly court proceedings over an unresolved dispute. 

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Key Takeaways

When it comes to your sale and purchase agreement, there are common mistakes you want to avoid. You should ensure that you:

  • consider everything you need to complete before the sale can go ahead;
  • include any post-completion obligations relevant to your commercial context; and
  • include necessary dispute resolution clauses. 

As with any commercial contract, you can significantly benefit from having a lawyer review your sale and purchase agreement for any mistakes. An experienced lawyer can identify potential discrepancies in your agreement and subsequently advise you on what might be the most appropriate way forward for your business. 

If you need help with your sale and purchase agreement, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What is due diligence in the context of a sale and purchase agreement? 

Before selling a business, a buyer might request to see your financial records and other relevant business records. This stage where the buyer reviews your records is known as due diligence. 

Who can draft a sale and purchase agreement?

Typically lawyers will draft a sale and purchase agreement. Whilst businesses can use standard agreement templates, these templates might not be entirely tailored to their specific arrangement.

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