Selling your business protect yourself from abortive legal costs
Business owners can take steps to reduce their risk of incurring high abortive legal and accountancy costs. The key is to check out the Buyer and negotiate carefully the Heads of Terms or Memorandum of Sale at the outset of the deal.
Credit checks on Buyers
Before accepting an offer for your business, you should check the credit worthiness of your buyer. You could not get a mortgage, credit card or loan without having this checked so why would you start what could be a complex and expensive process to sell your business unless you are satisfied as to the financial viability of your buyer? Unfortunately, some commercial agents who market businesses for sale do not do this, as they are keen to secure a deal very quickly. But dealing with someone who does not have the finance arranged to buy the business will just result in frustration after what could be months of wasted time, energy and costs.
Proof of Funds
Request proof of funds. If your buyer is a cash buyer then you should ask to see proof that the cash funds are available. Buyers often claim to be cash buyers when they are not. For example, if they need to borrow money from a friend or relative, refinance their own property, are waiting for an inheritance to be paid, waiting for a bank loan etc. In other words they are not yet in possession of liquid cash but make an offer which is, in reality, conditional on their finance being made available. If the buyer is reliant on bank or other finance, then ask to see a letter approving the finance in principle.
Heads of Terms/Memorandum of Sale
It is important to set out the terms of the deal early on in the negotiation. Don’t rush to simply agree the sale price while leaving other important details to be sorted out later on. Having a clear set of terms with a timetable will influence the way the transaction will proceed, and guide the lawyers to work towards achieving the agreed terms.
Heads of terms or memorandums of sale will usually be “subject to contract” and so not legally binding. However certain terms can be expressed to be legally binding and will be. For example confidentiality clauses and provisions regarding payment of legal or accountancy costs if a party withdraws.
There are various ways of protecting yourself against wasted legal and other costs. For example, make it a condition of the sale that if the buyer withdraws or does not meet the agreed timetable, they will pay the reasonable abortive legal and other costs. An undertaking can be obtained from the buyer’s solicitor to pay such costs and the amount can be limited to an estimated sum.
Some buyers may not wish to pay such costs until they have had the opportunity of carrying out basic due diligence and being reasonably satisfied as to the viability of the business they are buying. This is not unreasonable and so sellers’ solicitors and accountants could prepare a basic due diligence pack early in the transaction and give the buyers a fixed period of time in which to consider and provide the undertaking as to costs.
Non-refundable deposit
Consider requesting payment of an initial deposit to be held by the Seller’s solicitors as stakeholders towards the deposit to be paid on exchange of contracts. If the Buyer subsequently withdraws for no good reason, the abortive costs can be paid out of the deposit monies. Estate agents selling residential property frequently request such deposits and it is usual to then agree a lock-out or exclusivity agreement dealing with the terms on which such a deposit is held.
Careful drafting of suitable clauses is needed at the outset of the transaction to ensure that proper terms and conditions are agreed and the transaction gets off on a strong footing.
Landlord’s costs
If you are selling the assets of the business, including a commercial lease, it is usually necessary to obtain landlord’s consent to assign the lease. Less frequently this is also required with share sales where there is a major change in the share ownership. Consider therefore imposing a condition in the heads of terms that the buyer pays the landlord’s legal and professional costs.
Abortive costs
There are of course no guarantees that a transaction will proceed until actual completion has taken place. But by imposing terms at the outset for the protection of the parties, the chances of incurring high abortive legal and other fees can be substantially reduced.
Each case is different, but it is more difficult to renegotiate terms at a later stage when time has passed and each side has already incurred costs. By taking good legal and professional advice at the outset, you may be able to reduce your chances of incurring abortive costs which are a drain on your business finances.
If you would like an initial discussion as to your options, please contact me or a member of our Commercial team on 020 7940 4000.
Alan Zeffertt