If you’re in the throes of selling your business and a committed buyer expresses their intention to pull out of the sale, this can be understandably frustrating. It can have various consequences both financially and operationally on the future of the business and you personally. 

In the world of COVID-19, it’s likely that many buyers in the midst of a business transaction are having second thoughts — they may be concerned about the prospects of the business in light of government restrictions or reduced trade, or may have found themselves in a compromised financial situation. 

In any event, this article explores your rights in the business sale process and what you can do to enforce those rights. 

The Stages Of The Sale

The stage of the sale that has been reached largely informs the strength of your negotiating position and the next steps available to you. 

Below, we summarise the various stages of the business sale process, and the seller’s relative strength of position in forcing the buyer to go ahead with the sale. 

Stage 1: Expression Of Interest

What happens during this stage? 

During the expression of interest stage, the buyer may approach the seller expressing their interest in taking over the business, or the seller may approach the buyer, advertise the sale or engage a business broker on their behalf. This stage will usually involve high level discussions around the commercial terms of the sale. 

Seller’s position: low

At the expression of interest stage, the seller’s strength of position in forcing the buyer to go ahead with the sale is low, as no agreement has been signed yet. 

Stage 2: Heads Of Agreement 

What happens during this stage? 

At this stage, the parties usually agree on the key commercial terms of the sale, including the purchase price, which assets are included in the sale, and any conditions which must be met prior to the sale going ahead. 

This can be done informally (such as by way of verbal or email agreement) or through a Heads of Agreement (HoA) — a short form document setting out the agreed terms. A Heads of Agreement can be binding or not binding.

Seller’s position: moderate

At the Heads of Agreement stage, the seller’s strength of position in forcing the buyer to go ahead with the sale is moderate —  depending on the terms of the HoA and if the HoA is binding. 

Stage 3: Due Diligence 

What happens during this stage? 

In this stage, the buyer would usually conduct due diligence into the business, including checking the business’s financials and making enquiries into the ownership of business’s assets, where applicable.

Seller’s position: moderate

At the due diligence stage, the seller’s position to force the buyer to go ahead with the agreement is moderate. It all depends on whether the parties have entered into a binding HoA, and what the terms of this HoA are. 

Stage 4: Negotiating A Sale Agreement

What happens during this stage? 

This stage involves negotiating the finer details of the sale. Usually, the seller will engage a lawyer to draft the Business Sale Agreement, which will then be sent to the buyer’s lawyer to review and request changes. 

Seller’s position: moderate

At this stage, the seller’s position to force the buyer to go ahead with the business sale is moderate, depending on the terms of the HoA and if the HoA is binding. 

Stage 5: Signing The Sale Agreement 

What happens during this stage? 

The parties will each sign their copy of the Business Sale Agreement and provide a signed copy to the other party (also called “exchange”). If a deposit is payable, then the deposit will be paid on exchange of the contracts. 

Seller’s position: strong

The seller’s position to enforce the sale here is strong, as the buyer has entered into the formal sale agreement. 

However, some business sale agreements will include certain conditions which must be met for the sale to go ahead. This is known as ‘satisfying conditions precedent’, and may allow the buyer to back out of the sale. 

A common condition precedent is finance — if the buyer is unable to secure finance from their bank, they may be able to opt out of the sale without consequences. 

Stage 6: Settlement & Completion

What happens during this stage? 

On settlement, the balance of the purchase price is usually paid (unless the parties have agreed to different payment terms, such as payment in installments) and the business is handed over to the buyer.  

Some Sale Agreements also impose obligations on the buyer or seller after completion has occurred, such as requiring the seller to provide training to the buyer and/or incoming staff. 

The buyer cannot back out of the sale at this stage, as the sale has already been completed. However, there are some cases in which, depending on warranties and indemnities, the seller could have post-completion liability which would allow the buyer to cancel the sale. 

The Terms of The Agreements

As seen above, the buyer’s position depends largely on which stage of the business sale the transaction has reached. Another important and related factor is the terms agreed between the parties in the Heads of Agreement and the Sale Agreement. 

For the signing of a Heads of Agreement or Sale Agreement to give rise to an obligation on the seller to proceed with the sale, such an obligation needs to be set out in the agreement. Without that having been agreed between the parties, the buyer may be able to walk away from the sale with limited consequences. 

Further, Heads of Agreements should contain a term stating whether the agreement is binding or not binding (in other words, if its terms are legally enforceable). If the Heads of Agreement is not binding, the seller may have limited recourse against the buyer if they refuse to complete the sale (regardless of whether or not there is a term on the Heads of Agreement saying they must). 

For this reason, it’s important to have important documents like Heads of Agreements and Business Sale Agreements drafted and reviewed by lawyers to ensure that all necessary obligations are being imposed on each of the parties. 

Your Options From Here

Negotiation

Depending on the circumstances, the best place to start may be to approach the buyer, explain your position and try to reach a middle ground both parties can accept. 

This is a particularly attractive approach where the seller’s negotiating position isn’t strong — for example, where the parties have signed a non-binding heads of agreement. 

It might be the case that the buyer’s concerns in completing the sale can be addressed. For example, the parties may agree on a reduced purchase price, payment by installments or a delayed settlement date, in the interests of ensuring the sale goes ahead. 

If an agreement is reached, the buyer may request that a Deed of Release is signed to release the buyer from any liability that may arise in the future around completing the sale. 

It is prudent for the seller to have a lawyer advise on the implications of this to ensure you know what you’re agreeing to, as such an agreement will usually limit your rights in the future.  

Sale Agreement Requirements

If a Sale Agreement has been signed, the document will often contain clauses around what happens if the parties enter into a dispute. These clauses must be followed before the dispute is taken further. 

For example, a Business Sale Agreement may require the parties to follow a process where: 

  1. One party must give notice to the other party of the dispute;
  2. The parties must meet and attempt to resolve the dispute in good faith within 14 days of notice being given;
  3. If the dispute isn’t resolved, within 21 days of the meeting, the parties must attend mediation to be mediated by a neutral third party agreed between the parties; 
  4. If the dispute still isn’t resolved, the parties may commence court proceedings. 


Pre-Litigation And Litigation

If the above steps have been taken and it’s clear that the dispute isn’t going to be resolved on mutually agreeable terms, you may wish to think about taking more aggressive action. 

The first step is usually to have a lawyer draft a letter of demand. This is a legal document setting out the seller’s requests of the buyer, which would usually be to pay the agreed purchase price and complete the sale. 

If the buyer doesn’t satisfy the requests set out in the letter of demand, the next step is often commencing court proceedings by filing a Statement of Claim with the relevant court. 

Before commencing proceedings, it is important for the seller to demonstrate that they are “ready, willing and able” to complete — that is, the seller has fulfilled all obligations in preparation for the sale, including any conditions precedent to the sale completing. 

It’s worth noting that court proceedings are often very costly, stressful and time consuming. As with all types of commercial disputes, deciding whether or not to follow this route is a balancing act. You should weigh up how much money is on the line, and how much money, time and effort you’re willing to invest in recovering the money. 

What To Take Away…

As we can see, it’s important to get the right advice when selling a business to ensure that you’re protected in the event that the buyer changes their mind. 

Our experienced business sale team at Sprintlaw can help advise you on your next steps if you’re having issues with a buyer, or draft up your Sale Agreement to help limit the risk of things going wrong down the track. 

Contact our friendly team at 1800 730 617 or by email at team@sprintlaw.com.au for further information and a quote as to how we can help. Our legal consultants are available for a free, no-obligations chat about your specific situation.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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