08 Sept 2019
The mistake of allowing a buyer to over-inspect a business revolves around the failure to recognise this simple fact - your business is not sold until the cheque is banked and you have the money. It is a frustrating mistake when a business owner prematurely agrees to the buyer's request for an intrusive inspection, or makes extended promises to 'train' the buyer or allowing a 'trial' of the business without adequate commitment from the buyer. A deposit from the buyer is not a sufficient commitment because there is still no legal obligation to buy. In fact, a deposit doesn't mean much except to evidence that the buyer has money. Unless the sale contract is exchanged (and signed by both parties), the deposit may be refunded to the buyer on request at any time. Even if the sale contract has been exchanged, the buyer can still worm out of the sale with a good lawyer, albeit a little bit more difficult but not impossible. Buyers can have cold feet and 'buyer's remorse'. Do not instill fear or cold feet in the buyer by laying naked everything about the business too early, or encouraging the buyer to inspect the business at the wrong time. Generally speaking, you should refrain from 'providing training' or a 'trial' of the business until after the Contract For The Sale Of Business has been exchanged, the deposit is firmly in the trust account, and after the landlord has consented to the buyer on taking over the lease transfer. Do not be tempted to 'save time' by training the buyer concurrently whilst the solicitors are working on the sale contract. The buyer has zero obligation to buy until the sale contract has been exchanged. In your tryst to save a few weeks' time, you may lose the buyer permanently and potentially set yourself back months or years to find another buyer. Also learn to be measured in your acquiescence. You should not accede to every buyer requests without protecting your own interests. This is where you may need a specialist such as a business broker or solicitor to guide you. Allowing buyers to premature access to your business can give the buyers a rude awakening to the reality of running your business. For example, long hours standing, early morning starts, employee troubles, heavy physical work and bad customers can scare off buyers. The initial buyer enthusiasm can sizzle into real fear. Your advisors should give you useful and timely advice to safeguard the sale process reaching settlement. When and what to do at the right time is especially important. It is also helpful if your advisors have a good history of working together, and thus ensure that your advisors are all acting in your interest. But sometimes, your advisors may not agree on the best course of action. For example, your solicitor may advise that the buyer pay a penalty should the landlord refuse the buyer's lease application. Your broker agent may argue against this because the buyer is likely to walk away from the sale. Hence, you will need to take control and make a decision that is most aligned with your own interest. Your advisors are there to give you advice but you cannot delegate the decision making. Ultimately the buck stops with you. Also if the Contract For The Sale Of Business is subject to landlord approval (which is typically the case for most retail-type businesses), the buyer may attempt to pull every trick in the book to frustrate the landlord into declining the lease application and therefore allow the buyer to legally exit from the sale without any penalty. You may be left with nothing to show for it at the end. This is where you need a good team of advisors to guide you and to protect your interests.
Show too much of your business and you will have a nervous buyer. Source: Pixabay.com
A Special Caution
A special caution about not using solicitors. Very occasionally, one of the parties (or both) may act without legal representation. This usually more likely to occur in the sale of micro-businesses of less than $100K. Going down this path is a very bad idea. Without lawyers, either party can challenge the transaction and when that happens, there are usually no cheap recourse.
The buyer may decide to find faults with the Contract For The Sale Of Business as a reason to rescind the contract, hence it is in your interest to have a solicitor prepare the contract to make it as legally water-tight as possible. You should also insist on your buyer having proper legal representation. In fact, many lawyers will not take on your case if the other party has no legal representation. Your solicitor may encounter difficulties in communication if the other parties are acting for themselves only.
In the very unlikely event where you agree to sell your business without proper legal assistance on both sides, then you should not allow the buyer to inspect the business in way of trial or training until after settlement, where the buyer has paid you the agreed price in full.
This is because your options are very limited if there is a dispute. A Contract For The Sale Of Business that is prepared and reviewed by solicitors of both parties is much less likely to contain errors that could be challenged by either parties. Because of the confidence in the solicitors, the seller sometimes feels secure enough to allow the buyer further inspections and trial once the sale contract has been exchanged.
Legal fees should be considered a necessary outlay to sell your business. For a small business, the legal fees should only set you back $2,000 to $8,000 and is well worth the investment to immune yourself from potentially some very, very expensive mistakes.
Josh Foo contributed to this post.
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