Heads of terms in a business sale

The ‘heads of terms’ is an agreement that lays down the main terms in a business sale. The following is a brief guide on the terms that should be considered, negotiated and included in the ‘heads of terms’ in a business sale.

The subject of the sale

This may be the business or its assets. The assets of the business may include its equipment, vehicles, stock in trade, intellectual property, debtors, order books, the property it occupies and the staff. There are advantages and disadvantages of purchasing either the business or its assets, it depends wholly on the individual circumstances of a particular business and the needs/requirements of the purchaser.

I.e. the purchaser may decide he only wants to buy the machinery of a certain business in order to avoid a legal action against the seller by a third party. Or a purchaser may only want to buy the premises of a business as the equipment is of no use to him.

The price structure and payment

The payment of the sale price is something that is again dependent on the individual status of a business. Valuing the price of a business is partly based on the profitability of a business, this could mean the actual cost of the business could be dependent on the success of the business up to the date of completion. It is best that the purchaser rely on the audited accounts of a business as these are prepared by a chartered accountant who carries out a detailed inspection of the accounts.

It could be possible for the sale price of the business to be tied to the profit figures on audited accounts for a certain date, in such a situation the parties may agree to a part-deferred payment of the sale price.

Deferred payments may benefit both parties as:

  • The business price could be set to correlate with the performance of the business, so if the profits rise, the cost of the business increases and vice versa.
  • The purchaser may fund the cost of the business by funds generated by the business itself.
  • There could also be tax advantages for the seller, i.e. the tax liability for capital gains tax on the business sale may be spread over more than one tax year.

Exclusivity

A purchaser should try to negotiate a period of ‘exclusivity’ that provides the purchaser with a certain level of security. For example it could be agreed that seller will have to pay the purchasers legal fees if he pulls out of the sale within the exclusivity period. A period of exclusivity could even prevent the seller from dealing with other potential buyers for a certain period.

Preconditions

 If there is a anticipated specified event that could make the purchase of the business more appealing to the buyer,( i.e. certain profits expected from the sale of an asset or reaching a level of audited profits) the buyer may set this as a precondition of sale. This means the buyer need not complete the purchase if the precondition is not met. 

Warranties and indemnities

The following are again a form of security for the parties in a business sale.

A warranty is a written statement by the seller that confirms certain crucial information about the business i.e. the seller could give a warranty that there are no debtors or legal claims against the business.

An indemnity is a promise to reimburse a person in full, if a certain specified event takes place. For example the purchaser may insist that the seller give an indemnity to be responsible for any undisclosed liabilities of the business (that relate to the period before the completion of the sale).

For any matters relating to the sale of your business please contact Izaz or Michael on info@lawdit.co.uk

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