Monday, 31 October 2011
What is your number one tip- legally- for anyone buying a franchise?
Bennett Carroll Solicitors CEO, Guy Gibbons provides advice to anyone buying a franchise.
Sunday, 23 October 2011
Merging with a competitor
Introduction
In difficult and uncertain times, business owners are always on the lookout for alternative strategies to future-proof profitability.
It is in tough times that new strategies emerge.
Of late, we have seen businesses exploring and considering new structures and alliances which could broadly be considered "mergers", with similar businesses.
Structures do not necessarily extend all the way to a full-blown 50/50 partnership with a direct competitor. There are subtle but significant variations on this theme.
In fact, the full equal partnership of two identical competitors is probably the most rare of the possibilities.
Alternatives being seen in the marketplace are:-
(a) A sale which looks like or is called a merger;
(b) Merger of complimentary businesses;
(c) Co-operative arrangements.
A Sale which looks like or is called a merger
We hear of mergers everyday, but the reality is that many of them are actually business sales barely disguised as mergers. One business will buy another, the Principal of the selling business will remain as a Consultant for a time, and then depart. This is not a merger.
Merger/ Partnership
A merger in the sense that most people will recognise it, where each party buys a percentage of the other, and the Principal Shareholders of each company enter into a Partnership to run the combined business, does still happen, and we were recently involved in a three-way merger in the construction industry. Even then however, with that particular deal, there were still complex negotiations, formulas and arrangements with respect to keeping and retrieving clients in the event that the merger did not work, and each of the three venturers had different segments of the same market. The voting rights, casting votes and rights of veto for different types of decisions were also complex between the three parties. Nonetheless, it can be done and profitably.
Complimentary Businesses
One thing we are seeing more often in the marketplace, is a merger between businesses that do not compete, but are more vertically aligned.
We recently saw this in the solar industry with a group of Companies each taking a stake in the other. The first was an importer and wholesaler, the second a call centre and sales organisation, and the third a specialist retailer and installer. The three Principals took strategic stakes in each other's Companies (not equal Partnership), and, with the benefit of cross-supply agreements, each reaped the benefits of increased and stable sales, at better net margins. The principal issue there was, ensuring that the trading agreements between the three companies worked properly and that the parties could untangle themselves if required.
Co-operative Arrangements
Another structure emerging in these difficult times amounts to, at its most basic, sharing of resources across Companies. It might be as simple as sharing IT resources, or a formal arrangement for sales staff to sell the products of both Companies (recently seen in the the IT industry were sales people from organisations which have the same target market, regularly sell the products of two or more companies). There is then a formula for recognition and reward to the party that made the sale.
Important Points to Remember
1. Be clear about what you want. It is essential that both parties articulate clearly how they believe the process will work, and the benefits expected. The arrangement, whatever the structure, will very quickly unravel if the parties have different expectations of each other, and of the arrangement.
2. Documentation. The arrangement, even if it is a simple co-operative selling arrangement, needs to be documented. The initial material may never need to be used or looked at, if the arrangement works, but it must still be there in the event that there is either a disagreement, or that the arrangement needs to be unravelled.
3. The Effect of Culture. If the organisations are to merge completely, there might be all sorts of benefits:-
Economies of scale, pooled resources, streamlines staff and stock, more efficiency, larger client base, better product reach.
None of these things will make any difference if the two groups of people are not successfully brought together. The merger of two large Australian Banks in the early 1980's, is clear evidence of this, with senior staff for the balance of their careers describing themselves as one or the other. The cultural divide was never bridged and productivity was hampered as a result.
If the arrangement is to be a true merger, a very clear plan, not just for the logistical issues, but for how to bring the people together, is absolutely vital. More than that, a realistic assessment of whether this is likely, and if not, the effect upon the key non-owner-stakeholders, needs to be made.
1 plus 1 does not always equal 2.5, and can often equate less than 2.
Both parties need to identify key stakeholders in the management and at an operational level, who will need to be "on board", with the concept. There will quite often be very clear two-way contests for the one job remaining after the merger. This will be unpopular with those in the tribe whose candidate misses out. This is the fastest way for the mew post-merger atmosphere to become toxic. Having said that, it makes no sense to put the two businesses together and not achieve any economy.
A clear post-merger landscape and wall chart, is the first step.
Obviously, important details such as equipment, premises, software, procedures and logistics need to be looked at.
An Exit Strategy
Where two or more businesses that are essentially owned and/or driven by one person are brought together, the issues of decision-making , voting rights, and exit strategy, need to be discussed, documented and dealt with.
Voting rights
Which party has how much say on what issues, will be the most contentious of all the issues needing to be resolved. The most obvious to determine is the shareholding of the parties, which should be based upon capital injected (whether by value of the Companies being merged, or other contribution), this will, almost always, determine the voting rights of the parties.
We do see other formulas however, such as:-
(a) Casting votes on particular issues. Particularly where the mergers are complimentary rather than direct competitors, we do sometimes see the Principals hold the casting vote in their area (geographically or by product), so that the other venture party will, in certain circumstances, in that area, defer to the greater expertise of a casting vote holder, in the event of a deadlock.
(b) Voting rights can also be segmented by issue (equipment purchase or new product lines for example), or by financial risk or size of investment.
In each of there identified circumstances, the parties might have to agree unanimously, or special voting rights and casting votes, or rights of veto, might apply.
Exit plan
It would be extraordinary for a full merger to take a place in circumstances where both the Principals are at exactly the same stage of life, with exactly the same exit plans.
If there is a significant disparity between the stage of life of the Principals, then this needs to be resolved.
Regardless of this issue, it is absolutely critical that a trauma event plan, including a Put and Call Option in the event of death or major trauma, with insurance to create funding, be put in place between the parties and be resolved as a condition of completion, during the planning discussions.
Less Permanent Arrangements
It may not be necessary to go to the complete extent of doing a full merger. It may be that a strategic cross-shareholding (exceedingly common culturally between Japanese Companies), or even a simple but clearer co-operative arrangement, will yield more leads and more sales.
There is a certain amount of trust required between the parties, but trust is created and built by clear and open discussions.
Confidentiality
A certain amount of general discussion can be had about "how things might work", but at some stage you are going to reach the point where sensitive information will be exchanged. Again, it is unusual for both parties to be bearing exactly the same amount of risk. There will usually be a range of risks and one party will be more vulnerable than the other. Regardless, the perceived vulnerability is subjective.
A very clear and complete Confidentiality Agreement is essential, if you reach this stage.
Conclusion
Difficult times breed innovative solutions, and businesses that can identify, implement and fully execute new ideas, will often benefit well into the good times that return. Dedicating some time to identify would-be partners and exploring the synergies, is always a worthwhile strategy, but should be treated with care and a structured approach.
In difficult and uncertain times, business owners are always on the lookout for alternative strategies to future-proof profitability.
It is in tough times that new strategies emerge.
Of late, we have seen businesses exploring and considering new structures and alliances which could broadly be considered "mergers", with similar businesses.
Structures do not necessarily extend all the way to a full-blown 50/50 partnership with a direct competitor. There are subtle but significant variations on this theme.
In fact, the full equal partnership of two identical competitors is probably the most rare of the possibilities.
Alternatives being seen in the marketplace are:-
(a) A sale which looks like or is called a merger;
(b) Merger of complimentary businesses;
(c) Co-operative arrangements.
A Sale which looks like or is called a merger
We hear of mergers everyday, but the reality is that many of them are actually business sales barely disguised as mergers. One business will buy another, the Principal of the selling business will remain as a Consultant for a time, and then depart. This is not a merger.
Merger/ Partnership
A merger in the sense that most people will recognise it, where each party buys a percentage of the other, and the Principal Shareholders of each company enter into a Partnership to run the combined business, does still happen, and we were recently involved in a three-way merger in the construction industry. Even then however, with that particular deal, there were still complex negotiations, formulas and arrangements with respect to keeping and retrieving clients in the event that the merger did not work, and each of the three venturers had different segments of the same market. The voting rights, casting votes and rights of veto for different types of decisions were also complex between the three parties. Nonetheless, it can be done and profitably.
Complimentary Businesses
One thing we are seeing more often in the marketplace, is a merger between businesses that do not compete, but are more vertically aligned.
We recently saw this in the solar industry with a group of Companies each taking a stake in the other. The first was an importer and wholesaler, the second a call centre and sales organisation, and the third a specialist retailer and installer. The three Principals took strategic stakes in each other's Companies (not equal Partnership), and, with the benefit of cross-supply agreements, each reaped the benefits of increased and stable sales, at better net margins. The principal issue there was, ensuring that the trading agreements between the three companies worked properly and that the parties could untangle themselves if required.
Co-operative Arrangements
Another structure emerging in these difficult times amounts to, at its most basic, sharing of resources across Companies. It might be as simple as sharing IT resources, or a formal arrangement for sales staff to sell the products of both Companies (recently seen in the the IT industry were sales people from organisations which have the same target market, regularly sell the products of two or more companies). There is then a formula for recognition and reward to the party that made the sale.
Important Points to Remember
1. Be clear about what you want. It is essential that both parties articulate clearly how they believe the process will work, and the benefits expected. The arrangement, whatever the structure, will very quickly unravel if the parties have different expectations of each other, and of the arrangement.
2. Documentation. The arrangement, even if it is a simple co-operative selling arrangement, needs to be documented. The initial material may never need to be used or looked at, if the arrangement works, but it must still be there in the event that there is either a disagreement, or that the arrangement needs to be unravelled.
3. The Effect of Culture. If the organisations are to merge completely, there might be all sorts of benefits:-
Economies of scale, pooled resources, streamlines staff and stock, more efficiency, larger client base, better product reach.
None of these things will make any difference if the two groups of people are not successfully brought together. The merger of two large Australian Banks in the early 1980's, is clear evidence of this, with senior staff for the balance of their careers describing themselves as one or the other. The cultural divide was never bridged and productivity was hampered as a result.
If the arrangement is to be a true merger, a very clear plan, not just for the logistical issues, but for how to bring the people together, is absolutely vital. More than that, a realistic assessment of whether this is likely, and if not, the effect upon the key non-owner-stakeholders, needs to be made.
1 plus 1 does not always equal 2.5, and can often equate less than 2.
Both parties need to identify key stakeholders in the management and at an operational level, who will need to be "on board", with the concept. There will quite often be very clear two-way contests for the one job remaining after the merger. This will be unpopular with those in the tribe whose candidate misses out. This is the fastest way for the mew post-merger atmosphere to become toxic. Having said that, it makes no sense to put the two businesses together and not achieve any economy.
A clear post-merger landscape and wall chart, is the first step.
Obviously, important details such as equipment, premises, software, procedures and logistics need to be looked at.
An Exit Strategy
Where two or more businesses that are essentially owned and/or driven by one person are brought together, the issues of decision-making , voting rights, and exit strategy, need to be discussed, documented and dealt with.
Voting rights
Which party has how much say on what issues, will be the most contentious of all the issues needing to be resolved. The most obvious to determine is the shareholding of the parties, which should be based upon capital injected (whether by value of the Companies being merged, or other contribution), this will, almost always, determine the voting rights of the parties.
We do see other formulas however, such as:-
(a) Casting votes on particular issues. Particularly where the mergers are complimentary rather than direct competitors, we do sometimes see the Principals hold the casting vote in their area (geographically or by product), so that the other venture party will, in certain circumstances, in that area, defer to the greater expertise of a casting vote holder, in the event of a deadlock.
(b) Voting rights can also be segmented by issue (equipment purchase or new product lines for example), or by financial risk or size of investment.
In each of there identified circumstances, the parties might have to agree unanimously, or special voting rights and casting votes, or rights of veto, might apply.
Exit plan
It would be extraordinary for a full merger to take a place in circumstances where both the Principals are at exactly the same stage of life, with exactly the same exit plans.
If there is a significant disparity between the stage of life of the Principals, then this needs to be resolved.
Regardless of this issue, it is absolutely critical that a trauma event plan, including a Put and Call Option in the event of death or major trauma, with insurance to create funding, be put in place between the parties and be resolved as a condition of completion, during the planning discussions.
Less Permanent Arrangements
It may not be necessary to go to the complete extent of doing a full merger. It may be that a strategic cross-shareholding (exceedingly common culturally between Japanese Companies), or even a simple but clearer co-operative arrangement, will yield more leads and more sales.
There is a certain amount of trust required between the parties, but trust is created and built by clear and open discussions.
Confidentiality
A certain amount of general discussion can be had about "how things might work", but at some stage you are going to reach the point where sensitive information will be exchanged. Again, it is unusual for both parties to be bearing exactly the same amount of risk. There will usually be a range of risks and one party will be more vulnerable than the other. Regardless, the perceived vulnerability is subjective.
A very clear and complete Confidentiality Agreement is essential, if you reach this stage.
Conclusion
Difficult times breed innovative solutions, and businesses that can identify, implement and fully execute new ideas, will often benefit well into the good times that return. Dedicating some time to identify would-be partners and exploring the synergies, is always a worthwhile strategy, but should be treated with care and a structured approach.
Tuesday, 11 October 2011
Selling your Business- Contract Negotiation Process
Once you have received a signed offer (hopefully in the format of a signed contract), it is time to look at the terms upon which the buyer wants to take over the business.
This is perhaps the most critical moment of the entire process of selling your business.
An oversight, failure to understand, or miscalculation, at this stage, could either end the process, sending you back to the start, or could sentence you to having to complete the contract, and sell your business, on terms which ruin your future.
It is essential that you:-
1. take the time to read and carefully understand the contract that has been presented to you;
2. engage a competent adviser;
3. decide on your strategy for a response;
4. not be rushed;
5. respond in a way which is most likely to get you to your goal.
The first thing when reading the contract is to check that it is actually completed properly. Is it fully signed? Have all of the variables and blanks been completed? Who is the buyer? Is it a company? If it is a company or a corporate trust, has the director/s guarantee section been completed? Do you have enough guarantors? It is very common these days for a buyer's structure to be set up so that the guarantor provided has no assets, and the spouse has everything. You may want a guarantee from the spouse, despite the fact that she or he is not a director or trustee.
What is the position with purchase price and deposit? Are they somewhere near enough? People often ignore the deposit but it should be sufficient that it is a deterrent to prevent the buyer from walking away at such a critical point.
What is the position with the stock? Is the contract "walk in, walk out" (inclusive of stock)? Or is it a "plus stock contract, with a figure set up as a minimum stock figure, which the purchaser has to buy on top of the purchase price?
If it is "walk in, walk out", although you have an obligation to run the business in its ordinary manner before settlement, it is open to you to run the stock down to a certain degree and take that profit prior to completion. You will still need sufficient stock to operate, but there is no need to maintain a minimum stock level. If the minimum stock level is specified, is it reasonable? Will you have to maintain or increase stock levels leading up to settlement? Will you have "junk stock" leftover which is beyond the stock level specified in the contract, of which you will have to dispose?
What is the position of the staff? This is often highly contentious. The buyer will want to make contact with the key staff members, and ensure that they are remaining, and will want to start to make decisions about which staff to keep and which to jettison. You, on the other hand, will not want the buyer going anywhere near your staff until the contract is completely unconditional. This has to be clarified and managed in the contract.
If your business is particularly sensitive to the loss of key staff, it should be specified that:-
1. the buyer is to have no contact with staff until the contract is unconditional;
2. the contract may be extended for a short period of time for it to become unconditional.
Generally, the last condition to be met is the consent of the landlord. Though it is often the easiest, it is usually done slowly and badly by landlords and their solicitors because it is of no interest to them and there is no consequence for their tardiness.
The contract will be subject to getting this consent (or a new lease).
The buyer does not want to release this condition, and then find out that the landlord will not consent, or wants new, more difficult conditions to apply.
There is therefore a conflict between best outcomes for buyer and sellers.
Employee entitlements
The standard conditions deal with the treatment of employee entitlements, and processes vary from State to State.
Generally speaking, as a matter of technical mechanics, all staff have their employment terminated on the settlement date, and are re-employed (or not) from the first day of new trading.
This poses some problems:-
(a) Wrongful dismissal/ redundancy;
(b) Partially accumulated long service leave.
Wrongful dismissal/ redundancy
You are the seller have the current employment relationship with each staff member. If you terminate that relationship, whether by agreement with the buyer, or otherwise, there is nothing in present workplace law that allows you to do so just simply because you are selling the business. Having said that, there is very rarely any issue with the departure of unwanted employees.
This is not an explicit exception to your present obligation which limits the circumstances in which you could terminate an employment agreement.
The practical circumstance is that this happens every day, and employees accept that on a sale of business that they may no longer be needed.
I have yet to see a wrongful dismissal action brought by somebody whose position is terminated as a result of a business being sold. It is technically open, however.
What is needed is a clear line defining and differentiating your obligations and those of the buyer, particularly if the employee demands reinstatement or a redundancy payment.
It is more technically correct to say that an employee is being made redundant (though it is not in your interests to use this terminology).
The fact is, with the buyer's new proposed roster and structure, the buyer is saying that there is no place for this employee. The question then becomes "what are the employee's entitlements, and who pays them"?
Again, obligations are governed by the individual contract which you signed, and workplace law obligations.
There is a natural obligation, which normally falls upon you, to pay accumulated leave entitlements.
Presently, the practice (as opposed to the legal obligation) is not to pay any other entitlement to a departing employee.
The message is:-
1. read the contract terms and check the impact of these payments on your cashflow and sale proceeds;
2. speak to your adviser about how this works in practice.
This is perhaps the most critical moment of the entire process of selling your business.
An oversight, failure to understand, or miscalculation, at this stage, could either end the process, sending you back to the start, or could sentence you to having to complete the contract, and sell your business, on terms which ruin your future.
It is essential that you:-
1. take the time to read and carefully understand the contract that has been presented to you;
2. engage a competent adviser;
3. decide on your strategy for a response;
4. not be rushed;
5. respond in a way which is most likely to get you to your goal.
The first thing when reading the contract is to check that it is actually completed properly. Is it fully signed? Have all of the variables and blanks been completed? Who is the buyer? Is it a company? If it is a company or a corporate trust, has the director/s guarantee section been completed? Do you have enough guarantors? It is very common these days for a buyer's structure to be set up so that the guarantor provided has no assets, and the spouse has everything. You may want a guarantee from the spouse, despite the fact that she or he is not a director or trustee.
What is the position with purchase price and deposit? Are they somewhere near enough? People often ignore the deposit but it should be sufficient that it is a deterrent to prevent the buyer from walking away at such a critical point.
What is the position with the stock? Is the contract "walk in, walk out" (inclusive of stock)? Or is it a "plus stock contract, with a figure set up as a minimum stock figure, which the purchaser has to buy on top of the purchase price?
If it is "walk in, walk out", although you have an obligation to run the business in its ordinary manner before settlement, it is open to you to run the stock down to a certain degree and take that profit prior to completion. You will still need sufficient stock to operate, but there is no need to maintain a minimum stock level. If the minimum stock level is specified, is it reasonable? Will you have to maintain or increase stock levels leading up to settlement? Will you have "junk stock" leftover which is beyond the stock level specified in the contract, of which you will have to dispose?
What is the position of the staff? This is often highly contentious. The buyer will want to make contact with the key staff members, and ensure that they are remaining, and will want to start to make decisions about which staff to keep and which to jettison. You, on the other hand, will not want the buyer going anywhere near your staff until the contract is completely unconditional. This has to be clarified and managed in the contract.
If your business is particularly sensitive to the loss of key staff, it should be specified that:-
1. the buyer is to have no contact with staff until the contract is unconditional;
2. the contract may be extended for a short period of time for it to become unconditional.
Generally, the last condition to be met is the consent of the landlord. Though it is often the easiest, it is usually done slowly and badly by landlords and their solicitors because it is of no interest to them and there is no consequence for their tardiness.
The contract will be subject to getting this consent (or a new lease).
The buyer does not want to release this condition, and then find out that the landlord will not consent, or wants new, more difficult conditions to apply.
There is therefore a conflict between best outcomes for buyer and sellers.
Employee entitlements
The standard conditions deal with the treatment of employee entitlements, and processes vary from State to State.
Generally speaking, as a matter of technical mechanics, all staff have their employment terminated on the settlement date, and are re-employed (or not) from the first day of new trading.
This poses some problems:-
(a) Wrongful dismissal/ redundancy;
(b) Partially accumulated long service leave.
Wrongful dismissal/ redundancy
You are the seller have the current employment relationship with each staff member. If you terminate that relationship, whether by agreement with the buyer, or otherwise, there is nothing in present workplace law that allows you to do so just simply because you are selling the business. Having said that, there is very rarely any issue with the departure of unwanted employees.
This is not an explicit exception to your present obligation which limits the circumstances in which you could terminate an employment agreement.
The practical circumstance is that this happens every day, and employees accept that on a sale of business that they may no longer be needed.
I have yet to see a wrongful dismissal action brought by somebody whose position is terminated as a result of a business being sold. It is technically open, however.
What is needed is a clear line defining and differentiating your obligations and those of the buyer, particularly if the employee demands reinstatement or a redundancy payment.
It is more technically correct to say that an employee is being made redundant (though it is not in your interests to use this terminology).
The fact is, with the buyer's new proposed roster and structure, the buyer is saying that there is no place for this employee. The question then becomes "what are the employee's entitlements, and who pays them"?
Again, obligations are governed by the individual contract which you signed, and workplace law obligations.
There is a natural obligation, which normally falls upon you, to pay accumulated leave entitlements.
Presently, the practice (as opposed to the legal obligation) is not to pay any other entitlement to a departing employee.
The message is:-
1. read the contract terms and check the impact of these payments on your cashflow and sale proceeds;
2. speak to your adviser about how this works in practice.
Sunday, 2 October 2011
Business Sale Contract Negotiation
This section of the sale process is perhaps the most complex and variable of them all.
Some buyers will want to negotiate verbally, or by exchange of correspondence. Some will start that way and then progress to a written contract, which may be altered and exchanged several times.
By far the best process from the seller's point of view is the production of a signed contract with a deposit cheque attached to the front of it. Nothing indicates that a buyer is serious more clearly than a signed contract.
Your ability to demand a signed contract will depend upon the strength of your position in the negotiations.
It is important to strike a balance when presenting your attitude to the transaction, between appearing needy or even desperate, and at the other end of the spectrum, being so disinterested or difficult that the buyer does not take the transaction seriously.
Nonetheless, it is important to attempt to progress the negotiation on a contract as soon as possible.
Once you have a draft contract you have a clear indication of the issues that are important to the buyer.
Your broker should already have provided the buyer with a clear indication of your preferences and priorities, so far as the variables of the purchase are concerned (Price, stock, timing, staff, equipment, leases etc).
Who draws the Contract?
This is also up for discussion.
Many people believe that money can be saved by making the buyer produce the contract. The benefit is that, sometimes, a little money can be saved in not engaging a lawyer to draft the contract. The downside is that you lose the ability to seize the agenda, and dictate the parameters for the initial negotiations.
Seizing the agenda by having your solicitor prepare the contract costs a little more, but allows you to set boundaries and priorities of the discussion according to your own needs. The buyer will then have to either accept these parameters, or raise an early objection, allowing negotiation on those specific points.
A third option, given that you will be likely paying a significant brokerage fee to the broker, is to have the broker draft the contract, according to your directions. This is one of the few situations where, seemingly, people other than lawyers present themselves as competent to prepare legal documents and provide legal advice.
Drafting of the contract is often presented as "just filling out the form". Particularly with a business contract, it is very far from that.
It is true that the Real Estate Institution (REI) for your state, the real estates agent's union, often produces a "standard" contract which can be used as a template for the sale of a business. It is also true that, so far as it goes, the template is an acceptably good base point for drafting a contract. The REI contract is the most common document used for the sale of a business.
The contract specifies a number of blank variables in an items schedule for special conditions and variations to standard conditions.
Standard conditions can often be a trap for the unwary. Brokers point to these conditions (conscious that they really want a signed contract), and say words to the effect of "oh they're just the standard terms".
Just because they are standard terms, does not mean they are not dangerous, and will need to be looked at and perhaps varied.
One example is that there is often a dispute regarding consent from a landlord to assign the lease. The standard terms make the contract subject to obtaining consent from the landlord to the assignments. Unfortunately, and very surreptitiously, the contract also states that if the buyer commences pre-settlement training and orientation, then that subject to clause is lost.
It is exceptionally common for formal consent to the assignment to be uncompleted in the days before settlement. This leads to a dispute, intense negotiation, and additional cost for both of the parties, at a critical time, when the buyer and sellers are focused on other things, because the standard conditions create a conflict.
The most common situation with contract preparation is that the broker will prepare a draft contract, using the standard local real estate institute contract as a template, according to your directions, and have it available for the buyer to use when the buyer wants to make an offer.
If you intend to proceed on this basis, ensure that this draft is given to your solicitor to check before it is made available to the buyer.
There may well be important legal issues related to your particular business which will force changes to the contract. It is not safe to leave the identification and drafting regarding these issues to the broker.
In many cases, by the times a contract has been in the hands of the buyer, it is quite difficult to insert new issues and variations into the contract.
The Buyer's first offer
The first offer may be verbal, and may even be face-to-face, or conveyed by the broker to you.
Though there is no 'right and wrong' of negotiation, and whilst there is no 'breach of the law' in conducting negotiations verbally, there is significant scope for misunderstanding and dispute in verbal negotiations.
Allowing the buyer to engage in a lengthy verbal negotiation raises the possibility of a later allegation that something said between the parties formed a fundamental term of the deal, the absence of which is fatal to its completion.
The safest practice when negotiating the purchase or sale of a business or property is to, as soon as possible, ask the buyer to put it in writing.
Even a proposal in writing, that is not in the form of a formal signed contract, is a step forward from a verbal negotiation.
Likewise, however, an exchange of emails or correspondence creates some possibility for a dispute.
When does a Contract exist?
It is quite common for parties to fall into dispute, even before a formal signed document headed "Contract of Purchase" is completed.
Quite often, one party or the other will claim that a contract already exists, by virtue of the exchange of correspondence between the parties.
As a matter of law, it is possible for the parties to become committed to a contract without signing a formal contract document.
The law only requires an offer from one party (buyer or seller), acceptance of that offer by the other, and a promise to pay.
If these items are present in a chain of correspondence, then there is an argument that a contract exists.The question then is- does this chain of contract have sufficient details (price, description of the business and items to be sold, completion date etc) to be capable of being interpreted as a contract? The next question is- what do the parties intend and were they ad id ems( of the same mind)?
Usually one party will argue that wither this was simply a chain of negotiations, or alternatively that it was the intention of the parties, once a broad agreement had been reached as to the essential terms, to proceed to a formal contract, and that if anything, the chain of contract was simply an "agreement to agree".
For this reason, a signed contract is far preferable.
Some buyers will want to negotiate verbally, or by exchange of correspondence. Some will start that way and then progress to a written contract, which may be altered and exchanged several times.
By far the best process from the seller's point of view is the production of a signed contract with a deposit cheque attached to the front of it. Nothing indicates that a buyer is serious more clearly than a signed contract.
Your ability to demand a signed contract will depend upon the strength of your position in the negotiations.
It is important to strike a balance when presenting your attitude to the transaction, between appearing needy or even desperate, and at the other end of the spectrum, being so disinterested or difficult that the buyer does not take the transaction seriously.
Nonetheless, it is important to attempt to progress the negotiation on a contract as soon as possible.
Once you have a draft contract you have a clear indication of the issues that are important to the buyer.
Your broker should already have provided the buyer with a clear indication of your preferences and priorities, so far as the variables of the purchase are concerned (Price, stock, timing, staff, equipment, leases etc).
Who draws the Contract?
This is also up for discussion.
Many people believe that money can be saved by making the buyer produce the contract. The benefit is that, sometimes, a little money can be saved in not engaging a lawyer to draft the contract. The downside is that you lose the ability to seize the agenda, and dictate the parameters for the initial negotiations.
Seizing the agenda by having your solicitor prepare the contract costs a little more, but allows you to set boundaries and priorities of the discussion according to your own needs. The buyer will then have to either accept these parameters, or raise an early objection, allowing negotiation on those specific points.
A third option, given that you will be likely paying a significant brokerage fee to the broker, is to have the broker draft the contract, according to your directions. This is one of the few situations where, seemingly, people other than lawyers present themselves as competent to prepare legal documents and provide legal advice.
Drafting of the contract is often presented as "just filling out the form". Particularly with a business contract, it is very far from that.
It is true that the Real Estate Institution (REI) for your state, the real estates agent's union, often produces a "standard" contract which can be used as a template for the sale of a business. It is also true that, so far as it goes, the template is an acceptably good base point for drafting a contract. The REI contract is the most common document used for the sale of a business.
The contract specifies a number of blank variables in an items schedule for special conditions and variations to standard conditions.
Standard conditions can often be a trap for the unwary. Brokers point to these conditions (conscious that they really want a signed contract), and say words to the effect of "oh they're just the standard terms".
Just because they are standard terms, does not mean they are not dangerous, and will need to be looked at and perhaps varied.
One example is that there is often a dispute regarding consent from a landlord to assign the lease. The standard terms make the contract subject to obtaining consent from the landlord to the assignments. Unfortunately, and very surreptitiously, the contract also states that if the buyer commences pre-settlement training and orientation, then that subject to clause is lost.
It is exceptionally common for formal consent to the assignment to be uncompleted in the days before settlement. This leads to a dispute, intense negotiation, and additional cost for both of the parties, at a critical time, when the buyer and sellers are focused on other things, because the standard conditions create a conflict.
The most common situation with contract preparation is that the broker will prepare a draft contract, using the standard local real estate institute contract as a template, according to your directions, and have it available for the buyer to use when the buyer wants to make an offer.
If you intend to proceed on this basis, ensure that this draft is given to your solicitor to check before it is made available to the buyer.
There may well be important legal issues related to your particular business which will force changes to the contract. It is not safe to leave the identification and drafting regarding these issues to the broker.
In many cases, by the times a contract has been in the hands of the buyer, it is quite difficult to insert new issues and variations into the contract.
The Buyer's first offer
The first offer may be verbal, and may even be face-to-face, or conveyed by the broker to you.
Though there is no 'right and wrong' of negotiation, and whilst there is no 'breach of the law' in conducting negotiations verbally, there is significant scope for misunderstanding and dispute in verbal negotiations.
Allowing the buyer to engage in a lengthy verbal negotiation raises the possibility of a later allegation that something said between the parties formed a fundamental term of the deal, the absence of which is fatal to its completion.
The safest practice when negotiating the purchase or sale of a business or property is to, as soon as possible, ask the buyer to put it in writing.
Even a proposal in writing, that is not in the form of a formal signed contract, is a step forward from a verbal negotiation.
Likewise, however, an exchange of emails or correspondence creates some possibility for a dispute.
When does a Contract exist?
It is quite common for parties to fall into dispute, even before a formal signed document headed "Contract of Purchase" is completed.
Quite often, one party or the other will claim that a contract already exists, by virtue of the exchange of correspondence between the parties.
As a matter of law, it is possible for the parties to become committed to a contract without signing a formal contract document.
The law only requires an offer from one party (buyer or seller), acceptance of that offer by the other, and a promise to pay.
If these items are present in a chain of correspondence, then there is an argument that a contract exists.The question then is- does this chain of contract have sufficient details (price, description of the business and items to be sold, completion date etc) to be capable of being interpreted as a contract? The next question is- what do the parties intend and were they ad id ems( of the same mind)?
Usually one party will argue that wither this was simply a chain of negotiations, or alternatively that it was the intention of the parties, once a broad agreement had been reached as to the essential terms, to proceed to a formal contract, and that if anything, the chain of contract was simply an "agreement to agree".
For this reason, a signed contract is far preferable.
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