CONTRACT NEGOTIATION – TACTICS & STRATEGY

Your approach to the contract negotiation process will depend upon a range of variables, some of which will be beyond your control.

The most obvious example of this is the attitude of the buyer who may employ a range of different approaches, and will have priorities and processes which will probably only be partially known to you.

Obviously, the buyer’s attitude approach and priorities, will have a major effect on how the negotiation proceeds, how far it gets, which contract variables are altered or conceded, and ultimately whether you get a deal at all.

There are several important things to remember when stepping into this process:-

1. BEGIN WITH THE END IN MIND

As the seller, by setting the initial parameters for negotiation, you have some control over where the process begins.  Your broker (if you have chosen the broker well), should have been conditioning the buyer, and attempting to set expectations, throughout the purchase introduction process.  The broker (and you if there have been face to face negotiations), should have given a fairly clear indication of the variables in the contract which are important and/or non negotiable.  Having said that, most things are negotiable to some degree. Your initial approach and parameters, should be set up to allow some room for negotiation by the buyer, and give a reasonable expectation to the buyer of what you will and won’t accept, whilst at the same time being somewhere near reasonable.

You and your broker should have discussed this, and have a strategy in place.

2. DECIDE WHAT’S IMPORTANT

It is exceedingly rare for the buyer of anything, let alone a business, to step up and immediately agree to every variable of the deal.  It is important for you to decide which variables are important and which ones are not.

There are essentially three categories and variables for you to consider:-

1. Central and not negotiable
2. Central and negotiable
3. Throwaways

a.         Central and not negotiable

Examples of this category might be an absolute requirement for a guarantee from a purchase of company, or the requirement for the buyer to obtain a new Lease rather than an assignment of the existing Lease. The purchase of a business with the assignment of an existing Lease renders you liable for rent to the landlord, for the balance of the rental term.   If this is a significant amount and you have concerns about this ongoing liability, a requirement for a new Lease will rid you of this liability.  Likewise, where you have a purchaser that is a company, and you are uncertain as to its asset base or solvency, a guarantee from the directors (and, these days, the spouse(s) of the director(s)), is really quite essential.

b.         Central but negotiable

The purchase price is the most obvious example of this situation.  The amount you receive as the sum of your business, it’s critical for your future, but you can certainly expect the buyer to want to reduce the price.  It is quite common for contracts to be received which have several prices crossed out, one after the other, before a final figure was reached.

c.         Throwaways

A good example of this is the restraint clause.

The buyer might well be extremely keen to see you out of the industry for a significant period of time.  If you are leaving the industry entirely, and have no plans to return, this is something you might throw away, in exchange for, for example, keeping the purchase price higher.  All this will need to be negotiated during the contract completion phase.

3. The role of the broker

The broker will earn significant permission on the sale of your business. The brokers role is to find and introduce a buyer who is ready willing and able to complete.

The broker should also be assisting you with:-

1. Conditioning the buyer to the important parameters of the deal, upon which you will not compromise;
2. Relaying important information to you about the buyer’s priorities and attitudes;
3. Manoeuvring the buyer towards a contract which best suits you.

Many people, buyers particularly, make the mistake of assuming or believing that the broker is an unbiased mediator between the parties.  This is untrue.

The broker quite literally and legitimately, is your agent, and, if he or she wants a commission, must act in you interests to get a contract together.

The other side of this coin however, is that the broker cannot act in a false or misleading way.  The broker is your agent and you will be responsible for any improper conduct undertaken on your behalf.  It is not a sustainable approach from either you or the agent, to attempt to hoodwink the buyer into buying a business, as, at some stage either before or after settlement, the true facts will come to light and you will be held accountable for the acts of your agent.

Having said all of this, an enthusiastic and skilled broker can create appropriate deals where each party “wins”, where, in many other circumstances, a deal will not materialise.

The broker is also a worthwhile circuit breaker between you and the buyer.  It is very often extremely worthwhile to be able to deliver information through a third party, and avoid directly having to answer questions on the spot.  Having the broker relay information, allows the possibility of time for thinking, and ensures the provision of appropriate information.

The broker is also (or should be), a skilled negotiator, focused solely on the sale deal.  Remember, in these circumstances, you will still have the business to run, and this must remain a focus.

4. NEGOTIATION STYLES

The character, personality and approach of the buyer is a major variable in the contract negotiation process.

There is a large number of types of approach and list below is by no means exhaustive.

Some of the styles of negotiation which are often seen are as follows:-

1)     Direct clear and simple

2)     “Soviet style”

3)     “Chinese Style”

4)     Pushy

5)     Round and round

1)         Simple Clear and Direct

This is the buyer who displays a “what you see is what you get” approach.  The buyer presents a contract with variables that are somewhere within the bounds of what you consider to be a deal, and is willing to respond to a counter offer that you might make.  Responses to your proposals are returned in a timely way and the negotiation proceeds at a reasonable pace.  These are the easiest buyers to deal with.

2)         Soviet Style

Soviet style negotiation (named for the cold war negotiating style brought to prominence in 60’s and 70’s), opens with assumingly impossibly low offer and then proceeds at snails pace with tiny concessions away form that original position.

An example of this approach would be that if you have indicated a purchase price of, say, 20 with an expectation that you might settle it around 16 or 17, the Soviet style negotiator’s first offer will be 4, and might then proceed very slowly to 5 or 6.

In the face of an extremely low offer, particularly initially, the best options are:-

a)     withdraw from the negotiations and brand the offer ridiculous;

b)     Refuse to make a counter offer until the serious proposal is put forward

c)      Feign insult and go silent.

3)         Chinese Style

This style of negotiation, much applied in South East Asia, involves running a negotiation over long time frames.  Each issue dealt with one by one, and, similar to Soviet Style, concessions are small and well spaced apart.  This style of negotiator is looking for somebody who is impatient or desperate, and will attempt to make a “big concession” to bring the matter to a close.  Patience is the key with this style of negotiation and you must walk the line between keeping the matter going at a reasonable speed, and, at the other extreme, appearing needy or anxious.

The best response to this style of approach is to attempt to meet the size of the concessions being made, with the size of your own concessions, and try to be patient.  Making large concessions to attempt to prompt similar large concessions from the buyer, will not work with this type of buyer.  This may be frustrating but trying to force the pace will be interpreted as desperation, and you may well end up with deal parameters well below your expectations.

4)         Silent approach –

Some buyers will make an offer and then go silent

Transfer Documents

There's a small suite of documents and a clutch of processes that go with them, designed to transfer to the buyer the tangible and registrable assets that make up the business. In most cases it is the buyer's responsibility to create the documents that create these transfers, and you simply need to sign and return them.

You need to be aware however of the process.

Lease
In  some jurisdictions the Lease Transfer is made up of two documents; the Assignment of Lease itself, and a Deed of Covenant.

The Lease Assignment document (it may be called the Transfer or a Deed of Assignment depending upon the type of lease you hold), will be prepared by the buyer and sent to you to sign and return. That document effectively transfers any rights that you have in the Lease. You should not return it unless you receive a written undertaking from the solicitor to the buyer, that the document is not to be used pending settlement. If you do not receive this Undertaking, do not return the document. Do not accept this Undertaking from the buyer itself. An Undertaking from the solicitor is an enforceable undertaking able to be pursued both through the Courts and through the Solicitor's disciplinary body. An Undertaking from the buyer itself is worthless.

The Deed of Covenant is a document designed to create a direct link between the buyer and your landlord. It enables the landlord to sue and creates what is called "Privity of Contract". This document is prepared by the landlord's solicitor at your expense and is often done very slowly, and in fact may not be ready by settlement.

You should check as soon as possible on the cost of this document, as prices vary wildly. You do not have an opportunity to shop for prices, as the landlord will choose its own solicitor for it.

Your responsibility after the Contract is signed, (obligations vary slightly from Contract to Contract so check yours), is usually simply to take all reasonable steps to obtain the consent of the landlord to the Assignment. Chasing the documentation is the buyers responsibility.

Business Name, Website, Telephone and other services
Again it is up to the buyer to produce documentation for you to sign, but if you want to avoid ongoing responsibility for electricity, telephone, Internet and other services, it is important to take a direct hand in seeing that these services are cut off from the day after the settlement. This will take them out of your name. Remember, many of these services have security deposits, which should be adjusted off your final bill or returned to you.

Local Authority and State Government Licences
Most authorities maintain that these licenses cannot be "transferred" or "assigned", and have to be applied for freshly by the buyer.

Regardless of the wording used, the buyer will be responsible for obtaining licenses in its name for the continuation of the business.

One potential catch for a seller is where the Contract makes the purchase of the business subject to obtaining all of these licenses, and gives the buyer the opportunity to back out if those licenses are not obtained. It is implicit in that situation that the buyer will have to take all reasonable steps to secure that outcome.

Regardless, it will be important for you to be on top of the status regarding each of those licences, and in direct contact with the licencing authority to ensure that this is happening.

Requisitions on Licenses
Some of these licences have a requisitions regime.

Particularly in a food preparation business, the Local Authority License process often creates a situation where the local authority will indicate that the license can be assigned but only once several requisitions have been completed.

The Contract will usually specify but this is your responsibility, but sometimes will place monetary cap on the value of requisitions which with you have to comply after which it is the buyer's responsibility to pay. If you believe that requisitions are possibly or likely you should attempt to limit the monetary value of your contribution.

How do I know if I am buying at the right price? - Franchise Advice from a Lawyer

How do I know if I am buying at the right price?

Bennett Carroll Solicitors CEO, Guy Gibbons provides free legal advice to anyone buying a franchise.

Web: http://www.bcglaw.com/

Facebook: http://www.facebook.com/pages/Bennett-Carroll-Solicitors/...

 

What questions should I ask the franchisor prior to purchasing a franchise?

Bennett Carroll Solicitors CEO, Guy Gibbons provides free advice to anyone buying a franchise.


Web: http://www.bcglaw.com/

Facebook: http://www.facebook.com/pages/Bennett-Carroll-Solicitors/196139377080162

New Federal Asbestos Legislation

If your workplace or commercial holdings were constructed prior to 31 December 2003, then the new federal asbestos laws will apply to you.

You will need a current Asbestos Register and current Management Plan to comply with legislation commencing 1 January 2012. You will also need to ensure your reviews are up to date.

If you do not have a current Asbestos Register or current Management Plan and have not had a review, Quality Building Management (QBM) can take steps to ensure you comply with legislation.

After the Contract is signed

The mechanics of the business sale process, and the timing of certain steps, can be very critical to the success of the Contract, and if done incorrectly or in the wrong order, it can cause lasting damages to your business.

Time of the Essence
Any Contract will have in it the expression, "time is of the essence". This obscure little sentence can profoundly affect the party's rights.

What it means, in effect, is that, unless the parties agree otherwise, all of the time limits specified in the Contract, are set in concrete, and failure to comply with those time limits will gain one party rights, and lose the rights of the other party.

It is essential that you diarise each of these dates (Finance, Due Diligence and completion are the most obvious ones), and understand the consequences of non-compliance.

Due Diligence
Most "standard" template Contracts do not have a Due Diligence clause. It is most often inserted as a special condition. Unfortunately, many times, the wording of this clause is composed by the broker or, worse still, by the buyer.

There are subtle variations in Due Diligence clauses. Some will simply say that the buyer is able to make various enquiries and if the buyer notifies by the Due Diligence date, that the enquiries are unsatisfactory, the buyer may terminate the Contract. Other (the ones which favour you) will deem the Due Diligence satisfactory unless you are notified otherwise by the Due Diligence date. Yet others will create a specific obligation upon you to provide material by a particular date, and the Due Diligence will not start until all of that material has been provided.

Some clauses will give you a right to terminate if you don't hear anything by the date, but the option to proceed on to completion.

The wording of these clauses is absolutely critical.

Finance
In the same way as Due Diligence, there are subtle variations in finance clauses. The main variations are, if finance is not concluded by the date:-

a) The buyer may terminate, but if nothing is done, finance is deemed to be approved;
b) The Contract is automatically over;
c) The buyer may terminate, but if nothing is done then you have the option to press on to completion;
d) The buyer may terminate but if nothing is done, then either party has the right to terminate at any time before completion.

This last clause, though not common, is the most dangerous, because it gives you an uncertainty, right up until the date of completion. The current Real Estate Institute of Queensland (the Real Estate Agent's Union), standard Residential Contract, contains just such a clause. It is designed to give the agent the best chance of securing a commission, but does nothing to help either of the parties.

Unlike a Due Diligence clause however, even if the buyer is unable to get finance, there are still obligation. You are entitled to call for evidence that the buyer has made reasonable efforts to obtain finance in the amount and from the organisation, listed in the Contract. For this reason, when it comes to inserting details of the financial institution and the amount required, into the Contract, it is in your interest to have those parameters placed as widely as possible.

The Lease
The mechanics of the Assignment of Lease will, in the same way, be contained in the Terms of the Contract. There are slight variations from contract to contract and State to State.

Most, however, place the obligation upon you to make reasonable efforts to secure consent from your landlord to the Assignment of the Lease. This is principally because you have the contractual relationship with the landlord, and is in your interest not to have the buyer directly quizzing the landlord.

Unfortunately, most landlords are disinterested in taking diligent steps to make a decision about a new tenant. Most solicitors for landlords do not care about preparing documents in a timely fashion, in order to assist you with your transaction. Consequently, it is important to get this process started as soon as possible, by approaching the landlord and asking specifically what the requirements are for consent to Assignment of the Lease.

Landlords have wildly varying requirements all the way from "Oh just send me a short summary of who they are and it will be alright", through an informal list of assets and liabilities, and perhaps a face to face meeting, all the way up to a formal multi page application, requiring the provision of certified copies of financials, and an in depth assessment of industry capability.

Whatever those requirements are, you need to obtain them and pass them onto the buyer as soon as possible. You may then have to take a hand in ensuring that the material is provided. In practice, the solicitor for the buyer will take it from there, and will chase all the material. This does not mean that you should abdicate that responsibility.

With respect to protecting your staff from the anxiety of worrying about the sale of the business, it is important that you consider the confidentiality aspects of contact with your landlord and with the buyer. If the knowledge that you have signed a Contract to sell the business is sensitive and likely to cause destabilisation (as it would be in most cases), some confidentiality obligations for all of the parties, until particular milestones have been completed, would be very worthwhile. Again, this is mostly missing from standard Template Contracts.

Most Contracts are subject to and conditional upon the Assignment of the Lease. After all, what is the buyer buying, if the buyer can't get the right to occupy the premises? Beware, however, that some Template Contracts surreptitiously compromise those rights of the parties in the REIQ Template Contract, are lost, if the buyer enters into pre-contract training. This may be to your advantage.

The message is, "make sure that you know the terms of your Contract".

Assignment on Different Terms
Some landlords presently are using the consent to assignment process to attempt to get more security and comfort from a new tenant. Traditionally, landlords have accepted Directors's Guarantees, or alternatively a Rent Guarantee (sometimes called a deposit bond). A Rent Guarantee is, in effect, a cheque for between three and six months rent, provided by your bank, which can be cashed immediately, without reference to you, in the event that you default. You pay a relatively small quarterly fee to your bank to have this facility available, and, for larger tenants where the directors are perhaps not all shareholders, it avoided the need for Directors' Guarantees. In hard times, landlords have seized upon the assignment request as an opportunity to seek both a Rent Guarantee and a Directors' Guarantee.

Landlords are also routinely now asking for guarantees from spouses, having realised that the director presented by the buyer may not have any assets at all. Many standard business Template Contracts are silent as to whether any assignment consent will do. This is another item to check in your Contract, when it is presented to you for signing.