Selling your business- Obligations After Settlement
Collection of debts
If your business has trade debtors, that is, people who owe you money, those debts will normally belong to you after settlement, unless the contract specifies otherwise. You may need some assistance from the buyer to complete this process, and you may well find that the debtors wind up paying the new business the old debts, out of habit or ignorance. A certain amount of liaison between the parties will be necessary.
Ownership of the books
Unless the shares in the company which runs the business have been transferred, the practical effect of the sale of the business is that one business has stopped, and simultaneously, another has started.
You will have ongoing obligations as a taxpayer to lodge tax returns, and to justify the content of those returns by reference to source documents (invoices and the like).
Many business owners walk out of their business after sale without keeping a copy of records that might be needed to justify the contents of previous tax returns.
Although a copy of recent records will be required by the buyer to allow ongoing trading, the buyer has no obligation with respect to previous operations. It is recommended that the seller keep the books and records, and provide a copy to the buyer. The buyer may insist upon keeping the current year's records, but you, as the seller, should ensure that you have a complete record, even if the record consists of copies of documents for the most recent trading.
Restraint
These clauses are the most common battleground between buyers and sellers, where the relationship goes sour after completion. It is essential, if you have in mind to continue in the industry in any capacity (whether as owner, manager, employee or consultant), that careful consideration be given to the wording and scope of the restraint clause that is eventually between you and the buyer.
There are several factors to consider:-
1. Your future plans;
2. The effect of those plans on the saleability and value of the business;
3. The cost and duration of any litigation which may arise from a dispute over restraint.
Generally speaking, the law says that unless specifically prevented from competing after settlement, you are free to do so.
Most contracts, however, will contain an obligation on you, after completion, not to engage a business of a similar nature, directly or indirectly, for a particular period within a period geographic area.
Given that, these days, geographical area is becoming increasingly irrelevant, some more current restraints have a specific prohibition upon contact with current staff and with any customer who has recently been in the habit of using the business.
Subtle differences in the wording of these mistakes can make an enormous difference to your entitlement and capabilities, post settlement. Generally, there are several categories of post settlement intentions by sellers:-
1. Complete departure from the industry;
2. Retirement;
3. Part-time work for the business sold;
4. Continued work in the industry, but out of the current area of the business;
5. Continued work in a direct capacity.
It is very important that, at the very least, the restraint agreement be tailored to ensure that you cannot be accused, successfully, of being in breach of that agreement.
List cases
There is a significant body of law (called the "list cases"). dealing with situations where sellers have taken resources from the business to enable them to compete with the business after settlement (usually a client list). If it can be shown that you have taken these resources, this is a very significant step towards a damages judgment against you. You should ensure that such an allegation cannot be made against you.
Attacking the restraint period
The law says that if the restraint period or area is excessive in the circumstances, then there is no restraint at all and you are free to compete.
What is excessive in the circumstances, the Courts have said, "depands upon each individual circumstance". This is rather unhelpful. The Courts have not provided any formula for determining these boundaries.
Broadly, the test seems to be to look at the dynamics of the business, the geographic spread of customers, and the likely length of time necessary for the incoming buyer to cement relationships with each of those customers.
A common argument between the parties arises where the seller indicates that the buyer "approached me". This argument may in fact be available to a seller depending upon the wording of the restraint.
It is important to ensure that this wording (even though the Courts will read the wording restrictively in your favour as the seller), is clear and simple.
Sunday, 21 August 2011
Monday, 15 August 2011
When Settlements Go Bad
When Settlements Go Bad
The mechanics of a settlement of a property or a business contract are quite complex.
Whether buyer or seller, there are some serious obligations to be met, and vital timeframes which must be respected.
Ass to these that each party will have a financier involved, and that financiers cannot be controlled or cajoled, and you have a situation which is dangerous for both parties.
Whether property or business contract, the process is broadly the same:-
Seller's Obligation
Property
The seller has an obligation (unless the contract specifically states otherwise) to provide "vacant possession". That means a property which is empty and no occupancy rights attaching to it.
The sellers also has an obligation to provide "unencumbered title", which means that the title deed is free of any notations, caveats, easements, warrants or mortgages, other than those which are specified in the contract. It is common for an easement to be registered over the property, and this must be disclosed on the contract at the time that it is signed, or the buyer has a right to walk away.
In most cases, this means arranging for your mortgage to be released at settlement. This should be (and used to be) a very simple process taking a short period of time. It is not any longer.
In the past 5-7 years, banks have consistently reduced staffing in the area that manages this work (the securities area), and this has meant that a one page release document, instead of taking 2 or 3 days, can now takes up to 4 weeks to obtain. It is essential that, as soon as you obtain a contract, you alert your bank tot he settlement date and sign whatever internal documents are required (usually called a Release Authority) at your bank to start the process of releasing your mortgage.
The seller is also to obtain readings of the "utilities", that is electricity, gas, telephone and internet. These utilities cannot be "transferred". The practice is that your account will be opened, and the service turned off, and on the same day the buyer's account will be opened, and the service switched on (usually by the same person who switched yours off!) Failure to do this might result in the buyer using your electricity or gas.
Business
In addition to all of the obligation above, the seller has an obligation to obtain consent to the assignment of the lease fron the landlord. The lease will need to be assigned from you to the buyer, and there is often a formal approval process before the landlord accepts the buyer as a suitable tenant. Lanlord's processes range from a formal application with significant documentation, and an interview, all the way down to a short discussion followed by approval. Do not underestimate the time that this might take.
Two documents are required to be prepared to achieve the assignment- a deed of assignement or transfer (depending upon whether or not the lease is registered on the title), which is prepared by the buyer's solicitor; and a deed of covenant, which is prepared by the landlord's solicitor; usually slowly and late. You, as the seller, are responsible for the cost of preparation of the deed of covenant. Some law firms charge significant amounts of money for this, and you should check the approximate cost of the commencement of the process.
The next obligation for the seller is to facilitate a stocktake. Stock is calculated in two different ways, depending on whether the contract is "walk in, walk out" or "price plus stock".
Buyer's obligations
As the buyer, it is your responsibility to provide transfer documents to transfer all of the assets, within a reasonable time before the settlement, so that they can be signed and returned, or presented at settlement.
The transfer of any property will need to be stamped, and stamp duty paid, at or before settlement.
Usually, the buyer's solicitor will seek the return of the signed transfer so that it can be stamped before settlement upon an undertaking not to use it for any purpose until the settlement occurs. If you are not using a solicitor to purchase, you may have a problem with this as the solicitors for the seller are unlikely to accept your undertaking. Formal undertakings given by solicitors disciplinary action or loss of the right to practice. For this reason, a formal undertaking by a solicitor is usually able to be relied upon.
It is essential that you have done everything that is required by your financier to enable the financier to present cheques for the purchase price at settlement. Requirements may vary from lender to lender, and although you should not have to ask "Is there anything else I have to do?", you need to be constantly asking this of your financier or broker to make sure that there are no last minute requirements.
The more obvious requirements are:-
1. Provision of material for a final approval;
2. Signing acceptance of the offer and finance;
3. Signing mortgage documents;
4. Providing certificates of insurance;
5. Making available any balance of purchase price which has not been provided by the bank.
Preparation for settlement
In the days before settlement, the date, time and place of the settlement will be formally booked. The place for settlement is usually at the bank of the seller, which is where any title deed will be. Adjustments to the purchase price (rates, land tax, deposit and other adjustments) will be calculated and agreed, and the seller will provide a cheque breakdown, that is, a list of the cheques required at settlement. Very rarely does the seller receive the entire sale price. There will often be cheques required to be paid to the seller's bank, the local authority, the Office of State Revenue for land tax, and other adjustments.
The matter is then ready for settlement.
Problems at settlement
There are several common problems that occue at or shortly before settlement:-
1. Someone is late or doesn't show up;
2. The seller's financier cannot produce a release of mortgage;
3. The seller's financier will not accept the purchase price in exchange for a release on the mortgage. It does happen sometimes that the total debts of the seller are more than the amount of money which is available at settlement. The seller might have other mortgages and dets, and it is possible that the seller's bank will not accept the amount of money on offer. Usually, this is known in advance and the contract is agreed to by the seller's bank before being signed;
4. There is something wrong with the documents (an error in the transfer or the release of mortgage);
5. There is something wrong with the cheques;
6. One party or another cannot complete their obligations at settlement.
In these circumstances, there are several options available:-
1. Settle anyway-
This is a particularly dangerous option. If this is done, it is often done upon undertakings by the parties. If the party giving the undertaking does not discharge that undertaking, then the party not at fault has a defective title and a major problem requiring Court actio to complete.
2. Postpone settlement-
It is a reasonably common for a settlement to be "stood down", whilst the problem is rectified. Diligent solicitors will ensire that, in the lead up to settlement, their client's rights are reserved to settle at any time on the day of settlement, regardless of what other agreement might be made relating to time and place. This option is always subject to logistical difficulties, as there will often be multiple settlements on for each solicitors firm in each day, and it may not be possible to stand a settlement down. Financiers are also extremely reluctant to move quickly to correct errors, even if the errors are created by the bank itself.
Postponing the settlement to another day has its own problems, chief among which is that, usually removalists wiill have been booked, utilities cut off and put back on, and the logistical arrangements for the change of the property will already be locked in. Occasionally, if there is no other option, the buyer can be allowed a short term occupancy pending settlement, which can be terminated immediately if the settlement does not happen.
3. Tender and mock settlement-
A lot of people (and sadly, some lawyers) think that if a settlement does not occur on a particular day, then the party who was not ready to settle is automatically in breach of contract. This is not so.
A failure to settle, in the absence of a formal settlement at which the innocent party attend and proves readiness, does not create a breach of contract.
In an ordinary contract, a standard clause makes "time of the essence". This means that all deadlines specified in the contract are absolutely defined and vital, and failure to adhere to a deadline creates a loss of rights. In the absence of a formal settlement and tender by the party not at fault, all that happens to the contract is that time ceases to be of the essence. The contract remains on foot but the settlement date becomes no longer vital. It is, in effect, now written in pencil. Either party has the right to issue a "notice to complete", which specifies a new date completion and remakes time of essence. There is no aitomatic breach, and ensure that you have maximum rights, is to have a "mock settlement", and "tender". That is, to proceed with the settlement as originally scheduled, attend, and tender your documents to prove that you were ready, willing and able to settle at the time specified. Once this is done, you can formally place the other side in breach of contract
This does not mean that you to proceed to sue them, but it does preserve all of your rights whilst you are re-negotiating. This process should always be done where there is no acceptable proposal for extending a settlement date.
The mechanics of a settlement of a property or a business contract are quite complex.
Whether buyer or seller, there are some serious obligations to be met, and vital timeframes which must be respected.
Ass to these that each party will have a financier involved, and that financiers cannot be controlled or cajoled, and you have a situation which is dangerous for both parties.
Whether property or business contract, the process is broadly the same:-
Seller's Obligation
Property
The seller has an obligation (unless the contract specifically states otherwise) to provide "vacant possession". That means a property which is empty and no occupancy rights attaching to it.
The sellers also has an obligation to provide "unencumbered title", which means that the title deed is free of any notations, caveats, easements, warrants or mortgages, other than those which are specified in the contract. It is common for an easement to be registered over the property, and this must be disclosed on the contract at the time that it is signed, or the buyer has a right to walk away.
In most cases, this means arranging for your mortgage to be released at settlement. This should be (and used to be) a very simple process taking a short period of time. It is not any longer.
In the past 5-7 years, banks have consistently reduced staffing in the area that manages this work (the securities area), and this has meant that a one page release document, instead of taking 2 or 3 days, can now takes up to 4 weeks to obtain. It is essential that, as soon as you obtain a contract, you alert your bank tot he settlement date and sign whatever internal documents are required (usually called a Release Authority) at your bank to start the process of releasing your mortgage.
The seller is also to obtain readings of the "utilities", that is electricity, gas, telephone and internet. These utilities cannot be "transferred". The practice is that your account will be opened, and the service turned off, and on the same day the buyer's account will be opened, and the service switched on (usually by the same person who switched yours off!) Failure to do this might result in the buyer using your electricity or gas.
Business
In addition to all of the obligation above, the seller has an obligation to obtain consent to the assignment of the lease fron the landlord. The lease will need to be assigned from you to the buyer, and there is often a formal approval process before the landlord accepts the buyer as a suitable tenant. Lanlord's processes range from a formal application with significant documentation, and an interview, all the way down to a short discussion followed by approval. Do not underestimate the time that this might take.
Two documents are required to be prepared to achieve the assignment- a deed of assignement or transfer (depending upon whether or not the lease is registered on the title), which is prepared by the buyer's solicitor; and a deed of covenant, which is prepared by the landlord's solicitor; usually slowly and late. You, as the seller, are responsible for the cost of preparation of the deed of covenant. Some law firms charge significant amounts of money for this, and you should check the approximate cost of the commencement of the process.
The next obligation for the seller is to facilitate a stocktake. Stock is calculated in two different ways, depending on whether the contract is "walk in, walk out" or "price plus stock".
Buyer's obligations
As the buyer, it is your responsibility to provide transfer documents to transfer all of the assets, within a reasonable time before the settlement, so that they can be signed and returned, or presented at settlement.
The transfer of any property will need to be stamped, and stamp duty paid, at or before settlement.
Usually, the buyer's solicitor will seek the return of the signed transfer so that it can be stamped before settlement upon an undertaking not to use it for any purpose until the settlement occurs. If you are not using a solicitor to purchase, you may have a problem with this as the solicitors for the seller are unlikely to accept your undertaking. Formal undertakings given by solicitors disciplinary action or loss of the right to practice. For this reason, a formal undertaking by a solicitor is usually able to be relied upon.
It is essential that you have done everything that is required by your financier to enable the financier to present cheques for the purchase price at settlement. Requirements may vary from lender to lender, and although you should not have to ask "Is there anything else I have to do?", you need to be constantly asking this of your financier or broker to make sure that there are no last minute requirements.
The more obvious requirements are:-
1. Provision of material for a final approval;
2. Signing acceptance of the offer and finance;
3. Signing mortgage documents;
4. Providing certificates of insurance;
5. Making available any balance of purchase price which has not been provided by the bank.
Preparation for settlement
In the days before settlement, the date, time and place of the settlement will be formally booked. The place for settlement is usually at the bank of the seller, which is where any title deed will be. Adjustments to the purchase price (rates, land tax, deposit and other adjustments) will be calculated and agreed, and the seller will provide a cheque breakdown, that is, a list of the cheques required at settlement. Very rarely does the seller receive the entire sale price. There will often be cheques required to be paid to the seller's bank, the local authority, the Office of State Revenue for land tax, and other adjustments.
The matter is then ready for settlement.
Problems at settlement
There are several common problems that occue at or shortly before settlement:-
1. Someone is late or doesn't show up;
2. The seller's financier cannot produce a release of mortgage;
3. The seller's financier will not accept the purchase price in exchange for a release on the mortgage. It does happen sometimes that the total debts of the seller are more than the amount of money which is available at settlement. The seller might have other mortgages and dets, and it is possible that the seller's bank will not accept the amount of money on offer. Usually, this is known in advance and the contract is agreed to by the seller's bank before being signed;
4. There is something wrong with the documents (an error in the transfer or the release of mortgage);
5. There is something wrong with the cheques;
6. One party or another cannot complete their obligations at settlement.
In these circumstances, there are several options available:-
1. Settle anyway-
This is a particularly dangerous option. If this is done, it is often done upon undertakings by the parties. If the party giving the undertaking does not discharge that undertaking, then the party not at fault has a defective title and a major problem requiring Court actio to complete.
2. Postpone settlement-
It is a reasonably common for a settlement to be "stood down", whilst the problem is rectified. Diligent solicitors will ensire that, in the lead up to settlement, their client's rights are reserved to settle at any time on the day of settlement, regardless of what other agreement might be made relating to time and place. This option is always subject to logistical difficulties, as there will often be multiple settlements on for each solicitors firm in each day, and it may not be possible to stand a settlement down. Financiers are also extremely reluctant to move quickly to correct errors, even if the errors are created by the bank itself.
Postponing the settlement to another day has its own problems, chief among which is that, usually removalists wiill have been booked, utilities cut off and put back on, and the logistical arrangements for the change of the property will already be locked in. Occasionally, if there is no other option, the buyer can be allowed a short term occupancy pending settlement, which can be terminated immediately if the settlement does not happen.
3. Tender and mock settlement-
A lot of people (and sadly, some lawyers) think that if a settlement does not occur on a particular day, then the party who was not ready to settle is automatically in breach of contract. This is not so.
A failure to settle, in the absence of a formal settlement at which the innocent party attend and proves readiness, does not create a breach of contract.
In an ordinary contract, a standard clause makes "time of the essence". This means that all deadlines specified in the contract are absolutely defined and vital, and failure to adhere to a deadline creates a loss of rights. In the absence of a formal settlement and tender by the party not at fault, all that happens to the contract is that time ceases to be of the essence. The contract remains on foot but the settlement date becomes no longer vital. It is, in effect, now written in pencil. Either party has the right to issue a "notice to complete", which specifies a new date completion and remakes time of essence. There is no aitomatic breach, and ensure that you have maximum rights, is to have a "mock settlement", and "tender". That is, to proceed with the settlement as originally scheduled, attend, and tender your documents to prove that you were ready, willing and able to settle at the time specified. Once this is done, you can formally place the other side in breach of contract
This does not mean that you to proceed to sue them, but it does preserve all of your rights whilst you are re-negotiating. This process should always be done where there is no acceptable proposal for extending a settlement date.
Sunday, 7 August 2011
Franchise groups- What is the sale process?
What is the sale process?
The process of selling a business goes through several evolutions. After the business has been listed, hopefully, the broker will secure an intedning buyer.
Initial contact with the intending buyer
The broker should be alerting you to any contact with an intended buyer, no matter how intentative. This will allow you to plan. You may actually need to specifically say to the broker that you want to receive a contact in respect of any interested party, no matter how preliminary.
The buyer should receive an 'info pack' which has been prepared by the broker, containing a reasonable amount of information about the business.
If the existence of the listing of your business is in itself sensitive, you should ask the broker to require a confidentiality agreement before the release of any substantive information.
Depending upon the type of business, the initial stage of developing genuine interest for a buyer, may take some time. In some cases however the entire process can take only a week or two. It depends upon the type of business, the purchase price, and the personalities and plans of the parties themselves.
Genuine Interest
At some stage the broker will develop aa buyer to the point where there is genuine interest in buying the business.
At that stage the broker is likely to bring the buyer to the business for an initial discussion.
You need to have given some thought to the mechanics of that meeting. If the existence of a potential buyer for the business will be contentious or unsettling for staff, this meeting may need to be out of hours. Again, in these circumstances, the confidentiality agreement would be in order, prior to this meeting.
Questions asked at those initial meetings vary wildly, but the guiding rules should be:-
1. Provide initial basic information and then answer only the questions which are asked;
2. Be guided by the borker and allow the broker to conduct a meeting and drive the conversation;
3. Be conscious of your intellectual property, trading secrets and client details;
4. Do not reveal details of your key employees at this stage;
5. Treat the initial contact as a 'meet and greet' only;
6. (if the broker does not do so automatically), ask questions about the buyer, designed to find out who they are, to assess how genuine the buyer is, and whether this might simply be a 'fishing exercise' to gather industry information.
Attempt to find out what other businesses the buyer has looked at, the buyer's background, history, capital capabilities, and how far through the process of genuinely committing to a business the buyer actually is.
Ensure that you leave the meeting with a clear understanding of what will happen next, and some idea of the time frames.
The Next Steps
This is where the process varies from time to time.
Some buyers will want to attend a business again and again, and have an endless string of requests for information. It is important that your broker controls this process and that this does not become a distraction for you or the business. If this is the case, at some stage the broker should intervene and ask the buyer to commit to a contract, even if the contract is subject to a formal due diligence process.
Most buyers will attempt to do as much investigation as possible prior to having to committ to a contract. So long as you are not releasing sensitive information, placing the value of the business in danger, or risking unsettling staff, there should be no difficulty in releasing a reasonable about of fetail about the business.
This process however, should be used by your broker to create urgency in the buyer, and to engineer a requirement for the buyer to committ to a contract. After all, the broker's responsibility is (and his commission payment depends upon) securing a buyer who signs and completes a contract.
This entire process should be geared towards driving the buyer to signing the contract, by providing sufficient information to make the buyer comfortable to committ, but not so much information that the buyer feels under no pressure for time. The broker should be able to engineer this, but you need to be aware of the situation, and might be required to direct the broker back to this point.
The Format Offer or Heads of Agreement vs Contract
Occassionally, particularly with larger businesses or sales where not everything is being transferred (where, for example, you are keeping freehold some activities or items are not being transferred), it will be suggested that the buyer will submit a 'formal offer' or that the parties enter into a heads of agreement.
This step is intended to be a preliminary agreement to 'get the parties on paper' so that a more detailed final agreement can be done in due course.
Benefits
1. A heads of agreement can create an initial, low pressure, commitment from a buyer which can be built upon by the broker. It is seen in many cases as an easy way to get some kind of commitment from a buyer.
2. A heads of agreement gets the 'highlights' of the deal on paper, at an early stage, so that it is difficult for the buyer to shift the posts during the process.
Problems
1. The legal position with heads of agreement is unclear and unsatisfactory. The law classes these documents as 'agreements to agree', that is, initial agreements, with an expectation that the parties will continue to negotiate, and that a final agreement, which formally binds the parties will be signed at a later stage. Parties are bound to continue to negotiate 'in good faith', and to sign a document which is, broadly, inaccordance with the heads of agreement. As you can see though, this document has a great deal of lack of clarity and precision. In addition, there can still be a great deal of argument, and negotiation break down, when a formal contract arrives, with respect to parts of the formal contract, which did not appear in the heads of agreement.
2. There is additional cost and delay in preparing and signing a heads of agreement, during which time either an argument may break out, or the buyer may get cold feet.
Occasionally brokers may bring you a 'formal offer', which is essentially a letter saying "I will buy your business on these terms". Whilst this might be worthwhile, and is, again, a low pressure way to obtain some kind of commitment from the buyer, there is no substitute for an offer in the form of a sign contract with a deposit cheque on the front of it. This is, by far, the best, most clear, and most enforceable type of offer.
The process of selling a business goes through several evolutions. After the business has been listed, hopefully, the broker will secure an intedning buyer.
Initial contact with the intending buyer
The broker should be alerting you to any contact with an intended buyer, no matter how intentative. This will allow you to plan. You may actually need to specifically say to the broker that you want to receive a contact in respect of any interested party, no matter how preliminary.
The buyer should receive an 'info pack' which has been prepared by the broker, containing a reasonable amount of information about the business.
If the existence of the listing of your business is in itself sensitive, you should ask the broker to require a confidentiality agreement before the release of any substantive information.
Depending upon the type of business, the initial stage of developing genuine interest for a buyer, may take some time. In some cases however the entire process can take only a week or two. It depends upon the type of business, the purchase price, and the personalities and plans of the parties themselves.
Genuine Interest
At some stage the broker will develop aa buyer to the point where there is genuine interest in buying the business.
At that stage the broker is likely to bring the buyer to the business for an initial discussion.
You need to have given some thought to the mechanics of that meeting. If the existence of a potential buyer for the business will be contentious or unsettling for staff, this meeting may need to be out of hours. Again, in these circumstances, the confidentiality agreement would be in order, prior to this meeting.
Questions asked at those initial meetings vary wildly, but the guiding rules should be:-
1. Provide initial basic information and then answer only the questions which are asked;
2. Be guided by the borker and allow the broker to conduct a meeting and drive the conversation;
3. Be conscious of your intellectual property, trading secrets and client details;
4. Do not reveal details of your key employees at this stage;
5. Treat the initial contact as a 'meet and greet' only;
6. (if the broker does not do so automatically), ask questions about the buyer, designed to find out who they are, to assess how genuine the buyer is, and whether this might simply be a 'fishing exercise' to gather industry information.
Attempt to find out what other businesses the buyer has looked at, the buyer's background, history, capital capabilities, and how far through the process of genuinely committing to a business the buyer actually is.
Ensure that you leave the meeting with a clear understanding of what will happen next, and some idea of the time frames.
The Next Steps
This is where the process varies from time to time.
Some buyers will want to attend a business again and again, and have an endless string of requests for information. It is important that your broker controls this process and that this does not become a distraction for you or the business. If this is the case, at some stage the broker should intervene and ask the buyer to commit to a contract, even if the contract is subject to a formal due diligence process.
Most buyers will attempt to do as much investigation as possible prior to having to committ to a contract. So long as you are not releasing sensitive information, placing the value of the business in danger, or risking unsettling staff, there should be no difficulty in releasing a reasonable about of fetail about the business.
This process however, should be used by your broker to create urgency in the buyer, and to engineer a requirement for the buyer to committ to a contract. After all, the broker's responsibility is (and his commission payment depends upon) securing a buyer who signs and completes a contract.
This entire process should be geared towards driving the buyer to signing the contract, by providing sufficient information to make the buyer comfortable to committ, but not so much information that the buyer feels under no pressure for time. The broker should be able to engineer this, but you need to be aware of the situation, and might be required to direct the broker back to this point.
The Format Offer or Heads of Agreement vs Contract
Occassionally, particularly with larger businesses or sales where not everything is being transferred (where, for example, you are keeping freehold some activities or items are not being transferred), it will be suggested that the buyer will submit a 'formal offer' or that the parties enter into a heads of agreement.
This step is intended to be a preliminary agreement to 'get the parties on paper' so that a more detailed final agreement can be done in due course.
Benefits
1. A heads of agreement can create an initial, low pressure, commitment from a buyer which can be built upon by the broker. It is seen in many cases as an easy way to get some kind of commitment from a buyer.
2. A heads of agreement gets the 'highlights' of the deal on paper, at an early stage, so that it is difficult for the buyer to shift the posts during the process.
Problems
1. The legal position with heads of agreement is unclear and unsatisfactory. The law classes these documents as 'agreements to agree', that is, initial agreements, with an expectation that the parties will continue to negotiate, and that a final agreement, which formally binds the parties will be signed at a later stage. Parties are bound to continue to negotiate 'in good faith', and to sign a document which is, broadly, inaccordance with the heads of agreement. As you can see though, this document has a great deal of lack of clarity and precision. In addition, there can still be a great deal of argument, and negotiation break down, when a formal contract arrives, with respect to parts of the formal contract, which did not appear in the heads of agreement.
2. There is additional cost and delay in preparing and signing a heads of agreement, during which time either an argument may break out, or the buyer may get cold feet.
Occasionally brokers may bring you a 'formal offer', which is essentially a letter saying "I will buy your business on these terms". Whilst this might be worthwhile, and is, again, a low pressure way to obtain some kind of commitment from the buyer, there is no substitute for an offer in the form of a sign contract with a deposit cheque on the front of it. This is, by far, the best, most clear, and most enforceable type of offer.
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