In his latest Coffee Break Briefing, Insolvency expert Malcolm Niekirk looks at short business sale agreements.
In case you missed it you can watch the full video here or read our summary article below.
Why use a short business sale agreement?
A traditional business sale agreement can be a lengthy document, full of definitions and clauses covering risks which may never arise.
For a substantial or complex transaction, that level of detail can be entirely appropriate. However, it may be disproportionate for many sales by a liquidator or administrator.
A shorter agreement can:
- Be prepared more quickly
- Reduce legal costs
- Be easier for the parties to understand
- Make negotiation simpler
- Help the parties get to completion sooner
What could a simple business sale agreement look like?
For a straightforward business sale, the core agreement can be short. The first page could set out the fundamentals, as a simple invoice identifying:
- Who is buying and selling?
- What assets are being sold?
- What is the purchase price?
Standard terms can then deal with the usual insolvency considerations. Including exclusions from the sale, personal liability of the office holder, TUPE, VAT, books and records and potential Section 216 issues.
Adding extra terms when they are needed
One benefit of a short agreement is that it can be modular.
Rather than including every possible clause in every agreement, additional schedules can be added where the circumstances require them.
For example, a transaction might need additional provisions dealing with:
- Deferred consideration
- Personal guarantees or other security
- Customer data
- Collection of book debts
- Leasehold premises
- Earn-outs
- Work in progress
- Inventories
If the commercial deal changes during negotiations, the relevant schedule can simply be added or removed without extensively redrafting the main agreement.
For insolvency practitioners dealing with transactions that can move very quickly, that flexibility can be particularly useful.
Is security for deferred consideration always worthwhile?
Deferred consideration is a good example of where proportionality matters.
If part of the purchase price is being paid later, an office holder may understandably want security. This might include a personal guarantee, a charge over property or a debenture from the buyer.
However, each option can create additional work.
A personal guarantee is usually sensible. It need not be a complex document. It is important to get it properly signed and witnessed. It’s important to limit the guarantor’s opportunity to argue that their signature was forged, or that the seller agreed not to enforce the guarantee.
A charge over property often requires existing lender consent or a deed of priority. Those can be difficult and expensive to get (if possible at all). A debenture will need to be registered at Companies House and could conflict with other lending arrangements. Thus, a debenture too may need third party consent, or a deed of priority (or both) and its value may not be worth the time and cost of getting it.
The important question is therefore not simply whether security can be taken. It is whether the security is likely to provide enough additional value to justify the cost and potential delay involved.
What about customer data?
Data protection obligations do not disappear simply because a company is insolvent, so both the seller and buyer need to consider what information is being transferred and how it can lawfully be used.
But that does not need to be dealt with in additional clauses in a complex sale agreement.
Very often a table can clearly identify different categories of information and explain what the buyer must do with them. The table can be attached to a short letter, to confirm the buyer’s obligations.
When might a short agreement not be appropriate?
A simple agreement will not suit every sale.
Higher-value transactions, complicated asset structures or unusual risks may justify a more traditional business sale agreement.
There is no particular purchase price at which that automatically happens. The value, complexity and risk of each transaction need to be considered.
It is also worth remembering that some problems cannot be solved simply by adding more pages to an agreement.
Specialist Insolvency Solicitors
If you regularly deal with business and asset sales, our Insolvency & Restructuring team can help with agreements that are practical, proportionate and designed to keep transactions moving.
If after reading this short summary you have any questions about an upcoming sale, you can get in touch with our experts by calling 01202 499255 or by filling out the form.
If you missed the live session or would like to revisit any of the points covered, you can watch the full webinar here.
To never miss one of our FREE Insolvency Coffee Break Briefings again, you can sign up to receive updates here.
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