Business Franchise Australia


How to ensure a smooth process when purchasing a business

Mergers and acquisitions can add value and strengthen an organisation’s competitiveness. However, many businesses fail to realise their purchase agreements don’t cover off all of the key risk areas. This can put the deal at risk and cost time and money. It’s therefore essential that businesses considering an acquisition get legal advice to ensure the purchase agreement is complete and comprehensive, according to Thomson Reuters.

Rachel Launders, Practical Law Australia Advisory Board Member, and General Counsel and Company Secretary, Nine Entertainment Co. Holdings Ltd, said, “Many purchase agreements don’t deal with all the risks presented by a deal. This can result in an agreement that doesn’t deliver what one of the parties expects. By getting legal advice upfront, businesses can ensure their contracts are watertight so the sale goes through smoothly.”

Thomson Reuters has outlined five complexities to consider for any purchase agreement:

1. Warranties

Information warranties are necessary to protect the buyer in case the business isn’t presented in the condition that the buyer was led to believe. Most importantly perhaps, these warranties cover the quality of information that has been disclosed, and the processes that were followed when collating the disclosure material. They are created to ensure the information provided to the buyer is accurate and complete; if not, the buyer may be able to rely on the information warranty to cover their loss.

2. Completion day requirements

Matters that require third-party involvement such as consent to a change of control, the replacement of guarantees, and the release of security interests, can complicate the completion day requirements. If any of these deliverables are overlooked, it may be too late to get additional documents prepared and signed, or to have additional steps implemented, on the day of completion. Consequently, it’s valuable to have a “dress rehearsal” prior to completion to ensure all documents are signed or ready to be signed.

3. Purchase price adjustments

The purchase price may be adjusted according to actual balances (as opposed to projected balances) for certain balance sheet items at the time of purchase. This ensures the purchase price is a fair representation of the business’s value based on elements such as working capital, and can also be adjusted based on the occurrence or non-occurrence of specific events. Adjusting the purchase price can be complex so it’s important to seek expert advice before proceeding.

4. Post-completion restraints

In some cases it can be reasonable to impose post-completion restraints on the seller, particularly if they are likely to take customers with them or otherwise have the ability to impede the potential success of the business. Whether post-completion restraints are necessary depends on the nature of the business being sold, barriers to the seller re-entering the same type of business, and the seller’s existing activities.

5. Guarantors

It is important to check the worth of any proposed guarantor, and to acknowledge whether the business group has a deed of cross-guarantee in place. If so, this could mean that, if one company in a group becomes insolvent, the rest will too, meaning the guarantee won’t protect the buyer.

Rachel Launders said, “There are many issues that can arise during business purchase agreement negotiations. The commercial imperatives of each deal are different but the precedents used during previous approaches can be applied at the start of each new deal. This will help smooth out the acquisition process and, potentially, save the parties a great deal of time and money.”