Buyers and sellers of businesses have a number of alternatives to consider when deciding how to structure payment of the purchase price. The simplest payment alternative may often be a straightforward cash payment. But there are reasons, including tax reasons, for the parties to a business sale transaction to consider other payment structures.
Cash Payment in Full on Completion
As noted above, this can be the simplest payment option in both form and structure. The provisions of the sale and purchase agreement will specify the full payment price and the requirement that the price be paid in full on completion. The mode of payment – for example a banker’s draft or direct bank transfer – is also usually specified. In practice, cash is normally transferred to the seller’s solicitors who hold the monies pending completion of all the purchase formalities specified in the contract.
Instalments
An alternative is payment by instalments. Where instalments are to be made in place of a single payment, additional details are required, including instalment dates and what happens if an instalment payment is late. It is not uncommon for one missed instalment to render all remaining instalments immediately due and payable.
Where instalments are agreed, the seller must be sure the buyer is capable of meeting them and it is preferable for the seller to take security over the buyer’s assets pending payment of the purchase price in full.
Purchase Price Subject to Retention
Alternatively, the parties to a sale of business transaction may also agree that a proportion of the purchase price be held back for a specific period time by the buyer, for possible set-off against any potential warranty or indemnity claims arising in that period. Careful drafting of the agreement will be required to satisfy the seller that the buyer cannot make deductions for spurious or inflated claims simply to delay or avoid payment. It is common for the agreement to provide the relevant retention sums be held in a joint or escrow account and will set out a mechanism for assessing the level of retentions that may be held back in the event of a claim being made.
Price Subject to Completion Accounts
This is sometimes referred to as an “earn out”. The sale and purchase agreement will specify a purchase price to be paid upon profits or net assets falling within certain agreed parameters at some point down the track, with an mechanism to adjust the purchase price is those targets are not reached.
If you are a considering buying or selling a business, Rollingsons has experienced lawyers who can help you. For advice or more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by phone on 0207 611 4848.
