Dealbreakers - Common reasons why deals fall through and how you can avoid them

1. "It's just not worth it!"

The Seller inflates the Business's true worth, and eventually, the Buyer finds out.

Answer: Don't be tempted to exaggerate the Business's turnover or profit. Buyers should not make an offer before they see properly kept books and up-to-date accounts. Sellers will need to enlist the help of their accountant (if necessary) to keep on top of all tax and VAT returns on an ongoing basis.

2. Time is of the Essence …

If it is all taking too long, ask yourself "why?" At some point or another, the Buyer or the Seller may become dissatisfied and simply pull out. Even in the early stages of the legal process, timing can be a crucial issue. What if, for example, your solicitor says he cannot draft the sale contract because he does not yet have the deeds?

Answer: Think ahead! Choose the right lawyers who will work the deal according to your timetable. Seller's solicitors should be instructed early on to request deeds from the Seller's lender. Sellers should provide their solicitors with as much detail and information on the Business, when requested. It is usually possible to submit a draft contract simply based on the Land Registry entries, and fill in any other missing details and information later on. Have a timetable agreed in the Heads of Agreement (also known as Notification of Sale, Memorandum of Sale or Heads of Terms) drawn up by the Seller's agents. Both Buyers and Sellers should review this frequently to ensure that there is no slippage. Be flexible and do not set unrealistic deadlines.

3. Property Matters ...

What if the Seller's title is "defective" or does not have planning permission for its current use? What if there is a rent review in progress? What if the Property is leasehold and the premises have not been maintained properly meaning that the Buyer could be facing a large repair ("dilapidations") bill when the Lease comes to an end?

Answer: Have a planned programme of maintenance so that you or your Buyer are not facing a large liability at the end of the Lease. Buyers should have a full survey carried out and will want to assess any future liability for repairs/dilapidations under the Lease. Sellers should ask their solicitor to carry out a full review of the title so that any difficulties can be ironed out before they are raised by the Buyer. If a rent review is in progress, your solicitor should ensure that you will not end up having to pay higher rent which is backdated to the period that your Seller is liable for.

4. Is All That It Seems?

Does the Buyer have sufficient funds to buy? Are they genuine Buyers or just using the opportunity to find out about your Business? If the Buyer has a property to sell, how long is this really going to take? When a Buyer says "I have sold my property", what do they really mean?

Answer: Ask to see proof of a Buyer's funding before entering into the legal process. If worried about confidentiality, enter into a confidentiality agreement whilst the legal process is concluded. If a Buyer cannot proceed until it has sold its own property, it should be realistic in how long this is going to take, and should provide regular updates to the Seller on progress. Beware when a Buyer says their property is sold. People use this term to cover a multitude of situations. Find out what stage the related sale has reached. Is it only at the offer accepted stage? Has it exchanged? Has it completed? Only once a property has exchanged is it safe to say it is "sold" as it is not until then that the parties are contractually bound. Remember that before exchange of contracts has taken place, ANYTHING can happen!  

5. TUPE or not TUPE?

Difficulties often arise during the sale of a Business in relation to employee issues. If there are any outstanding claims against the employer, a Buyer may not wish to take on that liability which it would be required to do under TUPE (Transfer of Undertakings Regulations). Sometimes, there are certain employees, which are crucial to the Business, who may become unhappy or unsettled if they see the Business going through an uncertain stage, before the sale is concluded.

Answer: Resolve all employee issues as you go along. Keep all employees informed about the sale of the Business. Endeavour that the Buyer speaks to the employees to put any fears or uncertainties to rest.

6. I'll Warrant that …

Warranties guarantee that crucial aspects of the Business, such as employment, tax and property matters are all in good order. If a Buyer demands perfection from warranties, a Seller will merely disclose against those warranties at a much later stage and the deal can fall apart.

Answer: Think ahead. Reflect what cannot be warranted in the sale price. Avoid the Buyer being able to re-negotiate on the price by avoiding the situation where disclosures are given at a much later stage. Seller's solicitors should draft a realistic set of warranties and be up front about any problems.

7. Bad Debts

Are bad debts eating away at the Business's profits? A Buyer may pull out if this is the case.

Answer: Sellers should be pro-active in chasing debts and have a planned programme for credit control to beat the problem before it arises. Otherwise, the Buyer may seek an indemnity from the Seller, claiming the shortfall.

The above sets out general principles of law, for guidance only, and does not attempt to give specific legal advice.

For further information and advice, please contact Maria Guida at Hextalls law firm on 0207 265 4457 or by email mariaguida@hextalls.com