Selling a business is fraught with potential obstacles; your commercial dealings are scrutinised through an in-depth due diligence process to make sure that your business is worth what you think it is.
Your contracts are extremely valuable. If your contracts and agreements are below par then you risk a buyer seeking a price reduction or walking away from the deal.
So what should you be checking when selling a business to ensure that your contracts do not let you down?
Well firstly you need to ensure that none of your supplier contracts enable your customers to terminate their agreements following a change of control of your business. So check your non-assignment clauses.
How do your current contractual standards of services stack up? It makes sense to avoid obligations which are unnecessarily onerous – so check and replace “best” endeavours with “reasonable” endeavours where required.
Is there a risk of your customers poaching key personnel? If so, insert clauses to prevent your client base from poaching staff during the contract term and following termination of the contract.
Sticking with personnel and customers, have you adequately protected access to sensitive information? Think about bolstering your confidentiality clauses during the performance of contracts and for a specified period after completion.
Can you implement price increases on long term contracts? A buyer will want to be assured that these contracts will remain commercially viable in the future.
Intellectual property rights are often overlooked. Do you have IP rights which either are or are capable of being exploited? Do you have the requisite ownership and licence documents in place?
Is your business sufficiently protected on title to goods? If you sell goods, then you can legally retain ownership prior to the goods being sold on, so check your retention of title.
Ensure that the indemnities given by you to customers are acceptable to a potential buyer (including how they are capped).
Cap your liability to prevent the risk of unlimited liability. A lack of certainty will put buyers off. Whilst there are areas for which your liability can never be excluded, there are certain things which you can exclude liability for.
Avoid time of the essence clauses where possible – you don’t want to lose a contract purely due to a delay in delivery.
In relation to contracts where you are the customer there are a number of things to look out for. Avoid minimum volumes and supplier exclusivity. Be wary of contracts which limit commerciality and which could result in an actionable breach of contract.
Check that you are getting the best price from your suppliers. Do you have a most favoured customer clause? Are your payment terms commercially viable?
Do you have adequate remedies in place if your supplier does not deliver? Think about including rectification of mistakes at no costs and service credits clauses.
Are your liability clauses in order? Your suppliers may limit liability to its own breach or negligence. Are loss of profits and/or loss of sales covered?
Is your business required to approve a supplier subcontracting out? It is good practice to obtain consent before the appointment of a third party to carry out the contractual obligations of your supplier.
A buyer will prefer broad termination clauses so that they are not tied into a long-term contract when dealing with suppliers. Can you terminate a contract for convenience?
Finally a buyer will want to limit liability and jurisdiction to England and English law, so check that your contracts do not allow for overseas jurisdictions.
You don’t want to lose a deal because your contracts are not in good order, so you should always seek independent legal advice if in doubt.
Book a call with our legal team and we’ll guide you through every stage of your legal needs!