Comments on the Acquisition of a Business

Comments on the Acquisition of a Business

The sale of a business usually proceeds on the basis where one person has agreed to sell and another person has agreed to buy the business. Often also, there are things to be organised which can’t be done prior to signing the contract. Therefore, there will usually be a difference between the date the contract is signed and the date when the transfers and payment under the agreement occur. This second date is called the “settlement date” or the “completion date”.

During the period between execution and completion the purchaser has an interest in the business and wants to avoid the vendor running it down or extracting anything from the business. That is, the purchaser wants to make sure that the business they get on completion is the business they thought they were getting as at the date they signed the contract.

At some stage the purchaser should do a detailed inspection of the business to verify that they are buying what they think they are buying. This is called “due diligence” and the form the due diligence takes will vary depending on the nature of the transaction. A due diligence might involve a quick look at the business’s main books of account, or it might involve a detailed investigation of a wide range of things relevant to the business. This allows the purchaser to be confident that the price they are paying for the business is fair (for example if the business doesn’t own the assets that the purchaser thinks they are buying, then they would pay a lower price).

One of the ways that the purchaser tries to protect itself is by having the vendor make a variety of warranties about the business both as at execution and as at completion. For example, that the assets are not encumbered, and that there are no claims against the business. However, why should the vendor give these warranties if, for example, the purchaser already knows them to be false?

For example, if the purchaser’s due diligence reveals a circumstance which is a heavy litigation risk, the vendor would argue that the purchaser is aware of the risk, and they should take it on board (perhaps with a price change to account for the risk) rather than relying on a warranty from the vendor. Equally, if the purchaser knows that a certain asset is leased or otherwise encumbered, the vendor should not be warranting that it is not. In short any warranty will often be subject to anything the purchaser in fact knows as a result of the due diligence (assuming it was known prior to execution).

Exactly what is being sold will depend on the circumstances, whether it is the business as a whole, the shares in a company running the business or specific assets comprising the business. Whatever it is which is being sold, that should be stated clearly and consistently.


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