At the date of this article, there are uncertain times ahead for all businesses. The COVID-19 pandemic is a once in a 100-year health crisis that is impacting the Australian and world-wide economy. If you are selling a business and have recently signed a Business Sale Agreement (BSA), then the buyer may be thinking about pulling out as the prospects of the business are unknown. This can mean that although the buyer has signed the BSA, they are looking to get out of the sale. This article explains what you can do in these circumstances.
It Depends on the Stage of the Process
Your options and the risk of the buyer backing out depend on two factors:
- the current stage of the sale process; and
- the wording of the BSA or similar document you have signed.
If you and the buyer have not signed a BSA, then it will be difficult to press them forward with the transaction. However, where a business broker is involved, typically, they will have you and the buyer sign a Heads of Agreement (HoA) during the initial stages of the sale process, which is a document that sets out the commercial terms of the sale. The HoA can be legally binding or non-binding. You should engage expert legal advice early on. This will help you to understand your options and prospects of success if you wish to challenge a buyer who wants to pull out of the sale.
The following table summarises your position dependent on what documentation you have in place.
|No signed documentation||weak argument||look to email correspondence to point to an agreement and press that the buyer must proceed on the basis of this email 'agreement'|
|Signed HoA (non-binding)||weak argument||point to specifics in the HoA that state that they must proceed; negotiate the transaction in good faith|
|Signed HoA (binding)||stronger argument||point to specifics in the HoA and note that it is a binding agreement. Where they do not comply with these obligations then you will argue that they have breached the agreement|
|Signed BSA||strongest argument||the BSA may dictate the terms and actions you can take. (More detail below. )|
Before contemplating legal action, consider what agreement you can live with. Ask yourself: "What is the worst possible deal I will accept during COVID-19?" This could include simply accepting the deposit as compensation to avoid a long drawn-out legal battle.
You should then engage with the buyer directly to determine their concerns and what they are willing to agree to. Once you understand their concerns, then you can take steps to address them. For instance, you could amend the agreement to include a deferred payment or earn-outs (where the buyer only pays if the business hits certain revenue amounts).
|Such concessions should only be offered as a last resort and balanced against the strength of your claim.|
If you have:
- a strong claim to make the buyer proceed; and/or
- they have signed as a personal guarantor;
then it would not be advisable to provide these concessions unless you have exhausted other options.
Deed of Release
If you and the buyer agree to an amount of compensation in lieu of completing the sale, then it is very important that you receive the funds, despite the impact of COVID-19. However, it is to the buyer's benefit if you then enter into a Deed of Release. This is a document that sets out the terms of the settlement and states that neither party can bring a claim against the other.
If you do not enter into this deed, then it may still be possible to bring a claim against the buyer in the future. Nonetheless, the courts would not look favourably upon this as it is not negotiating in good faith.
Where you have a signed BSA, the terms will dictate your options. They may act as a guide to the level of aggressiveness you use to pursue the business sale.
|For example, most BSAs require you to provide mandatory notice prior to initiating court proceedings. This can include the requirement for you to issue a default notice and allow a certain period of time for the buyer to fix the breach.|
Where the buyer has said they wish to end or terminate the agreement due to COVID-19, you must avoid accepting this termination as this could limit your options.
If you cannot come to an agreement with the buyer, the next step is to consider having your lawyer take the following more aggressive approaches:
- Issue a Letter of Demand: this states your desired outcome and what will occur if they do not agree within the stated time frame;
- Prepare Statement of Claim: this is what is lodged with the court to start litigation. The draft can be sent with the Letter of Demand or sent if they fail to respond; and/or
- Lodge the Statement of Claim with the courts.
Only threaten court proceedings where you have a valid claim that has a good chance of winning. Courts often order the loser to pay the winner's legal costs (usually up to a maximum around 80%). This means if you lose the court proceedings you will be worse off, as the buyer may not have to proceed with the transaction and you may be required to pay their legal costs.
When initiating court proceedings, your main goal is to press the buyer to continue with the purchase. This is called an 'order for specific performance'. If such an order is made by the court, it means the buyer needs to continue with the purchase. But what happens if the buyer does not have the funds to complete the transaction due to COVID-19?
If this occurs, then you can look to terminate the contract and sue for damages. These can be calculated at the amount that you would have received had the breach not occurred and will depend on the wording of the BSA. Remember to also mitigate any other losses, such as attempting to re-sell the business, then look to claim the difference in the price received.
Ready Willing and Able to Complete
Assuming the buyer is going forward with the sale, it is important that you are ready, willing and able to complete the transaction. In most business sales, there are pre-conditions (known as 'conditions precedent') that need to be satisfied before the sale can be completed. A common example is a landlord approving the buyer as a tenant. It is important that you have done all you can do to satisfy the pre-conditions so as not to hold up the sale.
If the buyer is purchasing the BSA through a newly setup company, then this may limit your ability to recover damages as the company will not have any assets. Hopefully, the BSA includes the buyer giving a personal guarantee, which means that their personal assets can be used to satisfy costs if there is a court order made against them.
Before using a court claim to press a buyer into moving forward with their purchase of your business, despite COVID-19, seek expert advice on your prospects of success. You should then consider: "What is the worst deal that I would accept without going to court?" A personal discussion with the buyer can help to pressure them morally, while hinting at your legal options.
If that fails, then your lawyer can assist by issuing a Letter of Demand and drafting or lodging a Statement of Claim with the Courts. Receiving a judgment through court can be costly, stressful and time-consuming, so look to this as your last option.