You have now signed the Contract and possibly handed over a deposit. Usually it is at this stage that the Contract is “exchanged” with a counterpart Contract signed by the seller.
It is at the time of exchange that the Contract is effectively “entered into” and you became bound, with the deal contemplated by the Contract to be completed sometime later, usually weeks later, when title to all property sold is transferred from the seller to the purchaser and the balance of the purchase price is paid by the purchaser to the seller.
But… what happens now if you decide that you no longer want to complete the deal?
Unless you have a right to get out of the contract (rescind it), you will be exposed to having to compensate the seller for the seller’s loss.
What could the seller’s loss be?
The seller’s loss could be compensation sufficient to put the seller in the same position as the seller would have been in had you not breached the contract by failing to complete the purchase. At its worst, this would require you to compensate the seller by paying the purchase price in any event.
However, it’s not that simple for the seller. The seller has an obligation to mitigate its loss notwithstanding your rescission of the contract. Generally in the case of sales of business, that requires the seller to act reasonably in promoting, negotiating and entering into a subsequent contract to sell the business… But at some point you should expect to receive a claim for compensation from the seller.
If you receive such a claim, it may well be an ambit claim and capable of being reduced through negotiation. It’s important to ensure you close this deal properly, to ensure you remove any “sting from the tail”.
If you do a deal with the Seller, we recommend you have it evidenced in a deed of release
If you ever find yourself in this situation, and are fortunate enough to be able to reach agreement with the seller as to the amount of compensation, be careful to not simply handover a cheque in payment of the compensation without the receipt of the compensation being accepted in full and final settlement of all of the Seller’s rights in relation to the contract. If you fail to do this, the seller may be able to come back and make a further claim for compensation at some later time.
The best way to prevent this occurring is by having your agreement with the seller embodied in a properly drafted and effective deed of release, which deed can be your “Exhibit A” should it be required if the seller seeks to come back and make a further claim for compensation at some later time.
What commonly are the rights and obligations of the parties to a sale of business?
In NSW most sales of small and medium businesses are effected in accord with the NSW Law Society “Contract for the Sale of Business”.
That Contract provides a purchaser with a right to rescind, without penalty, “… if the Contract expressly gives a party a right to rescind”.
In the standard contract, without amendment, typically this right would only eventuate if the seller was unable to deliver up to the purchaser on completion all or part of the property and assets used by the seller to operate the business.
How should a buyer protect him or herself from other eventualities?
However, there are many things that you may require to occur before you are agreeable to completing a purchase of a business. Such things as:
you securing finance to be used to complete the purchase and provide an initial reserve of cash;
you being able to enter into a lease of the business’s premises with the landlord;
the parties to material contracts with the seller agreeing to the transfer the benefit of those contracts to you; and,
the seller providing you with training prior to the completion date, but to name a few.
To properly protect you as a purchaser, it is important that the Contract is worded such that you have the right to rescind when something you expect to occur, such as any one or more of those matters referred to above, do not occur.
Some tips to help you avoid this situation and cure it if it occurs
To avoid this situation arising it is important that prior to you entering into negotiations with the seller that you have the best possible understanding of the business you’re taking on and all its pitfalls, benefits and potential.
Having satisfied yourself of the above, you should then enter into negotiations with the seller on an “in principle and subject to contract” basis. Thereafter, and once the first draft of the contract for sale of business is received by you, you can obtain legal advice and amendments to the contract may be negotiated with a view to having the contract amended to serve your purposes better.