‘The Price Is Right’ might be a clichéd game show title, but it’s a fundamental point to check for anyone buying or selling a business.
When businesses are being bought and sold, everyone’s keen on knowing what’s the deal and making sure that ‘The Price Is Right’. But agreeing terms to buy or sell a business is not always as clear cut as it may at first appear.
Often the negotiating parties will agree a headline price with very little detail as to what this includes or what it is based on, and this is particularly an issue if you are buying or selling a limited company.
Experience shows that flushing out the detail of the deal terms as early as possible will ultimately save our clients time and cost and avoid misunderstandings occurring as the deal progresses.
Fiona Boxwell explains some phrases and concepts to be aware of to ensure both buyer and seller are on the same page.
1/ Is the deal price fixed?
“Often the deal price first stated is a headline starting point and not the actual cash price the seller ultimately receives.
The buyer will usually require various deductions to be made, such as bank loans or overdrafts outstanding at completion.
Or a seller may have large cash reserves in the business and will expect this cash in addition to the headline deal price.
To avoid misunderstandings, state explicitly what you consider to be included and excluded from the deal price quoted so that expectations are clear from the outset.”
2/ What’s the price based on?
“Is the headline price based on the assumption that at completion the net asset position of the business will be no worse than set out in the last set of full accounts provided to the buyer prior to it making its offer?
Or, does the buyer require a specific minimum net asset target to be achieved at completion? If so, make that target amount clear and state also whether there is an expectation of a minimum amount of cash being left in the company.”
3/ What are ‘completion accounts’?
“The practicalities of how a final adjusted price is established should be discussed at the same time as agreeing the price.
The parties may themselves want to establish an estimated apportionment of income and expenditure to completion and seek to agree a fixed final adjustment to the deal price to reflect this.
This may leave both parties at risk of further expenses or income cropping up after completion which were not taken into account in these approximate calculations.
To avoid this occurring, it can be required that such items are finalised through ‘completion accounts’. These are accounts drawn up to the date of completion as though that date were the business year end.
They seek to be as accurate as possible about apportioning income and expenditure to the period pre-completion, and enable a level of accuracy to be achieved in finalising the price payable.”
A deal will always progress more smoothly if all the above issues on are the table from the outset of negotiations.