Top 5 Tips for Negotiating a Business Purchase Agreement for Buyers

Summary

• Carry out thorough due diligence to identify risks, liabilities and negotiation leverage before agreeing terms.
• Negotiate strong representations, warranties and indemnities to protect against undisclosed issues after completion.
• Structure the purchase price carefully, using mechanisms like earn-outs or escrow to manage risk.
• This guide explains key negotiation strategies for UK business buyers entering a business purchase agreement, focusing on risk protection and deal structure.
• LegalVision, a commercial law firm, specialises in advising clients on business sale and purchase transactions.

Tips for Businesses

Use due diligence to shape your negotiation strategy. Focus on warranties, indemnities and payment structure to manage risk. Ensure post-completion protections are in place and align the agreement with the business’ performance and your long-term commercial objectives.

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• Tip 1: Conduct Thorough Due Diligence on the Purchase
• Tip 2: Negotiate Comprehensive Representations and Warranties
• Tip 3: Include Robust Indemnification Provisions
• Tip 4: Carefully Structure the Purchase Price and Purchase Payment Terms
• Tip 5: Pay Attention to Post Purchase Covenants and Conditions
• Key Takeaways
• Frequently Asked Questions

Negotiating a business purchase agreement is where you protect your investment before the deal is finalised. If you overlook key terms or fail to challenge risks, you may inherit liabilities, overpay or face disputes after completion. This article will explore the top five tips for buyers negotiating a business purchase agreement and how to secure terms that align with your commercial objectives.

Tip 1: Conduct Thorough Due Diligence on the Purchase

Before entering negotiations, conduct thorough due diligence on the target business. This process involves examining various aspects of the company tailored to the specific assets you are acquiring. Typical areas of due diligence include:

• financial records;
• legal contracts;
• operational processes; and
• intellectual property.

Thorough due diligence allows you to identify potential risks and liabilities. This information is crucial for negotiating favourable terms in the BPA.

For example, if you discover pending litigation against the target company, you can negotiate for stronger indemnification clauses or a reduction in the purchase price.

Due Diligence Guide For Purchasing a UK Business

Considering purchasing a UK business? Download this free guide for practical tips on conducting due diligence and reducing risks.

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Tip 2: Negotiate Comprehensive Representations and Warranties

Representations and warranties are statements made by the seller about the condition of the business. These clauses are crucial for protecting the buyer’s interests. Negotiate for comprehensive representations and warranties depending on what assets you are purchasing. Typical representations and warranties cover the following:

• financial statements’ accuracy;
• compliance with laws and regulations;
• ownership and condition of assets;
• validity of contracts;
• absence of undisclosed liabilities; and
• intellectual property rights.

Ensure that the representations and warranties survive the completion of the deal. This survival period allows you to seek compensation if you later discover that any of the seller’s statements were false or misleading.

Tip 3: Include Robust Indemnification Provisions

Indemnification clauses protect the buyer from losses arising from the seller’s breach of the agreement or undisclosed liabilities. When negotiating indemnification provisions:

• seek broad indemnification coverage for all representations, warranties, and covenants in the agreement;
• include a “cap” on the seller’s total indemnification liability. While sellers often push for lower caps, aim for a cap that adequately protects your interests, such as 100% of the purchase price; and 
• negotiate for an extended indemnification period for certain critical representations, such as tax matters or environmental issues.

Remember that indemnification provisions are often heavily negotiated. Be prepared to compromise on some points while standing firm on those most critical to your protection.

Tip 4: Carefully Structure the Purchase Price and Purchase Payment Terms

The purchase price and payment terms are central to any BPA negotiation. Consider the following strategies:

• negotiate for a portion of the purchase price to be held in escrow. This provides security for potential indemnification claims or adjustments to the purchase price post-completion;
• include an earn-out provision if uncertain about the business’s future performance. This ties a portion of the purchase price to the company’s post-acquisition performance; 
• negotiate for a working capital adjustment mechanism. This ensures that the business has sufficient working capital at completion and protects you from the seller extracting excessive cash before the sale; and
• consider using a locked box mechanism instead of a traditional completion accounts approach. This can provide more certainty on the purchase price and reduce post completion disputes.

Be prepared to justify your proposed structure with financial data and projections. This approach can make your negotiations more effective and increase the likelihood of reaching a mutually acceptable agreement.

Tip 5: Pay Attention to Post Purchase Covenants and Conditions

Post-completion covenants and conditions can significantly impact the value of your acquisition. Key areas to focus on include:

• Non-Compete and Non-Solicitation Clauses: Negotiate restrictions on the seller’s ability to compete with the business or solicit employees or customers post-completion;
• Transition Services: If the seller’s continued involvement is necessary for a smooth transition, negotiate transition services agreements with clear terms and timelines;
• Employee Retention: Consider including provisions for key employee retention, such as bonuses or employment agreements;
• Intellectual Property Transfer: Ensure all necessary intellectual property rights are properly transferred and that the seller assists with any required registrations or assignments; and 
• Ongoing Litigation: If continuing litigation exists, negotiate for the seller to remain responsible for these matters or provide adequate indemnification.

Key Takeaways

Negotiating a BPA as a buyer requires careful attention to detail and strategic thinking. Focus on conducting thorough due diligence to inform your negotiation strategy. Negotiate for comprehensive representations and warranties to protect your interests. Include robust indemnification provisions to safeguard against potential losses. Carefully structure the purchase price and payment terms to align with the business’s value and possible risks. Pay close attention to post-completion covenants and conditions to ensure a smooth transition and protect the value of your acquisition. By following these tips, you can negotiate a BPA that protects your interests as a buyer.

If you need assistance with a Business Purchase Agreement, our experienced commercial contract lawyers can assist as part of our LegalVision membership.  For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.  Call us today on 0808 196 8584 or visit our membership page.

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