Drafting a sale agreement

By Lee Rossini

After a verbal agreement to purchase your business has been reached between yourself and the seller, there is still work to be done. Although the sale may be agreed to in principle, it is often when negotiating the minutiae regarding the terms and conditions of the sale that stumbling blocks arise; some of which may scupper the deal altogether.

A sale agreement should:

• Set down clear definitions of applicable words and terms;
• Clearly define the parties to the agreement;
• Contain a confidentiality clause;
• Describe exactly what is being sold;
• Stipulate the material terms of the agreement;
• Stipulate the effective date of acquisition (the date of ownership as well as the date at which the risk passes to the purchaser);
• Adequately describe the purchase price and the method of financing the deal;
• Contain a clause that the sale is subject to regulatory approval;
• Include any conditions that should be met for the sale to be finalised, for example, that the current owner will remain with the business for a stipulated period after the sale;
• State that after the effective date of sale and before completing the handover, neither party may make any substantial changes to the business, or enter into any unusual arrangements without the prior consent of both parties;
• Consider any agreements or contracts that may be affected by the sale of the business, for example, lease agreements, agency contracts, product supplier contracts or existing sureties;\
• Clarify the costs involved in the sale and who is responsible for the costs;
• Check the warranties and indemnities for any potential risks;
• Check any conditions relating to claw-back of client adviser service fees, commission or other revenue streams; and
• Any supplementary contracts forming part of the sale agreement should be referenced and drafted, for example, a management or consultancy contract if the seller is to either remain at the business or will be consulting to the business.

Examples of the documents required at the time of sale:

• Business registration certificates;
• Founding documents;
• Contracts with product providers;
• Tax documents;
• Financial statements;
• Market evaluation of the business;
• Buy-sell agreement; and
• Contracts relevant to the sale.

After successfully negotiating the terms and conditions of the sale, unless you have experience in this area, consult with a commercial attorney to check the terms and conditions and to draft the final sale agreement. It is worth spending the money to have a professional with experience in the buying and selling of businesses to check and draft the agreement.  Do some research to find the right professional to assist you (ask other financial advisers, your membership body or product suppliers). Before appointing them to act on your behalf, ask questions to check whether they have the necessary knowledge and experience. Establish the parameters of what they will be doing for you and ask for a quote before signing them up.

The sale of a financial planning business should be a relatively straightforward and stress-free process. Although it may be tempting to do things on the cheap, if you do not feel confident about the process of selling your business, it is worth spending the money to ensure that your rights and assets are adequately protected. Dealing with a professional who understands the selling and buying of financial advice businesses can prevent costly and time-consuming disputes later.