| By Nancy L. Cofield, CBI • Broker | Please note that information in this article may be time sensitive and specific to the date it was originally published. Please contact the author for updates to this information. |
A contingency in the sale of a business is a condition in the offer that must be resolved by either a buyer or seller. If it isn’t satisfied, then the sale generally doesn't move forward.
Most offers to buy or sell a business contain one or more contingencies. For example, the sale may be subject to the buyer obtaining financing or the seller repaving the parking lot.
Experienced business brokers deal with a myriad of contingencies, most of which are placed in the offer by the potential buyer, and must be satisfied prior to closing the sale. Contingencies range from the very simple (i.e., the buyer receives a lease extension by a certain date), to very complex (i.e., the sale is contingent upon the buyer's approval of the seller's books and records).
The difference between these two examples? The first provides a specific event that must be satisfied within a specific time frame. If the seller satisfies the contingency, the buyer has to close the deal. The second example is open-ended, meaning a buyer could opt out of the proposed sale by disapproving the records and books for essentially any reason. Additionally, there is no time limit for the records-approval process, giving the proposed buyer as much time as he or she wants between making the offer and closing the sale.
The following are some tips on dealing with contingencies:
- Make sure each contingency refers to a specific time frame for resolution. Without a time limit, the deal could go on forever.
- Contingencies should be reasonable. There's simply no point in making the sale contingent on moving the building or business to another state. As they say, "It ain't gonna happen."
- Limit contingencies to only very important, critical issues that impact whether or not a buyer will actually purchase the business or not. Minor issues should be resolved prior to a written offer.
- Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller should not proceed until an offer containing price and terms is agreed upon.
Contingencies come in all different shapes and sizes, and almost all offers have at least one. They’re an inevitable part of selling and buying a business. As a buyer or seller, it's important to know what's reasonable and what's not.
Nancy Cofield, CBI, is
president/broker of Corporate
Investment International of North Florida, Inc. She can be
contacted at (904) 996-1666 or via Email at ncofield@cii-ma.com.
