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Buying a business:
Identifying any key contractual terms

As well as considering how much you would pay for the business in financial terms, you should also consider whether there are any terms or conditions that would be critical to your decision as to whether to make an offer for the business. These should be raised at the time that the Heads of Terms are agreed and before you start the due diligence (which is typically a costly exercise) in case they sink the deal.

Restrictive covenants

It is possible that failure to negotiate a restrictive covenant would be a deal breaker. If you consider, for example, that the vendors could set up a competing business that would significantly reduce the value of the business that you are buying, you should insist on a restrictive covenant to prevent them doing this.

Warranties and indemnities

It is standard that, as part of the final contract, the vendor agrees to give warranties and indemnities.

Warranties are representations that have been made by the vendor that are incorporated into the agreement as specific statements of fact. As examples, tax warranties might include clauses asserting that stamp duty had been paid where appropriate or that the business was not in any dispute with the tax authorities. If any statements prove to be untrue the purchaser can only get damages by bringing an action for breach of contract, and the amount of damages payable is determined by the purchaser's loss. It is much more difficult to claim damages under warranties than under indemnities.

Indemnities are promises by the vendor to make payments to the purchaser in certain circumstances. Common tax indemnities include promises to pay any tax liabilities which arise in the acquired company because of the previous relationship with the vendor, or underpaid tax, interest or penalties relating to returns filed by the vendor.

Many issues that are identified at the due diligence stage are resolved by using warranties or indemnities but, in practice, many warranties and indemnities are standard. If you are aware of any specific issues on which you anticipate requiring warranties or indemnities, you should consider referring to them in the Heads of Terms.

Exclusivity period

The process of acquiring a company is expensive in time and money and so, as a potential purchaser, you should negotiate an exclusivity period to commence at the earliest possible stage, but certainly once Heads of Terms have been agreed.