When you are selling your practice, signing the sale contracts is a milestone to be celebrated. It means that you’ve agreed with a buyer on all the variables involved in the price and terms of the deal.
However, what many people will be surprised to hear, is that even though you have the signatures on the contract, it usually doesn’t mean that the deal is locked in.
Most contracts that are signed are not unconditional on the date that they are signed. The deal is usually still subject to some “conditions precedent” that need to be met before the deal is set in stone.
The job of an experienced broker and commercial lawyer is to secure a sale for you. Part of that process is navigating and minimising the “conditions precedent” in the contract of sale such that the sale is locked in as quickly as possible.
Here are some examples of common conditions precedent and tips for how a vendor, their broker or lawyer should minimise these:
- Subject to…Finance
While a buyer should have sought out and secured finance before signing the contract, the negotiated terms are not final until there is a signed contract. As such, the finance on the practice sale cannot be unconditional until the practice sale and premises lease/sale contracts are signed and reviewed by the bank. As such most sales are “subject to finance” for 10 days or so post signing. An organised buyer should not need much more than this.
Tip 1: A vendor shouldn’t start drafting contracts until the buyer has selected a financier, submitted an application for finance and has preliminary approval subject to a final contract.
2. Subject to…Due Diligence
When a business is for sale, buyers should be given enough information to evaluate the business and come up with an offer. The information provided at this initial stage usually includes a prospectus/ IM, Profit and Loss reports, dental software reports and a copy of the lease on the premises.
However, when an offer is accepted, a buyer, their lawyer and their bank will often need additional information to verify that the information given is correct and that the business is operating correctly. Financial due diligence requests might include tax returns, bank statements and/or BAS statements. Legal due diligence requests might include checking contracts with staff, radiation licence, trademarks or a zoning permit on the building (note, these are examples and not an exhaustive list).
Tip 2: A buyer should NOT wait for a sale contract to be signed before they do this due diligence. Once an offer is accepted, drafting contracts can take several weeks; there is no reason why this period (between when an offer is accepted and contracts are ready to be signed) cannot be used by the buyer to complete due diligence, such that the contracts signed are NOT subject to due diligence.
3. Subject to…Other contracts being agreed and signed.
Most practice sales are captured by 3 or 4 agreements that all need to be agreed or signed in order for the transaction to be complete. There is of course the Practice Sale Agreement but this is usually subject to the:
- Premises lease agreement OR premises sale agreement
- Post sale work agreement for the vendor
3a Premises lease or sale
Most practices are bought on the understanding that they will be able to continue practicing in their current location. To secure this, the buyer needs the practice sale contract to be subject to either a premises sale or lease.
3b. Vendor work contract
Many deals will be subject to the vendor working post sale for a period of time. When this is the case, the contract of sale might be subject to the signing of the vendor’s post-sale work contract.
Tip 3: It is best practice that the premises lease or sale agreement and vendor’s post-sale work contract are negotiated and signed at the same time as the practice sale agreement, such that the practice sale is not delayed by these.
Conclusion.
When you are looking to engage a broker or commercial lawyer to help you sell your practice the only measuring stick that counts is the skill with which they secure your sale price. The better known elements of that include finding a buyer and negotiating a price. A lesser known but equally important part of securing a sale is documenting it such that it is “locked” and water tight as soon as possible and minimising any “subject to…”