Buy Sell Agreement – Business
Importance of having an agreement for sale of business
Business or asset sale is common in Malaysia. Sale of a business usually includes the assets of the business as well unless otherwise negotiated by the parties. A business sale is to be distinguished from a company sale or shares sale which involves the sale of the company shares as well as the business operated by such company. Sale of a business operated by an enterprise namely sole proprietorship or partnership is in other words, sale of the enterprise itself as there is no separate legal entity between the business and the sole trader or the partners (except partners to the limited liability partnership) i.e. the owner of the business will be personally liable for all debts incurred by the business whereby the creditors can go after the owner’s personal assets (such as cash savings, lands and properties, cars and other “cash-able” items) and other personal or employment income etc. A company, on the other hand, is a separate legal entity that can own a business and assets that are used in the operation of the business.
In any business sale, it is strongly recommended to reduce communications or understandings between the parties into writing for the benefit of both parties. Here are the reasons why:
Provides details and prevents miscommunications
Even a slight miscommunication or misunderstanding between parties may cause a deal to fall through. It is important to have a formal agreement to spell out all the agreed terms in and to provide parties with all the information which the parties might not have discussed in details, preventing any potential or further misunderstandings.
A business sale agreement should provide the relevant details of the deal namely the purchase consideration, manner of payment, the special conditions or conditions precedent to the sale to be fulfilled within a time frame (if any), completion and completion deliverables, dispute resolution alternatives such as mediation or arbitration and so on.
Ensures proper execution
Even if both parties are solidly committed to a deal, an agreement to a business sale is required to ensure proper execution of the deal. For example, if a business sale agreement requires the legal suits involving the business or assets (which is a deal breaker revealed through a due diligence conducted on the target business) to be settled by a certain date failing which the buyer is entitled to terminate the agreement, the parties would use their best endeavours to ensure that such condition is fulfilled i.e. the suits are duly settled to avoid termination or abortion of the deal.
A business sale agreement would provide what is agreed to be delivered by the parties on completion i.e. upon satisfaction of all the conditions precedent or full or partial payment of the purchase price so that the parties would procure the relevant deliverables in time to ensure that smooth delivery of such deliverables on completion of the deal. Examples of deliverables are novation of tenancy, deeds or documents of title relating to any business asset or property, disposition of vehicles, notices and/or new employment or service contracts to be signed between the buyer and the staffs to be transferred from the seller’s business etc.
Provides legal backup
One of the most important reasons to have a formal agreement in place is to avoid potential disputes as well as to protect both parties in the event of dispute. A formal agreement can deter the parties to the agreement from going back on their words when things turn sour as the other aggrieved party may tender such a document in the court or during mediation or arbitration to prove their case. Such agreements may help the court to decide if there was a valid binding contract by examining the contents of the document and the subsequent actions of both parties.
The options for dispute resolution between the parties such as court, mediation or arbitration should also be agreed upon between the parties and documented in writing to prevent dispute on the choice of the dispute resolution.