Stage 6 – agreeing the contract terms

When the seller’s solicitor prepared the draft contract, it will have included the obvious terms (eg: price) and terms to protect the seller (eg: an indemnity by the buyer in respect of post-completion debts of the business), but not necessarily any terms to protect the buyer (eg: non-competition clauses by the seller). It is the buyer’s solicitor’s job to make sure the contract includes provisions to protect the buyer’s interests.

These include warranties (eg: as to the accuracy of the seller’s accounts, on the basis of which the buyer may have made the decision to buy). If you are buying and have relied on anything said or shown to you by the seller, make sure your solicitor knows this, so that he or she can get the infiormation warranted as accurate.

The “buyer’s provisions” also include commitments by the seller for the futiure – such as non-competition provisions as referred to above, or indemnities in respect of existing debts that the buyer is not taking over.

There are other aspects that need to be checked and agreed – the apportionment of the price for instance: the total price should be split between (a) the freehold or leasehold property, (b) the goodwill of the business and (c) the inventory of fixtures, fittings and equipment (stock is usually bought in addition at its cost value on completion).

This apportionment can have a significant effect on the tax positions of both buyer and seller. For instance, if the property includes residential accommodation, the seller will often want to load as much of the price as possible on that element, and claim principal private residence exemption from CGT; the buyer will often want to acquire the property at a low cost, so that as much as possible of any future gain can be allocated to it, to maximise the benefit of the PPR exemption when the buyer in turn comes to sell. The buyer will also want to put as much value as possible on the inventory, in order to maximise the amount that can then be written down for tax purposes; the seller will not want the inventory to be sold at a price higher that its written-down value in the seller’s books, or there will be income tax payable on the excess

Sometimes there is a lot of to-ing and fro-ing over these issues; on other transactions, they are resolved fairly quickly. The important thing is to be realistic about what the other side can be expected to achieve and so to have realistic expectations

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