Business Sales – Due Diligence – Seller Warning – Contracts and Commercial Law

Buyer due diligence is a critical process in which prospective buyers thoroughly examine the financial, operational, legal, and other relevant aspects of a company before completing a purchase. While due diligence is essential to making informed decisions, there may be some risks associated with it.

Disclosure of Sensitive Information: During your due diligence, you will need to share detailed financial records, business strategies, employee and supplier details, and other potentially sensitive information with potential purchasers. There is a real risk that this information could be misused, leaked or exploited if the appropriate contract terms are not met.

This article is about one of the areas that buyers can exploit under due diligence clause –
employees.

Staff retention in the tight labor market on the Sunshine Coast is more vital than ever. In particular, in companies that employ qualified and specialized personnel such as “Trades”. Staff retention is essential:

• to the Buyer regarding the ongoing operation and value of the business after settlement; And




• To the seller, in the event of termination of the sale, in order to continue operation of the business and to retain value.

Case Study

ABC Pty Ltd (ABC) operated an electrical business on the Sunshine Coast with branches in Noosa, Maroochydore and Caloundra with another branch in Brisbane.

ABC Company entered into negotiations to sell its business and the draft contract provided by the buyer included a due diligence clause allowing for interviews with the seller’s employees during the due diligence period. ABC was concerned about this situation because it was struggling to get or retain employees in this competitive job market. The seller was concerned that the buyer would meet with the employees, terminate the contract, and simply offer them work, essentially ruining the business. On the other hand, the buyer simply wanted to interview employees to determine whether they would stay with the company and whether they would fit into the new work culture. There was an impasse that would have ended the negotiations.

How was this resolved?

The seller contacted a business sales attorney who drafted a special clause stating that the buyer had the right to interview employees through pre-arranged questions and through an independent third party but only when the contract was unconditional in all respects (including finances). and due diligence requirements) and the buyer has provided evidence that it has sufficient funds to compete in the sale. If the buyer is not satisfied with the interviews, they have seven days to end the contract where they will get their deposit back. The condition drafted also includes a non-solicitation clause which prevents the buyer from approaching company employees (if the sale is not completed) as well as an award of liquidated damages if this clause is breached.

The terms as they stood provided each party with the security they needed and the sale was completed.

Moral of the story – Find an experienced professional attorney who will truly suit you and achieve your ultimate goal of selling your business.