BALDWINS • FoodLegal

Australian Lawyers and Consultants

Dangers of Selling a Busines on Vendor Terms

© July 2005 by Joe Lederman, BALDWINS Australian Lawyers and Consultants

Sometimes people selling a business become too desperate in wanting to sell to
someone who may not have sufficient money to pay the full price. There are inherent
risks where the vendor proposes providing credit to the purchaser. These risks include
the prospect of the purchaser not paying the balance of the price, and the contract
needs to provide security to the vendor against that possibility.

If acting for a vendor in these circumstances, the vendor needs to be warned of the
risk and the warning put in writing.

The type of security must be carefully considered. Possibilities include a bank
guarantee, a debenture charge, a personal guarantee, and the holding of assets in the
name of the vendor under arrangements that prevent the purchaser getting possession
or control prior to completion of the full payment. Sometimes there is a combination
of multiple security arrangements required.

Some vendors are not fully cognisant that chattel mortgages provided by non-
company purchasers cannot be registered or that, even if enforceable the value of the
chattels (e.g., plant and equipment) may be inadequate to pay the outstanding debt of
the defaulting purchaser.

Sometimes security is offered which is woefully inadequate, such as the guarantee of
an individual who has no personal assets or a second mortgage when there is a first
mortgage that already covers most of the equity value of the property security in
favour of someone else.

As a general rule, the whole of the outstanding price should be made instantly payable
in full upon certain trigger default events. These must be carefully considered.

The impact of future default in payment must also be considered beforehand. For
example, who will manage the ongoing business if the vendor wishes to reclaim the
business ­ assuming that the contract of sale permits this?

Trade restraints or restrictive covenants imposed on a vendor should have carve-outs
to allow the vendor to compete with the purchaser or to take control without creating a
vendor breach of any sale agreement.

Where business assets are being sold on vendor terms, insurance arrangements also
need to be carefully considered to ensure that the vendor remains adequately insured.
Similarly, care must be taken to preserve the assets and their value and the purchaser
prevented from eroding their value whilst monies are outstanding.

The experience of acting for many vendors and purchasers enables us to provide
professional advice in acting on any business sale or purchase transaction.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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