We have assembled a highly experienced, capable team of legal practitioners, committed to delivering you expertise across all legal services. Find your local office:

Business sales – Due Diligence – Seller Beware

Share this post:

by Bruce Sargent

Buyer due diligence is a critical process in which potential buyers thoroughly examine a business’s financial, operational, legal, and other relevant aspects before completing the purchase. While due diligence is essential for making informed decisions, there can be certain dangers associated with it.

Disclosure of Sensitive Information: During due diligence, you will need to share detailed financial records, business strategies, staff and supplier details and other potentially sensitive information with potential buyers. There is a real risk that this information could be misused, leaked, or exploited if adequate contract conditions are not in place.

This article looks at one of the areas that can be exploited by Buyers under a Due Diligence condition – Employees.

More than ever, the retention of employees in the tight labour market on the Sunshine Coast is vital. Particularly, in businesses who employ specialist qualified staff such as “Tradies”. The retention of the employees is essential:

  • To the Buyer for the ongoing operation and value of the business post settlement; and
  • To the Seller, if the sale is terminated, for the ongoing operation of the business and retention of value.

Case Study

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

ABC entered negotiations to sell its business and the draft contract presented by the Buyer included a due diligence condition that allowed an interview with the Seller’s staff during the due diligence period. ABC was concerned about this condition as it had been struggling to engage or retain staff in such a competitive labour market. The Seller was concerned that the Buyer would meet the staff, terminate the contract, and simply offer them employment, essentially destroying the business. The Buyer on the other hand, simply wanted to interview to staff to determine if they would stay on and that they would fit into the culture of the new business. A stalemate existed that had the potential to end negotiations.

How was this resolved?

The Seller approached a Solicitor specialising in business sales who drafted a special condition stating that the Buyer had a right to interview the staff via pre-arranged questions and through an independent third party but only once the contract was unconditional in all respects (including the Finance and Due diligence conditions) and the Buyer had provided evidence that it had sufficient funds to compete the sale.  If the Buyer was not satisfied with the interviews it had seven days to terminate the contract in which it would receive back its deposit.  The condition drafted also included a non-solicit clause which prevented the Buyer from approaching the employees of the business (if the sale did not complete) together with an allowance for liquidated damages should that condition be breached.

The conditions as drafted provided each party with the security it needed and the sale was completed.

Moral of the story – find an experienced specialist solicitor that truly works for you and your ultimate goal of selling your business.

We have assembled a highly experienced, capable team of legal practitioners, committed to delivering you expertise across all legal services. Find your local office: