The deal terms in purchase agreements of SME transactions

Entrepreneurs looking to sell a business should be mindful of stricter terms from the buying party. Half of the transactions now involve deferred payment, and in all cases the buyer demands one or more guarantees regarding information provided.

These are the main findings from the Deal Terms survey, the annual study by acquisition platform Brookz into the deal terms of acquisition transactions in SMEs. In the survey - which took place for the first time this year - 101 acquisition lawyers participated and a total of 342 purchase agreements were scrutinized.

Earn-out

Rapidly rising interest rates, high inflation and international military conflicts are currently creating an uncertain economic outlook. Entrepreneurs looking to sell a business must therefore reckon with increasingly strict terms and conditions from the buying party.

Almost half of all 342 transactions surveyed (47%) involve an earn-out, in which part of the sale proceeds depend on revenue or profit targets achieved in the future. In addition, in four of the 10 transactions surveyed, selling entrepreneurs provided a vendor loan (seller loan) to enable financing of the deal.

And in almost all of the examined transactions, the buyer demands additional guarantees regarding a correctly prepared balance sheet, the non-pawning of property, no legal claims and correct data on personnel.

Collateral

To ensure that any claims can also be recovered from the seller, buyers demand collateral in the form of an asset conservation statement (60.5%), offsetting against the vendor loan (37.7%), withholding part of purchase price (25.2%), personal surety (20.4%) and a bank guarantee (17.8%).

And to prevent the selling entrepreneur from becoming active again in the same sector within the foreseeable future, 85% of all purchase agreements include a non-competition clause for a period of 1 to 3 years.

Buyer's market

According to Peter Rikhof, founder of Brookz, the stricter deal terms are a sign that the takeover market has turned from a seller's market to a buyer's market over the past year.

'Two years ago, most deals were simply settled in one cash payment and buying parties often settled for lenient terms regarding warranties and indemnities. But those days are over now. There are still plenty of buyers in the market, but because of the uncertain outlook, some of the future risks are now placed on the seller. As far as I am concerned, a predictable and normal consequence of a well-functioning acquisition market.