Published in Retail Newsagent Magazine, Jan 2014
Listen to economic commentators and you get the impression that things are on the up. We certainly have a way to go before we are back to the position we were in a few years ago, but the picture is increasingly positive.
Times like this always signal a transition period for the property market. Some business owners decide to sell up and move on, but others spot an opportunity to take on a struggling store and make it work.
The general lack of appetite of the banks to lend money in the volumes they once did, however, means that purchasers (particularly when buying a freehold) now have to raise a substantial deposit.
When faced with this problem, some buyers feel the need to be creative to get the deal done, or even shortcut the legal process. But both of these things can be incredibly risky.
When buying the goodwill of a business, a commonly mapped out legal process follows once a price has been agreed, involving solicitors and, potentially, the landlord. Once the legalities are complete, the store’s stock is valued and everything completes on a given date. However, I have come across several cases in the past year where shortcuts have been taken and things have gone badly wrong.
In some cases, this happens because part of the transaction has been taken past the completion date. Frequently, the purchaser cannot raise enough money to complete the purchase of all the goodwill or stock. Often referred to as deferred completions, the previous business owner agrees – for a certain amount of the figures involved – to be paid over a period of months out of the new owner’s cash flow.
This has risks for both parties and, in my view, should be avoided where possible. The only guarantee the seller has that the buyer will pay is a clause written into the sale contract. This offers no real security and if the buyer defaults, the only recourse for the seller is a potentially costly court case. If the seller is also the owner of the freehold and has given the new owner a lease, they potentially have a degree more control, but recovering any money can still be fraught with problems.
The easiest way to avoid these problems is never to deviate from the process of completing in full on the date agreed and doing everything through your solicitor, even if you know or are related to the other party.
But if a deferred completion really is the only way of doing the deal, make sure you agree a payment plan – as short and affordable as possible – with the new owner.
The other thing I have come across is deals being done without involving solicitors. This often occurs when both parties know each other and assume that as a result, nothing could possibly go wrong. This also happens if both parties want to avoid expensive legal fees and other associated costs. If a dispute arises in these cases, because nothing is in writing, it can simply be one person’s word against another.
In one very sad case I saw last year, one friend agreed to sell the goodwill to his mate, but to occupy the shop on a trial basis to see if he could make it work. Money changed hands for the sale of goodwill and the existing owner then went on an extended holiday. Nothing was documented and the landlord of the property wasn’t contacted before he left, so, in effect, the friend had no legal right to be there. The landlord subsequently discovered what had gone on and evicted the new owner, who lost a considerable amount of money as a result. The previous owner never returned.
- Always use a solicitor to complete a transaction
- Stock must always be valued on the day of completion
- All monies must be paid through your solicitor
- Only consider a deferred completion as a last resort
- Make sure everything is documented
- Walk away from the transaction if you have concerns about how it is being conducted