Selling Your Business: Minimizing Financial Risk in a Purchase

In the sale of a privately held business, one of the most consequential elements is the negotiation of the purchase agreement. While buyers typically control the first draft, the terms are often weighted in their favour—particularly around pricing mechanics, post-closing liabilities, and representations and warranties.

“For sellers, carefully reviewing and negotiating these provisions is essential to managing legal and financial exposure, preserving deal value, and avoiding future disputes.”

 

Structuring the Purchase Price: Managing Deferred Payments and Adjustments

The economic terms of a business sale often go beyond the headline purchase price. Buyers commonly include payment deferral mechanisms that can reduce the seller’s net proceeds if not carefully negotiated.

Hold-back arrangements withhold part of the purchase price post-closing to cover potential indemnity claims. Sellers should negotiate the amount, duration, and clearly defined release conditions.

Earn-out provisions tie part of the sale price to future financial performance. To limit uncertainty, performance metrics should be specific, achievable under normal operations, and supported by access to financial data.

Working capital adjustments require the seller to leave a target level of capital at closing, with post-closing adjustments based on actuals. Agreements should include a clear calculation method and dispute-avoidance thresholds.

Representations, Warranties, and Disclosure Strategy

Buyers typically seek broad representations to shift risk. To limit post-closing liability, sellers should ensure statements are factual, verifiable, and appropriately qualified. Full disclosure of material risks—particularly relating to litigation, compliance, and employment—is essential. Properly drafted disclosure schedules help mitigate the risk of misrepresentation claims and related indemnity exposure.

Indemnification Provisions: Scope, Duration, and Financial Limits

Indemnity clauses are among the most heavily negotiated terms in an M&A agreement. While buyers seek protection against losses from breaches of representations, warranties, and covenants, poorly structured provisions can leave sellers exposed to significant post-closing liability.

To mitigate this risk, sellers should negotiate:

“Clear procedures for claims, including notice, dispute resolution, and limits on consequential damages, are also essential to managing indemnity exposure.”

 

Closing Obligations and Transitional Support

While buyers typically prepare the closing documents, sellers remain responsible for key operational tasks to support a smooth transition. These may include:

• Notifying employees or unions.
• Assigning or renegotiating leases and contracts.
• Coordinating with landlords, suppliers, and key clients to maintain business continuity.

These obligations should be clearly documented in the purchase agreement to avoid ambiguity. In earn-out scenarios, where the seller stays involved post-closing, additional covenants may be required to safeguard business performance and reporting integrity.

Legal Advisory: Why Early Counsel Matters

The purchase agreement governs the allocation of legal and financial risk in a business sale and directly impacts the deal’s overall value.

“Engaging legal counsel early in the transaction enables sellers to evaluate the implications of key provisions, negotiate more favourable terms, and structure the deal to reflect the realities of the business.”

Our Business Group at Boughton Law provides expert advice through every stage of the transaction process—navigating pricing structures, liability allocation, and post-closing obligations with confidence and strategic foresight.