One term that you may hear when negotiating the sale of your business – or the purchase of a new business – is “conditions precedent” or “conditions”. What does this term mean, and what are common examples?
CONDITIONS or CONDITIONS PRECEDENT are events that have to happen before something else can happen. Quite simply, they are the conditions that must be met before the deal will close.
Common examples of these conditions are:
- The covenants, representations and warranties of the seller will be true and correct as of the date of the agreement and the date of closing.
For example, if you sign an agreement on the 10th of January, with an anticipated closing date of the 31st of January, everything that you promised to the other party was true on the 10th must still be true on the 31st.
- The transaction will not close until all necessary consents to the transaction have been received.
When you are buying a business, you are buying the contracts relating to that business – for example, the lease for the premises and the supply contracts. Many of these contracts contain “change of control” or “assignment” provisions, which state that the contract can’t change hands without the landlord or the supplier’s permission.
This condition is included to ensure that the deal doesn’t close until these consents have been obtained, giving you as the purchaser confidence that after closing you can continue leasing the premises or working with the suppliers on the same terms and conditions.
- The purchase of the assets will not occur until the vendor’s bank provides a letter stating that they have no interest in the assets being sold.
Let’s say you’re buying just some of the assets of a business – not the entire company. However, the business has a line of credit with its local bank and the bank has taken out a security registration against “all personal property” of the business, to protect its loan.
What you need here is a letter from the bank saying that they have no interest in the assets being transferred to you, so you can confidently proceed with the purchase.
- The obligations of the purchaser to complete the purchase of the business are subject to the purchaser having obtained financing on terms satisfactory to the purchaser in its sole discretion.
If you’re selling a business, and you see this condition, it means that the purchaser will still need to get their money organized in order to close the deal.
If you’re buying a business, and you know you’ll need financing to do so, including this condition means that if you can’t get bank financing to your liking, you can withdraw from the purchase.
Any questions? Our Private Company Mergers & Acquisitions team would be happy to help.