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What is a contingency?

Contract torn

A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller.

If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.

It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer's approval of the seller's books and records.

The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.

Here are some tips on contingencies:

  • There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
  • It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say - "it ain't going to happen."
  • Contingencies should be limited to very important or critical issues - those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
  • Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
  • Contingencies come in all sizes and shapes. Very few offers don't contain at least one, and usually more than one. They are an inevitable part of selling - and buying a business. A business broker knows what is reasonable and what is not.

Copyright Business Brokerage Press

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