When a business purchase falls through: a digital agency acquisition that failed on seller security

At a glance

Not every deal completes, and the ones that do not are often more instructive than the ones that do. Our client, an individual buyer, agreed to buy a Southampton digital agency for a six-figure price with part of the consideration deferred. Due diligence was under way and the share purchase agreement was in negotiation when the seller withdrew. The sticking point was security: the seller wanted certainty that the deferred part of the price would be paid, and the parties could not agree how to provide it.

The client and the objective

The buyer wanted to add a new revenue stream by acquiring an established agency with existing client contracts, a small team and a portfolio of work, rather than building an agency from scratch. The price was to be paid partly on completion and partly over time, which is a common structure when an individual is buying a service business.

The deal as proposed

• Share purchase of the entire issued share capital by the buyer personally.
• Part of the price paid on completion, the balance deferred.
• Due diligence focused on client contracts, intellectual property in the agency's work, and change-of-control provisions that might let clients walk away on a sale.
• Seller represented by its own solicitors.

Why it did not complete

Security for deferred consideration

A seller who agrees to be paid over time is lending the buyer part of the price. Sellers reasonably ask what happens if the buyer does not pay. The usual answers are a personal guarantee, a charge over the shares being sold, a debenture over the company, a bank guarantee or an escrow arrangement. Each has a cost for the buyer: a personal guarantee puts the buyer's own assets on the line, a charge over the shares gives the seller a route back to the company if payments stop, and a lender funding the completion payment will usually insist on ranking ahead of the seller.

Here the seller's requirements for security went beyond what the buyer was willing or able to give, and the gap could not be closed by adjusting the price, the timing or the covenants. The seller chose to withdraw rather than complete on the terms available.

What the due diligence had shown

The due diligence itself had been constructive. Client contracts had been reviewed for change-of-control and termination rights, the ownership of the agency's creative work and code had been checked, and key staff arrangements were being documented. None of that was the reason the deal failed, but it meant the buyer had a clear picture of what he was buying when the seller withdrew, and no reason to pursue a deal on terms he was not comfortable with.

Outcome

The transaction was aborted before exchange. Because the work was carried out on a fixed fee agreed at the outset, the buyer's legal cost was known in advance and limited. The buyer continues to look for an agency to acquire, with a clearer view of the terms he will accept.

What this deal shows

• If any part of the price is deferred, agree what security the seller will get in the heads of terms, before either side spends money on lawyers.
• An individual buyer should decide early how much personal exposure they will accept. A personal guarantee is the simplest security to give and the most dangerous.
• A deal that falls over on a fundamental term is cheaper than one that completes on terms you cannot live with.
• Fixed fees matter most on the deals that do not complete.