When a sale collapses on completion day: the lender document that stopped a seven-figure business sale

At a glance

We acted for the two shareholders of a London background-checking business on a seven-figure share sale. Due diligence was finished, every document was agreed and signatures had been collected. Hours before the agreed completion, the buyer's lender sent a document directly to our clients for electronic signature, without telling us it existed. It asked the sellers, in effect, to give up their right to the deferred part of the price unless the lender chose to allow it to be paid. The sellers would not sign, the lender would not negotiate, the buyer had no other funding, and the deal fell through.

The client and the objective

The two sellers had different reasons for selling: one wanted to retire, the other was likely to start a new venture. Both wanted a clean sale at a full price with the majority paid on completion, and had accepted a deferred element on the basis that it was a debt owed to them by the buyer, not a payment at anyone else's discretion.

The deal as agreed

• Share sale of the entire issued share capital on a cash-free, debt-free basis with a normalised working capital adjustment.
• The majority of the price payable on completion, the balance deferred.
• Buyer funded by a lender, with the lender's solicitors involved throughout.
• Due diligence completed, share purchase agreement and ancillaries agreed, all signatures held ready for completion.

Why it did not complete

The subordination document

Lenders funding an acquisition commonly require that deferred consideration owed to the sellers ranks behind the loan. That is a normal commercial position and it is usually negotiated early, through a deed of priority or subordination that both sides' solicitors see and agree. Here the document arrived on completion day, went straight to the sellers, and went further than subordination: on its wording the sellers' deferred payments became payable only if the lender agreed, with no fixed entitlement at all.

No room to negotiate

We advised the sellers that the document changed the economics of the deal they had agreed, and asked the lender to amend it to a conventional subordination. The lender declined to change the wording. The buyer had no alternative funding in place, so without the lender there was no completion. The sellers chose not to give up a material part of the price, and the transaction was aborted.

Outcome

The sale did not complete. The sellers kept their business and remain free to sell it to another buyer; the work done on due diligence and documents will shorten the next process considerably. The experience has changed how we handle lender-funded buyers on the seller side, as set out below.

What this deal shows

• If the buyer is borrowing, ask early and in writing what the lender will require from the sellers, and get the subordination terms agreed before signatures are collected.
• A document sent directly to a client by the other side's lender should go straight to their solicitor, unsigned.
• Deferred consideration that is payable only at a lender's discretion is not deferred consideration; it is a hope.
• A buyer with a single funding source has a single point of failure, and the sellers carry that risk until completion.