Biggest mistakes buyers make when buying a business: price, warranties and the seller

What are the biggest mistakes buyers make when acquiring a business? As an M&A lawyer I have seen buyers make mistakes that cost them thousands of pounds and months of wasted time, and the worst part is that every one of them was avoidable. The three that come up most often are structural: paying a fixed price with no adjustment for completion accounts, using a cheap template share purchase agreement with no real warranties, and failing to keep a working relationship with the seller. Here is what each mistake looks like and what to do instead.

Mistake one: not adjusting the purchase price through completion accounts

Buyers often think they are buying a business at a predefined price. They may have stipulated in the heads of terms that they are buying the business for, say, £1 million, and they assume that number is final.

If the price genuinely never changes, that is known as a locked box deal. The price is locked and does not move. That can be a serious mistake for a buyer, and here is why.

From the moment the heads of terms are signed until you actually become the owner of the business, usually at least three months pass. During those three months the target business might have incurred more liabilities. It might even have disposed of important assets. Paying the same price for a business that is now different, with fewer assets and more debt, is a big mistake.

Think about what can happen in a quarter. The company can take on a new loan, run up its trade creditors, fall behind with its tax, sell a vehicle or a piece of equipment, or simply let cash drain out of the bank account. None of that is necessarily dishonest; it is just a business carrying on trading. But if the price you agreed in the heads of terms was based on a snapshot taken before all of that happened, you are overpaying.

That is why I advise my buyer clients to adjust the purchase price in the sale and purchase agreement according to completion accounts.

What are completion accounts? In short, they are financial accounts prepared to show the state of the business as at completion. They work like this:

• If the company turns out to have more debt than anticipated, the purchase price is reduced, for example pound for pound.
• The opposite is also true. If the company has more cash in the bank than anticipated, you pay the seller more.

The mechanism cuts both ways, which is what makes it fair and which is why sellers can usually be persuaded to accept it. You pay for the business you actually receive on completion day, not the business that was described to you three months earlier. If you have already signed heads of terms that fix the price, raise the point with the seller now rather than at the SPA stage, when a change of approach looks like a renegotiation.

Mistake two: not including extensive warranties in the SPA

Sometimes buyers use a cheap or free online template to buy their business. This is a false economy.

When buying a business, you are responsible for conducting your own due diligence, and that means you are responsible for identifying the issues with the target. But due diligence never finds everything. Sellers do not always keep good records, some problems have not surfaced yet, and some questions simply do not get asked. A cheap template does not protect you against those unknown issues, the things that did not come up during due diligence. It is drafted for nobody in particular, so it protects nobody in particular.

Instead, buyers should instruct qualified specialist solicitors to draft comprehensive documents that are bespoke to their deal. A properly drafted SPA will include extensive warranties, and in my experience the warranty schedule alone is typically longer than 20 pages.

What is a warranty? A warranty is a promise the seller makes to you, as the buyer, about the state of the business. An example is a warranty that the company does not owe any money to HMRC. If that turns out to be untrue, you can claim money back from the seller. That claim can be made directly, or the amount can be set off against any deferred payments you still owe the seller.

That set-off point is worth dwelling on. If part of the price is deferred, the warranties give you real leverage: rather than chasing the seller for money after they have been paid in full, you simply deduct what you are owed from what you still have to pay. A template SPA with a page of generic warranties gives you very little of that protection, because the warranty that would have caught the problem is not there.

The warranties in a bespoke agreement are long because they are specific. They cover the tax position, claims and disputes, the accounts, the contracts, the employees and whatever else matters in that particular business. Each one is a question the seller has to answer with their own money on the line, which is a far stronger incentive to disclose than any due diligence questionnaire.

Mistake three: not meeting the seller on a weekly basis

The first two mistakes are about documents. The third is about behaviour, and it is just as costly.

Buying a business is complex and difficult. It takes a lot of energy, and it is not uncommon for a deal to abort. Very often the reason a deal fails is that the buyer and the seller are not on the same page. They cannot agree important terms of the contract. That leads to delays, legal fees increasing, sometimes even the purchase price increasing, and eventually the deal falls over.

Instead, buyers and sellers should meet on a weekly basis to discuss the deal and keep building rapport and trust. Use that time to iron out details so that the deal keeps moving smoothly towards a timely completion.

From my professional experience, I have had two main kinds of buyer client:

• The one who meets the seller regularly, builds rapport and trust, and uses those conversations to resolve points before they become disputes.
• The one who is contentious and distant, and finds issues with many things.

The client who focuses on building rapport with the seller ends up completing the deal quicker, at a lower cost, and often at a lower purchase price. The same cannot be said for the litigious and distant client. Lawyers can negotiate the contract, but they cannot manufacture goodwill between the parties, and goodwill is what gets a difficult deal across the line.

A weekly meeting does not have to be formal. A short call to go through the open points, agree who is doing what and confirm the timetable is usually enough. What matters is that the seller hears from you directly, rather than only through solicitors' emails, and that small disagreements are resolved while they are still small.

Be willing to walk away from the deal

As a bonus tip: be willing to step away. As a buyer, you are not obliged to buy from this particular seller. There are other businesses.

The seller, on the other hand, has typically signed an exclusivity agreement and cannot sell to anyone else during the exclusivity period. That asymmetry is in your favour. A buyer who is genuinely prepared to walk away negotiates from a stronger position than one who has decided they must have this business whatever the terms. It also keeps you honest with yourself: if due diligence turns up something serious, or the seller will not agree to a price adjustment or proper warranties, walking away is often the right commercial decision rather than a failure.

How the three mistakes connect

These mistakes tend to travel together. A buyer who accepts a fixed price is often the same buyer who uses a template and keeps the seller at arm's length, because all three come from treating the acquisition as a simple purchase rather than a negotiated process that runs for months. Fix the mindset and the individual mistakes tend to fix themselves.

Next steps

If you are preparing an offer, make sure the heads of terms provide for a price adjustment rather than a fixed figure, and budget for a bespoke SPA with proper warranties rather than a template. Then set up a standing weekly call with the seller. Proper legal due diligence is the other half of minimising your risk, and a corporate solicitor can help you structure both the investigation and the agreement.