What is a Contingency?* - South Florida Business Broker Russell Cohen

Business Broker Russell Cohen


What is a Contingency?*

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.

Employee Status

Less than 20% of business entities (a little less than 5 million firms) had
paid employees, and these firms accounted for nearly 98% of total revenue –
the other 19 million plus businesses with no employees accounted for less than
2% of total U.S. revenue. Firms with more than 500 employees represented less
than ½ of one 1 percent of all employer firms, but accounted for about 50%
of total U.S. employment.

Source: BizStats.com


M & A Source • International Business Brokers Association (IBBA) • Business Brokers of Florida • FICPA • Better Business Bureau *Boca Raton Chamber of Commerce * Davie/Cooper City Chamber of Commerce * Society of Commercial Realtors* Independent Insurance Agents of Broward County* Network Professionals - South Florida Networking Group* 6 Degrees of Golf