Traps in preliminary sale agreements

Too general definitions of the subject of sale

In my practice at Ambicja i Prawo Consulting, I have already seen 47 cases where parties imprecisely described what is included in the enterprise. If the agreement lacks a detailed attachment with a list of assets, the buyer can challenge the technical condition of machinery or the lack of software licenses after paying the deposit. In June 2023, one of our clients had to lower the price by 84,000 PLN just because the agreement did not specify the wear and tear of the machine park.

The rules are clear to us – every element must be described in the protocol. Avoid statements like 'good condition' or 'standard equipment'. Instead, prepare a full list with serial numbers and purchase dates for key equipment. We read contracts without ambiguity, because these 'trinkets' most often become the source of conflict at the stage of the final agreement.

The rules are clear to us – every element must be described in the protocol.

Contractual penalties and deposits in practice

I often encounter the belief that a contractual penalty of 5% of the transaction value is sufficient security. Unfortunately, in M&A processes with amounts in the range of 2-3 million PLN, such an amount for a large company may only be an exit cost from the investment. Last year, while supporting the sale of a manufacturing company, we negotiated a penalty of 12% with an option to claim supplementary damages. This effectively deterred the buyer from trying to change terms at the last minute.

We focus on the specifics. Remember that a contractual penalty must be linked to real risk, e.g., failure to perform an information duty or violation of a non-compete clause by a shareholder after the sale. If the agreement does not contain a clear provision on exactly when the penalty becomes due, you may wait for your money for months in court.

Conditions precedent – your lifeline

A condition precedent is a provision that states the agreement will become valid only after specific requirements are met. The most common mistake is the lack of a condition regarding bank approval for the transfer of revolving loans. We saw a transaction that got stuck for 4 months because no one entered the requirement to obtain written consent from the financial creditor into the agreement.

At Ambicja i Prawo Consulting, we always check if the preliminary agreement requires obtaining shareholder or company body consent for the sale. Without this, the preliminary agreement can be considered invalid by operation of law, and you will be left with a prospective buyer and a blocked company. It is better to spend an extra 7 days on corrections than to risk invalidating the entire transaction.

It is better to spend an extra 7 days on corrections than to risk invalidating the entire transaction.

What is worth negotiating first?

Start with the price and payment method, but do not forget the audit schedule (due diligence). If the buyer imposes a 2-week deadline for verifying all financial documentation, it is a signal that they might want to look for reasons to lower the price. We always suggest at least 30 business days for a reliable verification to avoid nervous moves in the final phase.

Remember that every hour of negotiation is time during which your company should function normally. If you feel that the other side avoids specifics regarding financing, do not be afraid to halt talks. In 2024, we supported 14 transactions, and in 3 cases, we advised clients to withdraw from the preliminary agreement because the conditions were too risky for their personal security.