comfort that the Seller is tied into the success of the business post- sale. With deferred payments, a Buyer should expect the lawyer to add protections for the Seller who is now a creditor. Inherently the Buyer has a contract to pay the Seller so they have the normal rights of a contract. However, the lawyer may want to add other protections. These can include: • Capital Controls which prevent any assets (including cash beyond what has been agreed) withdrawn from the business until the deferred amount is paid. • A debenture over the business/fixed and floating charges (although if there is institutional debt, this is usually subordinated and not very valuable in practice) • Share reversion where if payments are missed (i.e.maybe twice) shares start reverting back to the Seller (not desirable but just as a sort of penalty). Occasionally there is a situation where the profitability of the business is volatile and the Buyer is concerned about the business down turning temporarily and there not being enough profit to pay the deferred. This can cause the Buyer to want to reduce the deferred to a safe level which is unacceptable to the Seller. A frequently used solution to this is to introduce the concept of ‘Flexi Deferred’ where if EBTIDA drops below the level the deal was constructed at, the deferred payment can be reduced for that period and pushed out into the future so it is not lost. This is what happens in practice anyway through negotiation, so it is sometimes better just to contractualise it at the legal stage. (Note: we normally recommend using a ‘synthetic EBITDA’ number that is derived as a historical percentage of gross profit. This prevents the Buyer from crushing actual EBITDA with admin expenses thereby reducing actual EBITDA.
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