Article 1849 of Spain's Civil Code (Código Civil) defines a sale as a contract in which one of the parties “undertakes to deliver a specific thing.” In return, the other party must pay an amount in money or in whatever has been agreed beforehand. In the case of SMEs, the thing is the business: an industrial or commercial operating unit.
The law doesn't specify which clauses the contract must contain. In fact, it can vary greatly depending on the nature of the companies, the sector, or even the type of buyer. However, alongside a set of basic standard clauses, such as identification of the parties, purpose, price, confidentiality, or non-compete, there are others you should know about if you're going into a business sale, so you can consider including them.
Earn-out clause
In general, a company's price is set based on the profits it's expected to generate in the following years. For this reason, it's common practice to set a fixed amount that the buyer must pay at the time of the acquisition and a deferred amount. The latter is variable and may not be fixed, since it depends on the outcome of certain previously agreed parameters.
This way, the buyer will pay less if profits have been lower and more if they've exceeded expectations. The big advantages are that the seller receives a larger amount if results are good, and the buyer defers an amount that will be consistent with actual profits.
This clause is also very useful because it ensures the seller stays on for a period of time. This is truly valuable, especially for owner-centric businesses where the owner holds a leadership position. That's why the earn-out often sets out the terms of that continued involvement.
Escrow clause
Under this clause, the buyer holds back a specific amount of money for a set period to secure all of the seller's warranties. In the English-speaking world, the role of the escrow agent was created, while in Spain this function is usually performed by notaries.
To do this, a deposit account is set up with conditions that apply until it's released, overseen by the notary or escrow agent. The parties must also agree on who pays this professional's fees. This clause is very useful when there's no trust between the parties.
Jurisdiction and governing law clause
This provision sets the law that will govern the contract and the competent courts. Usually, these are the civil or commercial courts of the place where the legal entity is domiciled. However, the parties can agree on whatever they want. In fact, they can even designate courts in other countries that fall under the umbrella of the European Union's regulations on this matter.
However, this freedom has some limits. These include the following:
- The jurisdiction can't be contrary to the general principles of law or to public policy.
- It can't be incompatible with the mandatory rules that must be complied with.
- It must have subject-matter and territorial jurisdiction.
- It can't be an abusive jurisdiction for one of the parties.
This clause also often provides for other forms of dispute resolution should conflicts arise. We're referring to arbitration or mediation, so that misunderstandings can be resolved without going to court. In many cases, a detailed prior procedure is set up to avoid long and costly litigation in the event of disagreements.
Representations and warranties clause
Although this is a standard clause, we'll explain it. Its aim is to provide transparency and certainty to both parties to a contract by establishing the accuracy of certain facts and conditions. Put simply, it sets out the warranties and liabilities of the contracting parties. Representations are statements about the truth of certain facts at a given point in time. Warranties, on the other hand, are promises that certain conditions will remain true in the future.
Both parties use this clause to provide accurate and reliable information on various matters, such as assets, debts, financial position, and pending litigation, among others.
It's very important to know which types of clauses business purchase agreements can contain. That way, you can negotiate the points that matter most given your circumstances. Knowing that these mechanisms exist and using them will also give you all the protections you need to carry out your deal, whether you're buying or selling.
