If you are preparing to sell your business, one of your concerns might be the potential buyer quickly reselling it for a profit.
The buyer may know a specific third party interested in acquiring such a business or know how to rapidly increase its profitability and attractiveness to other buyers – knowledge that might not be available to you.
In such cases, it is worth considering inserting an anti-embarrassment clause which can help restrict or discourage a quick resale of your business and protect your interests in the event of a higher resale price shortly after the sale.
What are anti-embarrassment clauses?
An anti-embarrassment clause is designed to deter the buyer from selling the recently acquired business in its entirety or through selling key assets and contracts with customers, soon after the acquisition.
As the name suggests, an anti-embarrassment clause aims to prevent the seller from the “embarrassment” of seeing their recently sold company being purchased for a higher price and resulting in profit that benefits the buyer only.
There are two main ways in which an anti-embarrassment clause can protect your business from being quickly resold for profit:
- Upward revision of the purchase price: The clause can give you a contractual right to receive an upward adjustment to the original purchase price based on the profits made by the buyer from reselling the business to a third party.
- Retention of minority shareholding: The clause can allow you to retain a minority shareholding in the business post-completion. This can include certain consent rights (outlined in a shareholders’ agreement) and financial benefits attached to those shares.
Both of these options can incorporate a sliding scale so that the benefit you receive decreases over time, ensuring the buyer is not unfairly penalised for agreeing to an attractive offer from a third-party post-completion, provided there was no intention to cause you to lose out.
When should I include an anti-embarrassment clause?
While not often used in corporate transactions in the UK, anti-embarrassment clauses can be of great reassurance to sellers.
For example, if you’re hoping that your business will continue to grow and expand after your exit, an anti-embarrassment clause can help to show a buyer’s commitment towards long-term growth and investment in the company.
If the buyer has approached you directly for an “off market” or under marketed sale, you might have limited insight into the true value of your business. In this case, an anti-embarrassment clause protects both your interests and those of the buyer.
Furthermore, if your business operates within a sector or industry of rapid growth, you might suspect the buyer of seeking to make a quick profit on the business simply as a result of sale timing.
How we can help you
The kind of seller protection offered in anti-embarrassment clauses is always going to be subject to a hard-fought debate between parties, since very few buyers are open to their hands being tied post-completion.
However, an anti-embarrassment clause can be a good way of obtaining reassurance of a buyer’s intent for a business going forward.
Our experienced Corporate and Commercial law team can help you draft an anti-embarrassment clause that meets your needs and represent you in negotiations with the buyer, ensuring you make the most out of your business sale.
For support with drafting anti-embarrassment clauses, please contact Maung Aye, Joint Managing Partner and Head of Corporate & Commercial, on 0203 972 6784 or via email at maung.aye@mackrell.com.
