Simultaneous exchange and settlement

The usual procedure for the sale of a business is to exchange contracts, carry out due diligence and other enquiries during the next four to six weeks, then settle.

However, in some circumstances, it is better to exchange contracts and settle the transaction at the same time. The main advantages are:

Simplicity

Many provisions of a normal contract will be unnecessary, such as provisions relating to the deposit and to the conduct of the business pending completion.

Transparency

The purchaser knows what they are getting and is not exposed to the business being run down by the vendor between exchange and settlement.

Stock

The stock take can be carried out immediately before settlement. Accordingly, there will be no need to include or implement contractual provisions for independent valuation of the stock.

Timing

By postponing exchange, you postpone the vendor’s obligation to pay CGT, and the purchaser’s obligation to pay duty (if any).

However, there are disadvantages:

Uncertainty

Neither party knows that they have a definite deal until settlement. This means that a vendor will reveal information, and the purchaser will incur expenditure, without the other side being bound to go ahead with the transaction.

Lenders’ requirements

It may not fit in with the requirements of a lender. The lender may wish to view an exchanged contract before approving a loan and to see a stamped contract on settlement.

See Simultaneous exchange and settlement.