What Is a Contingency in a Business Sale?

A contingency in the sale of a business is a condition written into the offer or purchase agreement that must be satisfied before the sale can close. If the condition is not met, either party, usually the buyer, can typically walk away without penalty. Most offers on a business include at least one contingency, and many include several.

Common contingencies in a business sale

Contingencies are usually added by the buyer to address a concern that must be resolved before they commit. The most common include:

• Review of books and records. The buyer's approval of the seller's financial statements, tax returns, and supporting documents.
• Financing. The buyer obtaining a loan on acceptable terms, such as an SBA-backed acquisition loan.
• Lease. The landlord approving an assignment of the existing lease or granting the buyer a new lease or extension.
• Licenses and permits. The buyer obtaining any licenses needed to operate, such as a liquor license or a contractor's license.
• Franchise approval. The franchisor approving the buyer, when the business is a franchise.
• Seller obligations. The seller completing a specific task before closing, such as repairing equipment or resolving a dispute.

Specific versus open-ended contingencies

The way a contingency is written matters as much as what it covers.

A specific contingency ties the sale to a defined event with a deadline. For example, the sale is contingent on the buyer receiving a five-year lease extension by a stated date.

An open-ended contingency gives one party broad discretion. For example, the sale is contingent on the buyer's approval of the seller's books and records. Written this way, the buyer can decline for almost any reason. Sellers should expect a books-and-records contingency in nearly every deal, but they can ask that it be limited by a clear review period.

Guidelines for reasonable contingencies

Every contingency needs a deadline. Without a defined period for satisfying or removing each condition, a deal can drift indefinitely while the seller's business sits off the market.

Contingencies should be achievable. Conditions that cannot realistically be met stall the deal without protecting either party.

Reserve contingencies for issues that decide the deal. Minor questions are best resolved before an offer is written. A contingency should cover something that would actually change whether the buyer proceeds.

Some issues belong after the offer. A seller may reasonably withhold certain confidential or proprietary information until price and terms are agreed. A contingency allows the buyer to review that information later while protecting the seller in the meantime.

How sellers can manage contingencies

• Prepare financial records, lease documents, and contracts before listing so the buyer's review moves quickly.
• Talk to your landlord early about assignment.
• Ask for specific language and firm deadlines on each contingency.
• Cooperate promptly with the buyer's requests. Delays on the seller's side give the buyer time to reconsider.

A business broker has seen most contingencies and can tell you which requests are standard and which are unreasonable. If you are preparing to sell a business in Southern California, a confidential valuation from BusinessQuest Brokers is a practical first step. Request a valuation.

Frequently asked questions

What is the most common contingency in a business sale?

A review of the seller's books and records is included in most offers. Financing and lease contingencies are also very common.

How long should a contingency period last?

It depends on what the contingency covers. A financial review may need a few weeks, while a financing or license contingency can take longer. What matters is that each contingency has a defined deadline in the agreement.

Can a buyer back out because of a contingency?

Yes. If a contingency is not satisfied within the agreed period, the buyer can generally withdraw under the terms of the agreement. That is why the wording and deadlines of each contingency deserve careful review by your attorney.